Dividends vs. Capital Gains for Spending Needs?

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nedsaid
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by nedsaid » Fri Oct 13, 2017 8:46 am

Phineas J. Whoopee wrote:
Wed Oct 11, 2017 5:43 pm
naha66 wrote:
Mon Oct 09, 2017 11:01 pm
...
The above is from the beginning and the end of article. Why all the negatively about dividends, is it because Larry showed so much disdain for them, I read some of his rants on seeking alpha. He was down right mean to some posters.
...
We are not against dividends. We are against misunderstandings about dividends. Dividends are a very important part of total return, but in and of themselves they do not increase an investor's wealth. They are not like interest, which does increase wealth. That's the misunderstanding we are against.

There is no negativity, except in response to posters who claim dividends are a superior source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior source.

There will be discussions of the advantages and disadvantages of placing dividend-producing stocks in taxable vs. tax-advantaged accounts, and about the risks of concentrating one's portfolio into certain types of stocks, dividend-paying or otherwise.

We are not against dividends.

PJW
I think this is a fair statement from PJW. I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away. People who chased Energy Master Limited Partnerships learned this the hard way, I know of at least one of these that were purchased for high yield but the underlying company took bankruptcy when energy prices fell. Preferred stock can give you the high yield, declining value problem too.

In many cases, dividend stocks do better than the rest of the market but that would be due to the underlying factors, Value for High Dividend and Profitability/Quality for Dividend Growth. I have also cautioned that yield has been chased pretty hard for eight years now and it makes no sense to start chasing it now. Adjusting for factors, dividend stocks as a group perform identically to non-dividend paying stocks as a group. A dividend tilted strategy is not a bad one, the timing is terrible. There are signs that the enthusiasm for low volatility stocks, which has overlap with High Yield is cooling off but still I would not chase dividends or low volatility here.
A fool and his money are good for business.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by rustymutt » Fri Oct 13, 2017 8:56 am

I opp for the Capital Gain s myself. Growth, with annual average return over the last 10 years at 8%, has my portfolio growing, despite yearly withdraws. (less then 3%) It's doing as model academically with much less risk, and lowest costing fund.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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TD2626
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Fri Oct 13, 2017 9:19 am

nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.

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TD2626
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Fri Oct 13, 2017 10:10 am

Some opinions and questions:

I recognize that dividend payments are simply part of total return, and that it to first order it shouldn't matter mathematically whether the total return is from dividends or buybacks/capital gains. I further recognize that an investor should not chase yield and should remain diversified by investing broadly and avoiding overconcentration in dividend stocks. (This goes both ways, too - one shouldn't overconcentrate in zero-dividend growth stocks). I also recognize that in a taxable account, dividends generate a moderate tax drag. The excess tax drag in the accumulation phase would probably be as follows:

-Hypothetical Dividend Fund has a 1% higher yield than blend fund (very rough estimate)
-20% of this 1% yield goes to taxes (rough estimate strongly dependent on state and local taxes)
-So 20% of the 1% higher yield is gives a 0.2% tax drag - compounded during all of accumulation.

-In this rough model, the tax drag is 20 basis points in taxable during accumulation when reinvesting dividends. If one is choosing between spending the dividends and spending the capital gains, the drag at that point would be far less as sales of highly appreciated stock generate substantial capital gains. If the stock has appreciated by 95% after decades of investment and tax loss harvesting and you are choosing between selling those highly appreciated shares and paying those capital gains taxes versus paying taxes on the dividends, then wouldn't there be relatively little difference at that point as only 5% of the share sale proceeds are untaxed?

A needless 20 basis point tax drag compounded during accumulation is substantial. It compounds for decades and reduces growth substantially. It probably isn't completely catastrophic, though, in my opinion. If one has 10% of their portfolio in a diversified dividend index fund,then the drag on the whole portfolio is 1/10th of that 20 basis points, or 2 basis points. Is it possible that an investor could rationally decide to pay this tax drag for the convenience and behavioral discipline of a "spend the dividend" strategy, and/or for the weak value tilt? It's roughly similar in my opinion to choosing to pay a somewhat higher ER to one fund shop vs another for otherwise similar funds (for, say, better customer service), or choosing to pay the added volatility drag due to uncompensated currency risk in Total World for the convenience of having a single core stock fund.



Phineas J. Whoopee wrote:
Wed Oct 11, 2017 5:43 pm
There is no negativity, except in response to posters who claim dividends are a superior source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior source.
I feel that dividends are a "better" source of return, but only to the extent that I feel that credit/debit cards are a superior way of paying for something vs mailing a check. With the plastic vs check issue, the payment gets made either way... it doesn't really matter so I don't feel too strongly either way. If someone wants a check mailed, I mail the check (while grumbling about how much easier it would be to use a visa/mastercard), but I don't get all that upset. I recognize that with debit/credit cards, there is a processing fee for the merchant that often gets passed on to the customer, but I am willing to pay that cost for the speed, convenience, fraud protection, and transparency of using a card - but I really don't care that much.

Similarly, I feel that dividends are "better" because they are a more direct, transparent, and traditional method of returning value to shareholders - but if a company wants to pay via buybacks instead, I am fine with that.




I don't feel that anyone has responded to some of my views regarding the convenience aspect of a dividend withdrawal strategy:

A "spend the dividends" strategy can be much more convenient to operate than a strategy involving routine stock sales. Processing a sale can be very difficult, costly, and time-consuming especially if reinvestment has occurred for many decades and there are hundreds of share lots. It is a difficult, manual process that may in some cases involve substantial transaction fees, looking up cost basis records, dealing with a 1099-B, mailing in stock certificates, etc? Does the convenience of a dividend strategy outweigh the substantial costs of the tax drag? Or can you set up regular sales from stocks to realize capital gains using Spec ID?

I feel that the convenience argument is one of the stronger arguments for dividends during a withdrawal phase. Any thoughts?

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Fri Oct 13, 2017 10:32 am

TD2626 wrote:
Fri Oct 13, 2017 10:10 am
Some opinions and questions:

I recognize that dividend payments are simply part of total return, and that it to first order it shouldn't matter mathematically whether the total return is from dividends or buybacks/capital gains. I further recognize that an investor should not chase yield and should remain diversified by investing broadly and avoiding overconcentration in dividend stocks. (This goes both ways, too - one shouldn't overconcentrate in zero-dividend growth stocks). I also recognize that in a taxable account, dividends generate a moderate tax drag. The excess tax drag in the accumulation phase would probably be as follows:

-Hypothetical Dividend Fund has a 1% higher yield than blend fund (very rough estimate)
-20% of this 1% yield goes to taxes (rough estimate strongly dependent on state and local taxes)
-So 20% of the 1% higher yield is gives a 0.2% tax drag - compounded during all of accumulation.

-In this rough model, the tax drag is 20 basis points in taxable during accumulation when reinvesting dividends. If one is choosing between spending the dividends and spending the capital gains, the drag at that point would be far less as sales of highly appreciated stock generate substantial capital gains. If the stock has appreciated by 95% after decades of investment and tax loss harvesting and you are choosing between selling those highly appreciated shares and paying those capital gains taxes versus paying taxes on the dividends, then wouldn't there be relatively little difference at that point as only 5% of the share sale proceeds are untaxed?
Correct, once the cash is in the account it doesn't matter how it got there. If you need withdrawals and have cash distributed from a dividend you might as well use that before generating additional capital gains.
A needless 20 basis point tax drag compounded during accumulation is substantial. It compounds for decades and reduces growth substantially. It probably isn't completely catastrophic, though, in my opinion. If one has 10% of their portfolio in a diversified dividend index fund,then the drag on the whole portfolio is 1/10th of that 20 basis points, or 2 basis points. Is it possible that an investor could rationally decide to pay this tax drag for the convenience and behavioral discipline of a "spend the dividend" strategy, and/or for the weak value tilt?
I think the convenience is overstated (particularly if you are using mutual funds and not ETFs) and the 'spend the dividend' strategy is as likely to lead to behavioral errors as create behaivoral discipline - forcing a conservative withdrawal rate that is tied to yield can very easily lead one to chase yield thinking it increases their safe withdrawal rate when really it increases their risk.

I agree that depending on the circumstances the tax drag may not catastrophic (note to SnarlyJack, your circumstance do not fit that bill). But even then, focusing on dividend yield is still a behavioral mistake that you are better off avoiding.
Phineas J. Whoopee wrote:
Wed Oct 11, 2017 5:43 pm
There is no negativity, except in response to posters who claim dividends are a superior source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior source.
I feel that dividends are a "better" source of return, but only to the extent that I feel that credit/debit cards are a superior way of paying for something vs mailing a check. With the plastic vs check issue, the payment gets made either way... it doesn't really matter so I don't feel too strongly either way. If someone wants a check mailed, I mail the check (while grumbling about how much easier it would be to use a visa/mastercard), but I don't get all that upset. I recognize that with debit/credit cards, there is a processing fee for the merchant that often gets passed on to the customer, but I am willing to pay that cost for the speed, convenience, fraud protection, and transparency of using a card - but I really don't care that much.

Similarly, I feel that dividends are "better" because they are a more direct, transparent, and traditional method of returning value to shareholders - but if a company wants to pay via buybacks instead, I am fine with that.
See, the reason I disagree with the analogy is because dividends are like someone paying you via credit card at arbitrary times unrelated to when you bill them or when you need the cash-flow. I'd rather they create an escrow account that I can draw from when I need the money - and that is what returning the cash via buybacks can be analogous to here.
I don't feel that anyone has responded to some of my views regarding the convenience aspect of a dividend withdrawal strategy:

A "spend the dividends" strategy can be much more convenient to operate than a strategy involving routine stock sales. Processing a sale can be very difficult, costly, and time-consuming especially if reinvestment has occurred for many decades and there are hundreds of share lots. It is a difficult, manual process that may in some cases involve substantial transaction fees, looking up cost basis records, dealing with a 1099-B, mailing in stock certificates, etc? Does the convenience of a dividend strategy outweigh the substantial costs of the tax drag? Or can you set up regular sales from stocks to realize capital gains using Spec ID?

I feel that the convenience argument is one of the stronger arguments for dividends during a withdrawal phase. Any thoughts?
You can definitely set up auto-withdrawal from mutual funds, I don't think you can use specific-ID by default (you would still need to specify) though you can definitely use Last-in-First-Out by default which most of the time will result in selling at he highest cost basis and there may be some that have a 'tax-optimized' default option. In any case, even if you are defaulted to using average-cost it is still better than raising the same dollars via dividend because dividends are 100% taxable and even average cost contains some basis.

As for the rest, for most people it is trivial - they import their 1099-B from their brokerage automatically (it is how they get the dividend numbers too), changes in reporting laws means that cost basis is increasingly accurate as reported and where it isn't you are probably better off dealing with those shares now rather than later as you get older and are more likely to forget where the documentation is.

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TD2626
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Fri Oct 13, 2017 11:09 am

avalpert wrote:
Fri Oct 13, 2017 10:32 am
TD2626 wrote:
Fri Oct 13, 2017 10:10 am
Some opinions and questions:

I recognize that dividend payments are simply part of total return, and that it to first order it shouldn't matter mathematically whether the total return is from dividends or buybacks/capital gains. I further recognize that an investor should not chase yield and should remain diversified by investing broadly and avoiding overconcentration in dividend stocks. (This goes both ways, too - one shouldn't overconcentrate in zero-dividend growth stocks). I also recognize that in a taxable account, dividends generate a moderate tax drag. The excess tax drag in the accumulation phase would probably be as follows:

-Hypothetical Dividend Fund has a 1% higher yield than blend fund (very rough estimate)
-20% of this 1% yield goes to taxes (rough estimate strongly dependent on state and local taxes)
-So 20% of the 1% higher yield is gives a 0.2% tax drag - compounded during all of accumulation.

-In this rough model, the tax drag is 20 basis points in taxable during accumulation when reinvesting dividends. If one is choosing between spending the dividends and spending the capital gains, the drag at that point would be far less as sales of highly appreciated stock generate substantial capital gains. If the stock has appreciated by 95% after decades of investment and tax loss harvesting and you are choosing between selling those highly appreciated shares and paying those capital gains taxes versus paying taxes on the dividends, then wouldn't there be relatively little difference at that point as only 5% of the share sale proceeds are untaxed?
Correct, once the cash is in the account it doesn't matter how it got there. If you need withdrawals and have cash distributed from a dividend you might as well use that before generating additional capital gains.
A needless 20 basis point tax drag compounded during accumulation is substantial. It compounds for decades and reduces growth substantially. It probably isn't completely catastrophic, though, in my opinion. If one has 10% of their portfolio in a diversified dividend index fund,then the drag on the whole portfolio is 1/10th of that 20 basis points, or 2 basis points. Is it possible that an investor could rationally decide to pay this tax drag for the convenience and behavioral discipline of a "spend the dividend" strategy, and/or for the weak value tilt?
I think the convenience is overstated (particularly if you are using mutual funds and not ETFs) and the 'spend the dividend' strategy is as likely to lead to behavioral errors as create behaivoral discipline - forcing a conservative withdrawal rate that is tied to yield can very easily lead one to chase yield thinking it increases their safe withdrawal rate when really it increases their risk.
This would be envisioned with a ~3% withdrawal rate. If someone needs a higher withdrawal rate, it isn't a good idea to reach for yield. That being said, it's worth noting that in bonds, higher yield pretty much always means higher risk, while in stocks, it is unclear whether risk changes when going from 1 to 2 to 3% dividend yield. (Of course, chasing a 10 or 20% dividend yield is not realistic or responsible). Regarding behavioral errors, an investor would have to rationally weigh their own propensity to make behavioral errors to decide what the best course is.

I agree that depending on the circumstances the tax drag may not catastrophic (note to SnarlyJack, your circumstance do not fit that bill). But even then, focusing on dividend yield is still a behavioral mistake that you are better off avoiding. I feel that investors who are accumulating and reinvesting dividends and/or have high state taxes seem to be among those least suited for dividend strategies, in my opinion.
Everything depends on particular circumstances, though and there are a wide range of portfolio allocations that could be considered reasonable even for a specific given situation.

Phineas J. Whoopee wrote:
Wed Oct 11, 2017 5:43 pm
There is no negativity, except in response to posters who claim dividends are a superior source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior source.
I feel that dividends are a "better" source of return, but only to the extent that I feel that credit/debit cards are a superior way of paying for something vs mailing a check. With the plastic vs check issue, the payment gets made either way... it doesn't really matter so I don't feel too strongly either way. If someone wants a check mailed, I mail the check (while grumbling about how much easier it would be to use a visa/mastercard), but I don't get all that upset. I recognize that with debit/credit cards, there is a processing fee for the merchant that often gets passed on to the customer, but I am willing to pay that cost for the speed, convenience, fraud protection, and transparency of using a card - but I really don't care that much.

Similarly, I feel that dividends are "better" because they are a more direct, transparent, and traditional method of returning value to shareholders - but if a company wants to pay via buybacks instead, I am fine with that.
See, the reason I disagree with the analogy is because dividends are like someone paying you via credit card at arbitrary times unrelated to when you bill them or when you need the cash-flow. I'd rather they create an escrow account that I can draw from when I need the money - and that is what returning the cash via buybacks can be analogous to here.
Yes, although a constant 3% withdrawal rate also involves withdrawing money at times unrelated to when it is needed.
I don't feel that anyone has responded to some of my views regarding the convenience aspect of a dividend withdrawal strategy:

A "spend the dividends" strategy can be much more convenient to operate than a strategy involving routine stock sales. Processing a sale can be very difficult, costly, and time-consuming especially if reinvestment has occurred for many decades and there are hundreds of share lots. It is a difficult, manual process that may in some cases involve substantial transaction fees, looking up cost basis records, dealing with a 1099-B, mailing in stock certificates, etc? Does the convenience of a dividend strategy outweigh the substantial costs of the tax drag? Or can you set up regular sales from stocks to realize capital gains using Spec ID?

I feel that the convenience argument is one of the stronger arguments for dividends during a withdrawal phase. Any thoughts?
You can definitely set up auto-withdrawal from mutual funds, I don't think you can use specific-ID by default (you would still need to specify) though you can definitely use Last-in-First-Out by default which most of the time will result in selling at he highest cost basis and there may be some that have a 'tax-optimized' default option. In any case, even if you are defaulted to using average-cost it is still better than raising the same dollars via dividend because dividends are 100% taxable and even average cost contains some basis.

As for the rest, for most people it is trivial - they import their 1099-B from their brokerage automatically (it is how they get the dividend numbers too), changes in reporting laws means that cost basis is increasingly accurate as reported and where it isn't you are probably better off dealing with those shares now rather than later as you get older and are more likely to forget where the documentation is.
I may be biased by a recent experience involving lots of hassle looking up very old cost basis records and calculating basis records for long-term reinvestment in taxable. There were hundreds of share lots and it was a ton of work, it took a staggering amount of time to do that math. I recognize that with brokerages getting better at tracking basis themselves this may not be as big of a problem in the future.

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Artsdoctor
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Artsdoctor » Fri Oct 13, 2017 12:16 pm

TD,

I understand your bias regarding convenience. Those of us who have non-covered shares of mutual funds, ETFs, stocks, or bonds are responsible for calculating the cost basis of those shares. It goes with the territory and it always has. The moment you open a taxable account, you need to be aware that every single transaction has tax ramifications, if not in the current year, in the future.

However, this is no longer the case with covered shares. All shares purchased of any type of security are now recorded, reconciled, and reported by the broker. If we're going to talk about convenience, we have to bear in mind that there are many, many investors who will only have covered shares so your or my reservations do not apply to them--or anything going forward.

For what it's worth, I would still caution people to keep track of their own shares though. Although the broker is obligated to do so, it's still the responsibility of the investor to verify that the numbers are correct. There are plenty of situations where you shouldn't rely solely on the broker (for example, if you're going to transfer to someone or something, like a trust, the broker has a reasonable chance of dropping the ball in the transfer of correct shares).

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by rgs92 » Fri Oct 13, 2017 1:49 pm

I've always had the idea that dividend amounts are more stable than the stock prices themselves.
So if my million dollars in stocks generates $24,000 a year in dividends ($2000/month), that is a stable amount that I can take.
So it's a sequence of returns issue, and I can reliably get my $2,000 each month regardless of market conditions.

This may not make sense theoretically (since dividends reduce company profits), but it helps psychologically to avoid selling in a down market.

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nedsaid
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by nedsaid » Fri Oct 13, 2017 3:45 pm

TD2626 wrote:
Fri Oct 13, 2017 9:19 am
nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.
The US Stock Market yield is 1.8% or so. If you are buying stocks for income, look in the neighborhood of 3%. If you buy stocks with a yield much higher than the yield for the market as a whole, you might have an unsustainable dividend. Years ago, I owned shares of Occidental Petroleum. Earnings didn't cover the dividend and they were floating new stock from time to time to raise cash. That wasn't sustainable and I sold.
A fool and his money are good for business.

3504PIR
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by 3504PIR » Fri Oct 13, 2017 4:15 pm

PhysicianOnFIRE wrote:
Fri Oct 06, 2017 10:02 am
KlangFool wrote:
Fri Oct 06, 2017 9:50 am
FrugalProfessor wrote:
Thu Oct 05, 2017 3:49 pm
I loathe dividends and am perplexed by people's obsession with them. If a mutual fund or stock's dividend yield isn't high enough for your liking, sell some stock and create your home grown dividend.

For an investor with a multi decade investing horizon, I hate the drag caused by dividends, as shown by the following example.

$1 investment with 5% real return, 2% dividend yield, 20% tax rate on dividends (15% federal + 5% state), 20Y investing horizon.

No dividends.
FV = $1*(1+5%)^20 = $2.65

Dividends create a tax drag of 2%*20%=0.4%, causing the real return to drop from 5% to 4.6%.
FV = $1*(1+4.6%)^20 = $2.46

Dividends in this case have destroyed 7.3% of the potential value of the no-dividend stock (=1-$2.46/$2.65).
FrugalProfessor,

https://en.wikipedia.org/wiki/Qualified_dividend

Sorry to nitpick. There are the normal dividend and qualified dividend. They are taxed differently. Depending on the exact ETF and mutual fund, the amount/ratio of normal versus qualified dividend come into play as to how much tax that you do pay.

KlangFool
True. The FrugalProfessor's example assumes the best case scenario of 100% qualified dividends. If a percentage or your dividend take is ordinary, non-qualified, then the tax hit is worse.

It would be interesting to know what percentage of a dividend darling portfolio's dividends are qualified. Quite a few index funds' dividends are 90% to 100% qualified, but I have no experience with individual stocks or dividend focused ETFs. Should be easy enough to look up, I suppose.

:beer
-PoF
His example also assumes that there would be a positive return.

tj
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by tj » Sat Oct 14, 2017 11:39 pm

KlangFool wrote:
Tue Oct 10, 2017 10:39 am
snarlyjack wrote:
Tue Oct 10, 2017 9:43 am
Good Morning everyone,
(additional information).

I just graduated from the U of M last year (at 22 years old)
with a B.S. Degree in Finance. I just got my first job out of
college (about 1 1/2 years ago). I make about $15.00 per hour,
$31,200. I' am single with no debt & save about 50% of my income.
I put 5% of my income into a Roth 401K with a company match of 80%.
The rest of my money goes into my Roth IRA ($450. month),

& my taxable account ($1,000. month). Total savings $1500.
month. I live pretty frugal with the goal of bringing up
my account as quickly as possible.

I' am finding this whole process being somewhat complicated.
Not only do you have to have your budget down pat, you
also need to have Vanguard funds down pat & your taxes down pat.
I 'am finding that you need to have your act together, in quite a
few different ways. Financial planning isn't easy & as you know
the choices do have consequences. My support line (Aunts, Cousins, etc
are in Montana). My Aunts & Uncles are monitoring me...
Thanks for all your help & suggestions!
snarlyjack,

So, essentially, you choose to give up collecting Earned Income Tax Credit from the federal government. This is worth about $510 per year to you. You should not contribute to Roth 401K. In fact, you should contribute the full 18K into Trad. 401K.

https://www.irs.gov/credits-deductions/ ... it-amounts

<<Investment Income Limit
Investment income must be $3,400 or less for the year.>>

https://www.irs.gov/credits-deductions/ ... -next-year

There could be additional saver's credit too.

https://www.bogleheads.org/wiki/Saver%27s_credit

Do you file your own tax? Do you use a tax software?

Is $1,000 to $2,000 more per year by moving your investment around worthwhile to you?

KlangFool
I think this is probably the biggest reason to avoid the dividend funds. EITC would require AGI under $15k. It's really hard to maximize the saver's credit because it's a non-refundable credit.

Zeca
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Zeca » Sun Oct 15, 2017 4:29 am

I was reading this post i thinking....

If everyone here paid a 45% tax on dividend maybe start think twice and go with funds that reinvest their dividends.

I like receiving dividends but when i look at my taxes...... :evil:

Cunobelinus
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Cunobelinus » Sun Oct 15, 2017 5:08 am

TD2626 wrote:
Fri Oct 13, 2017 9:19 am
nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.
Perhaps seemingly obvious question #1: I do not desire to restart the debate over REITs vs. stocks/equities and their status as a separate asset class/hedge/whatever, but does the same logic of dividends apply to REITs? Specifically, is the overall asset value declining by the dividend amount each time a dividend is payed?

Perhaps seemingly obvious question #2: along the same lines, this logic should/should not apply to bonds?

I have not looked at REIT or bond price at the period immediately before and immediately after the dividend payment (or whatever a bond's yield's payment is called).

Cunobelinus
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Cunobelinus » Sun Oct 15, 2017 5:13 am

Zeca wrote:
Sun Oct 15, 2017 4:29 am
I like receiving dividends but when i look at my taxes...... :evil:
Verily. My wife inherited a taxable account that pays a large sum of dividends, but she hassles me when we do taxes and she sees my taxable VTIAX (Vanguard International) pay out a small fraction of her annual dividends. I used to think high dividend paying accounts like hers were fantastic, until the dividends started to add up at tax time.. when we got married and filed jointly. First world problems though..

dbr
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by dbr » Sun Oct 15, 2017 9:06 am

Cunobelinus wrote:
Sun Oct 15, 2017 5:08 am

Perhaps seemingly obvious question #2: along the same lines, this logic should/should not apply to bonds?
The logic that applies to bonds is the same as the logic that applies to stocks: What is the return?

The difference is that the return of stocks is a mixture of both dividends and capital gains, for some stocks more of one and for other stocks more of the other. For bonds there is no capital gain on average so the yield is the return. In that case higher yielding bonds are also higher returning bonds.

A disadvantage of bonds is that this makes all the return taxable at ordinary income tax rates. That is why the general advice is to shelter bonds from imposing tax costs by putting them in accounts where tax is deferred or even avoided entirely. When that can't be achieved the other out is to buy tax exempt bonds, which have their own risk-reward logic. Also Treasury fixed income is state tax exempt.

As long as people continue to examine only yield and not also return, all of these discussions become nonsense, which is why some of us here get so irritated over them. Why the discussion persists in the way it does is beyond my comprehension.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Sun Oct 15, 2017 10:35 am

Cunobelinus wrote:
Sun Oct 15, 2017 5:08 am
TD2626 wrote:
Fri Oct 13, 2017 9:19 am
nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.
Perhaps seemingly obvious question #1: I do not desire to restart the debate over REITs vs. stocks/equities and their status as a separate asset class/hedge/whatever, but does the same logic of dividends apply to REITs? Specifically, is the overall asset value declining by the dividend amount each time a dividend is payed?
Yes, the value of the REIT declines by the amount of the dividend when they take the cash from the REIT and distribute it to shareholders.
Perhaps seemingly obvious question #2: along the same lines, this logic should/should not apply to bonds?
The value of a bond does not decrease when interest is paid on the bond because the interest does not come from the 'assets' of the bond - it is not like dividends at all (a Bond fund is obviously different in that regard).

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Sun Oct 15, 2017 10:45 am

TD2626 wrote:
Fri Oct 13, 2017 11:09 am
avalpert wrote:
Fri Oct 13, 2017 10:32 am
TD2626 wrote:
Fri Oct 13, 2017 10:10 am
Some opinions and questions:

I recognize that dividend payments are simply part of total return, and that it to first order it shouldn't matter mathematically whether the total return is from dividends or buybacks/capital gains. I further recognize that an investor should not chase yield and should remain diversified by investing broadly and avoiding overconcentration in dividend stocks. (This goes both ways, too - one shouldn't overconcentrate in zero-dividend growth stocks). I also recognize that in a taxable account, dividends generate a moderate tax drag. The excess tax drag in the accumulation phase would probably be as follows:

-Hypothetical Dividend Fund has a 1% higher yield than blend fund (very rough estimate)
-20% of this 1% yield goes to taxes (rough estimate strongly dependent on state and local taxes)
-So 20% of the 1% higher yield is gives a 0.2% tax drag - compounded during all of accumulation.

-In this rough model, the tax drag is 20 basis points in taxable during accumulation when reinvesting dividends. If one is choosing between spending the dividends and spending the capital gains, the drag at that point would be far less as sales of highly appreciated stock generate substantial capital gains. If the stock has appreciated by 95% after decades of investment and tax loss harvesting and you are choosing between selling those highly appreciated shares and paying those capital gains taxes versus paying taxes on the dividends, then wouldn't there be relatively little difference at that point as only 5% of the share sale proceeds are untaxed?
Correct, once the cash is in the account it doesn't matter how it got there. If you need withdrawals and have cash distributed from a dividend you might as well use that before generating additional capital gains.
A needless 20 basis point tax drag compounded during accumulation is substantial. It compounds for decades and reduces growth substantially. It probably isn't completely catastrophic, though, in my opinion. If one has 10% of their portfolio in a diversified dividend index fund,then the drag on the whole portfolio is 1/10th of that 20 basis points, or 2 basis points. Is it possible that an investor could rationally decide to pay this tax drag for the convenience and behavioral discipline of a "spend the dividend" strategy, and/or for the weak value tilt?
I think the convenience is overstated (particularly if you are using mutual funds and not ETFs) and the 'spend the dividend' strategy is as likely to lead to behavioral errors as create behaivoral discipline - forcing a conservative withdrawal rate that is tied to yield can very easily lead one to chase yield thinking it increases their safe withdrawal rate when really it increases their risk.
This would be envisioned with a ~3% withdrawal rate. If someone needs a higher withdrawal rate, it isn't a good idea to reach for yield. That being said, it's worth noting that in bonds, higher yield pretty much always means higher risk, while in stocks, it is unclear whether risk changes when going from 1 to 2 to 3% dividend yield. (Of course, chasing a 10 or 20% dividend yield is not realistic or responsible).
That is true, risk may not necessarily increase - though I believe if you look at the history of relative dividend rates (that is those paying higher/lower then averages in the same time frame) that has tended to be the case.

Regarding behavioral errors, an investor would have to rationally weigh their own propensity to make behavioral errors to decide what the best course is.
Is that even possible - given what we know about cognitive biases (think Dunning-Kruger and Imposter Syndrome and the like) I believe the only rational conclusion when it comes to self-evaluating your propensity to make behavioral errors is to not trust your self-evaluation. The prudent thing to do is to assume you are prone and design methods to mitigate the effect.

Phineas J. Whoopee wrote:
Wed Oct 11, 2017 5:43 pm
There is no negativity, except in response to posters who claim dividends are a superior source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior source.
I feel that dividends are a "better" source of return, but only to the extent that I feel that credit/debit cards are a superior way of paying for something vs mailing a check. With the plastic vs check issue, the payment gets made either way... it doesn't really matter so I don't feel too strongly either way. If someone wants a check mailed, I mail the check (while grumbling about how much easier it would be to use a visa/mastercard), but I don't get all that upset. I recognize that with debit/credit cards, there is a processing fee for the merchant that often gets passed on to the customer, but I am willing to pay that cost for the speed, convenience, fraud protection, and transparency of using a card - but I really don't care that much.

Similarly, I feel that dividends are "better" because they are a more direct, transparent, and traditional method of returning value to shareholders - but if a company wants to pay via buybacks instead, I am fine with that.
See, the reason I disagree with the analogy is because dividends are like someone paying you via credit card at arbitrary times unrelated to when you bill them or when you need the cash-flow. I'd rather they create an escrow account that I can draw from when I need the money - and that is what returning the cash via buybacks can be analogous to here.
Yes, although a constant 3% withdrawal rate also involves withdrawing money at times unrelated to when it is needed.
It shouldn't - withdrawal strategies shouldn't lead you to withdrawal money you won't need (over whatever time frame you are planning cash flow for) just because it would fit under your safe withdrawal number - for the same reasons really, you don't want to create the tax liability for no reason at all.

I may be biased by a recent experience involving lots of hassle looking up very old cost basis records and calculating basis records for long-term reinvestment in taxable. There were hundreds of share lots and it was a ton of work, it took a staggering amount of time to do that math. I recognize that with brokerages getting better at tracking basis themselves this may not be as big of a problem in the future.
That does suck, no question about it - but putting it off won't make it suck less.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Sun Oct 15, 2017 10:50 am

avalpert wrote:
Sun Oct 15, 2017 10:35 am
Cunobelinus wrote:
Sun Oct 15, 2017 5:08 am
TD2626 wrote:
Fri Oct 13, 2017 9:19 am
nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.
Perhaps seemingly obvious question #1: I do not desire to restart the debate over REITs vs. stocks/equities and their status as a separate asset class/hedge/whatever, but does the same logic of dividends apply to REITs? Specifically, is the overall asset value declining by the dividend amount each time a dividend is payed?
Yes, the value of the REIT declines by the amount of the dividend when they take the cash from the REIT and distribute it to shareholders.
Perhaps seemingly obvious question #2: along the same lines, this logic should/should not apply to bonds?
The value of a bond does not decrease when interest is paid on the bond because the interest does not come from the 'assets' of the bond - it is not like dividends at all (a Bond fund is obviously different in that regard).
I believe this relates to the difference between "clean" and "dirty" prices of bonds.
https://www.bogleheads.org/wiki/Bond_pr ... lean_price

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Sun Oct 15, 2017 10:55 am

TD2626 wrote:
Sun Oct 15, 2017 10:50 am
avalpert wrote:
Sun Oct 15, 2017 10:35 am
Cunobelinus wrote:
Sun Oct 15, 2017 5:08 am
TD2626 wrote:
Fri Oct 13, 2017 9:19 am
nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.
Perhaps seemingly obvious question #1: I do not desire to restart the debate over REITs vs. stocks/equities and their status as a separate asset class/hedge/whatever, but does the same logic of dividends apply to REITs? Specifically, is the overall asset value declining by the dividend amount each time a dividend is payed?
Yes, the value of the REIT declines by the amount of the dividend when they take the cash from the REIT and distribute it to shareholders.
Perhaps seemingly obvious question #2: along the same lines, this logic should/should not apply to bonds?
The value of a bond does not decrease when interest is paid on the bond because the interest does not come from the 'assets' of the bond - it is not like dividends at all (a Bond fund is obviously different in that regard).
I believe this relates to the difference between "clean" and "dirty" prices of bonds.
https://www.bogleheads.org/wiki/Bond_pr ... lean_price
Yes, similar to when you close on your mortgage and the amount of 'prepaid interest' varies based on the settlement date's relationship to payment dates.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by nedsaid » Sun Oct 15, 2017 1:51 pm

Cunobelinus wrote:
Sun Oct 15, 2017 5:08 am
TD2626 wrote:
Fri Oct 13, 2017 9:19 am
nedsaid wrote:
Fri Oct 13, 2017 8:46 am
I have a preference for dividends but I don't chase them and I don't buy investments just for their yield. The market does a pretty good job setting prices, I know people who have chased yield too hard only to see the value of their securities decline over time. What the extra yield giveth, decline in value taketh away.
I like this comment. People should recognize that dividends aren't free money - if a stock yields 6% and you believe over the long run stocks will yield 5% real, then in real terms you would expect the value of the stock to decline. Sometimes you hear of people going for a 8%, 10%, 15%, 20% etc yield without realization that that likely isn't sustainable and is very risky.
Perhaps seemingly obvious question #1: I do not desire to restart the debate over REITs vs. stocks/equities and their status as a separate asset class/hedge/whatever, but does the same logic of dividends apply to REITs? Specifically, is the overall asset value declining by the dividend amount each time a dividend is payed?

Nedsaid: Well, the difference with REITs is that most of the return is from the dividends. They are a vehicle specifically designed to distribute income though you also get a small slice of return of capital. I would not apply the same logic.

Perhaps seemingly obvious question #2: along the same lines, this logic should/should not apply to bonds?

Nedsaid: I have been a smart aleck and suggested that bond fund investors "create their own dividend." The thing is, bonds derive their entire return from their yield. Again, they are an income vehicle like REITs though they don't represent equity ownership.

I have not looked at REIT or bond price at the period immediately before and immediately after the dividend payment (or whatever a bond's yield's payment is called).
A fool and his money are good for business.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Cunobelinus » Mon Oct 16, 2017 10:42 pm

Thanks. I appreciate the responses. It made sense as soon as I started reading.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by SQRT » Tue Oct 17, 2017 4:35 am

The situation is a little different in Canada. Most of the best companies pay dividends so its difficult to avoid them. Also since the Canadian income tax system integrates corporate and personal taxes (through a gross up and credit system for dividends) people with incomes under about $60k per year dont pay any extra tax on their divs.

Agree that harvesting cap gains is much more efficient from a tax perspective for high earners.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by pkcrafter » Tue Oct 17, 2017 10:16 am

The dividend puzzle, as it is known, is strictly driven by a person's make-up and behavior, and this is why the topic turns into long discussions. Here's a short explanation from Meir Statman. If you Google Dividend Puzzle, you will find more information.

See top of pg 3. Pages not numbered.

http://www.aiinfinance.com/Statman.pdf

Christine Benz interview with Statman. There is also a video, but I can't get it to show. Article is below the video.

http://beta.morningstar.com/videos/8158 ... erous.html

Everyone has personal thoughts on dividends, and that's OK as long as a person's beliefs don't create problems or raise costs. My own thoughts are, obviously no one should be taking dividends before retirement. Dividends are taxed whether you take them or not, so dividend-paying funds aren't good in taxable accounts. The problem I see in taking dividends in retirement is you lose control of when to make withdrawals and from where to take them. In a down market, you don't want to withdraw from stocks, so automatic dividend payments are not a good idea. Also, the dividends are paid out whether you want or need them at that time. Reinvesting the dividends gives you control on when and from where to take them (also known as withdrawals). Also, if an investor is focusing on dividend-paying stocks or funds he may end up with a portfolio that is not well-diversified.


Paul
Last edited by pkcrafter on Sun Dec 03, 2017 8:45 pm, edited 6 times in total.
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by dbr » Tue Oct 17, 2017 11:21 am

I have started reading the paper. So far there are two examples on which I might comment.

1. The paper clearly states that the dividend investors illustrated by the Con-Ed story are idiots. People can make of that what they want.

2. Discussing "representativeness" people queried make a wrong choice because they are ignorant of a fundamental fact of statistics. People can make of that what they want as well.

I will have to consider more carefully if behavioral factors in investing really are behavioral factors or are just the fact that a large population as a whole is going to be stupid and ignorant about a lot of things. I suspect behavioral theory in investing amounts to something more meaningful than that, but I don't know much about it so far.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Tue Oct 17, 2017 12:41 pm

I" am not arguing one way or the other.

However, For every white paper that you show me showing
dividends are bad, I can show you a white paper showing dividends are good.
Investors are confused...

If you take taxes out of the mix they are very close to one another
(think Jeremy Siegel). Dividend companies are mostly Big Blue Cap.
stocks in mature companies (Boeing, Microsoft, Exxon, Royal Dutch Shell,
Coke, Pepsi, etc...).

I just put a lot of money into the TSM Fund so I could get exposure
to the whole market. And to reduce (dividend taxes) in the future.
The TSM fund will probably work out better for me over the long
haul. I' am trying to get a super efficient portfolio. However, I see
both sides of the coin...

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Tue Oct 17, 2017 12:51 pm

snarlyjack wrote:
Tue Oct 17, 2017 12:41 pm
I" am not arguing one way or the other.

However, For every white paper that you show me showing
dividends are bad, I can show you a white paper showing dividends are good.
Investors are confused...

If you take taxes out of the mix they are very close to one another
(think Jeremy Siegel). Dividend companies are mostly Big Blue Cap.
stocks in mature companies (Boeing, Microsoft, Exxon, Royal Dutch Shell,
Coke, Pepsi, etc...).

I just put a lot of money into the TSM Fund so I could get exposure
to the whole market. And to reduce (dividend taxes) in the future.
The TSM fund will probably work out better for me over the long
haul. I' am trying to get a super efficient portfolio. However, I see
both sides of the coin...
Why would I take taxes out of the mix? I can only spend after-tax dollars on food and shelter. No, I'd like to keep taxes in the mix.

And I highly doubt you can find as many "white papers" backing up dividends as a strategy as those arguing for a reasonable approach to after-tax investing (not that it is a matter of comparing the stack of papers, it's about comparing the quality of evidence). Note that you have not provided such white papers; blog posts from dividend fans are not white papers.
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by pkcrafter » Tue Oct 17, 2017 12:56 pm

snarlyjack wrote:
Tue Oct 17, 2017 12:41 pm

I just put a lot of money into the TSM Fund so I could get exposure
to the whole market. And to reduce (dividend taxes) in the future.
The TSM fund will probably work out better for me over the long
haul. I' am trying to get a super efficient portfolio. However, I see
both sides of the coin...
:thumbsup

dbr, sure the lady at Con-Ed was indeed ignorant, but this thread is one of many that have discussed divys at lenth, so folks on the forum cannot be ignorant of the facts. And yet some readers support and defend divys the whole way though. It's not ignorance, it's qualities and preferences inherent in the individual, hence the dividend puzzle.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by patrick013 » Tue Oct 17, 2017 2:12 pm

Well if I pay 33% federal tax interest rec'd pays that amount.

If I acquire a qualified dividend fund I would pay 15% federal
tax on dividends rec'd and still have equity exposure, low beta,
and a 4% income.

Now that's bias towards income receipts but doesn't really affect
my long stock allocation which isn't a dividend fund.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Tue Oct 17, 2017 2:33 pm

patrick013 wrote:
Tue Oct 17, 2017 2:12 pm
Well if I pay 33% federal tax interest rec'd pays that amount.

If I acquire a qualified dividend fund I would pay 15% federal
tax on dividends rec'd and still have equity exposure, low beta,
and a 4% income.

Now that's bias towards income receipts but doesn't really affect
my long stock allocation which isn't a dividend fund.
Why would you compare bonds to stocks? They're totally different as a matter of source of returns.

Even if you pay a 15% tax on the qualified dividend income, you still have a higher dividend yield than a broad market fund, meaning your tax drag is higher. Also, don't forget state tax. Dividends simply aren't the most tax-efficient way to return capital to investors and preferring them is a behavorial error by definition, because it is not an optimally efficient way of receiving your returns.
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TJSI » Tue Oct 17, 2017 2:47 pm

" In considering stock returns, then, what is most important to the truly long-term investor is corporate dividends--their yield when they are purchased and their subsequent growth."

John Bogle, Bogle On Mutual Funds, 1994 edition pg 13.

He did qualify the book as he said is was for the intelligent investor.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by patrick013 » Tue Oct 17, 2017 3:19 pm

triceratop wrote:
Tue Oct 17, 2017 2:33 pm
patrick013 wrote:
Tue Oct 17, 2017 2:12 pm
Well if I pay 33% federal tax interest rec'd pays that amount.

If I acquire a qualified dividend fund I would pay 15% federal
tax on dividends rec'd and still have equity exposure, low beta,
and a 4% income.

Now that's bias towards income receipts but doesn't really affect
my long stock allocation which isn't a dividend fund.
Why would you compare bonds to stocks? They're totally different as a matter of source of returns.
Customer is always right ? I'm going to replace 10% of my bond AA with a
dividend fund breaking all the rules but getting a better cash return. It's a gray
AA adjustment I know but I'm getting what I want and actually more than keeping
my bond AA at the full percent it would otherwise be. It's harmless and fits
my style. All these cap gains when I should be holding, my bond/dividend fund
allocation should allow me to hold the regular stock index fund AA intact. If it
doesn't work out I can change it. If interest rates spike I can sell the dividend fund
and buy bonds then. I usually juggle my bonds more than most people till I
get the allocation I like. Not looking for LTCG's that much either so it's just a strategy
till rates rise more if anything. More of a budget preference with a quality income
security than a behavioral tweak which would actually result in less income without
a sale, than a tweak to the bond AA with the dividend fund to provide at a low risk
an acceptable level of income currently from the bond AA.

So it's just something I do until interest rates rise. Dividend funds have the
ability also to trounce over a regular stock index fund even in taxable so the
risk is worth the reward even there too IMO.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Tue Oct 17, 2017 4:12 pm

pkcrafter wrote:
Tue Oct 17, 2017 12:56 pm
snarlyjack wrote:
Tue Oct 17, 2017 12:41 pm

I just put a lot of money into the TSM Fund so I could get exposure
to the whole market. And to reduce (dividend taxes) in the future.
The TSM fund will probably work out better for me over the long
haul. I' am trying to get a super efficient portfolio. However, I see
both sides of the coin...
:thumbsup

dbr, sure the lady at Con-Ed was indeed ignorant, but this thread is one of many that have discussed divys at lenth, so folks on the forum cannot be ignorant of the facts. And yet some readers support and defend divys the whole way though. It's not ignorance, it's qualities and preferences inherent in the individual, hence the dividend puzzle.

Paul
Willful ignorance is still a form of ignorance - at least I would argue it is. What drives them to be willfully ignorant (possibly subconsciously) may be qualities and preferences inherent in them - but the outcome is still ignorance.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Tue Oct 17, 2017 4:14 pm

patrick013 wrote:
Tue Oct 17, 2017 2:12 pm
Well if I pay 33% federal tax interest rec'd pays that amount.

If I acquire a qualified dividend fund I would pay 15% federal
tax on dividends rec'd and still have equity exposure, low beta,
and a 4% income.

Now that's bias towards income receipts but doesn't really affect
my long stock allocation which isn't a dividend fund.
Except dividends funds are not substitute for safe fixed income investments - they are much riskier. Yet thinking the income from dividends is similar to income from fixed income vehicles is one of the (many) poor outcomes that often comes from dividend chasers.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Tue Oct 17, 2017 6:48 pm

I don't consider myself ignorant "willful ignorance, is still a form of ignorance". (?)

If you read what I wrote; "Investors are confused". To prove
my point in addition to the numerous white papers floating
around in these forums, I went online & copied another study on the
dividend strategy. My point was I can identify with why investors are confused.
I agree, dividends are tax inefficient & a narrow set of the whole market.
The TSM Fund is a great long term core holding. However, I still like Big Blue
Cap. stocks (Coke, Pepsi, Boeing, Caterpillar, John Deere, Microsoft, etc...).

Here is another study on the dividend strategy. Enjoy...

https://www.watrust.com/downloads/wealt ... ective.pdf

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Tue Oct 17, 2017 6:56 pm

snarlyjack wrote:
Tue Oct 17, 2017 6:48 pm
I don't consider myself ignorant "willful ignorance, is still a form of ignorance". (?)

If you read what I wrote; "Investors are confused". To prove
my point in addition to the numerous white papers floating
around in these forums, I went online & copied another study on the
dividend strategy. My point was I can identify with why investors are confused.
I agree, dividends are tax inefficient & a narrow set of the whole market.
The TSM Fund is a great long term core holding. However, I still like Big Blue
Cap. stocks (Coke, Pepsi, Boeing, Caterpillar, John Deere, Microsoft, etc...).

Here is another study on the dividend strategy. Enjoy...

https://www.watrust.com/downloads/wealt ... ective.pdf
So Why confuse them more with a poor paper like that? Not a single mention of how tax-efficient small cap value investing would have performed over that study [they achieved the small cap tilt via an equal weighting strategy rather than market cap]. In other words, they didn't convince me that dividends are an exploitable factor for returns compared to like value or small cap stocks. They didn't prove their thesis at all.
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Tue Oct 17, 2017 7:15 pm

Triceratop,

In my statement I was responding to the conversation that
PKCrafter & Dbr were having concerning "qualities & preferences"
in the dividend puzzle. I was trying to say that I understand why
investors are confused about dividends.

I consider myself very logical. Before I started investing, I went
on line & started researching investments. I think that is what
most logical people do (?). And, don't you know the "internet
never lies"...it's all very logical & organized. I can understand
how a investor can be misinformed...

pkcrafter
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by pkcrafter » Tue Oct 17, 2017 8:42 pm

avalpert wrote:
Tue Oct 17, 2017 4:12 pm
pkcrafter wrote:
Tue Oct 17, 2017 12:56 pm
snarlyjack wrote:
Tue Oct 17, 2017 12:41 pm

I just put a lot of money into the TSM Fund so I could get exposure
to the whole market. And to reduce (dividend taxes) in the future.
The TSM fund will probably work out better for me over the long
haul. I' am trying to get a super efficient portfolio. However, I see
both sides of the coin...
:thumbsup

dbr, sure the lady at Con-Ed was indeed ignorant, but this thread is one of many that have discussed divys at lenth, so folks on the forum cannot be ignorant of the facts. And yet some readers support and defend divys the whole way though. It's not ignorance, it's qualities and preferences inherent in the individual, hence the dividend puzzle.

Paul
Willful ignorance is still a form of ignorance - at least I would argue it is. What drives them to be willfully ignorant (possibly subconsciously) may be qualities and preferences inherent in them - but the outcome is still ignorance.
Avalpert, thanks for the link, interesting site.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Tue Oct 17, 2017 9:24 pm

snarlyjack wrote:
Tue Oct 17, 2017 7:15 pm
Triceratop,

In my statement I was responding to the conversation that
PKCrafter & Dbr were having concerning "qualities & preferences"
in the dividend puzzle. I was trying to say that I understand why
investors are confused about dividends.

I consider myself very logical. Before I started investing, I went
on line & started researching investments. I think that is what
most logical people do (?). And, don't you know the "internet
never lies"...it's all very logical & organized. I can understand
how a investor can be misinformed...
Maybe this is a generational thing (not that I am that old) but no, I don't think most logical people would rely on google searches to learn a new topic and none of them would assume that 'the internet never lies'.

KlangFool
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by KlangFool » Tue Oct 17, 2017 9:30 pm

avalpert wrote:
Tue Oct 17, 2017 9:24 pm
snarlyjack wrote:
Tue Oct 17, 2017 7:15 pm
Triceratop,

In my statement I was responding to the conversation that
PKCrafter & Dbr were having concerning "qualities & preferences"
in the dividend puzzle. I was trying to say that I understand why
investors are confused about dividends.

I consider myself very logical. Before I started investing, I went
on line & started researching investments. I think that is what
most logical people do (?). And, don't you know the "internet
never lies"...it's all very logical & organized. I can understand
how a investor can be misinformed...
Maybe this is a generational thing (not that I am that old) but no, I don't think most logical people would rely on google searches to learn a new topic and none of them would assume that 'the internet never lies'.
+1.

KlangFool

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Tue Oct 17, 2017 10:18 pm

Maybe I' am the "Lone Ranger" but I doubt it...

When I started thinking about investing, I knew
that I didn't want to pay any commissions. That
narrowed my search down to T. Rowe Price, Fidelity
& Vanguard. Then I started researching each company.
(Before I landed on Bogleheads).

After I picked Vanguard I started looking at the available
funds and the different strategies. 100's of funds.
(Before I landed on Bogleheds).

Eventually, I landed on Bogleheads but it was way later.
In my experience your sequence of events (for most people is off).
And you must realize that "the internet never lies" was a joke.

***For most people this is a learning experience. If Vanguard (Marketing Dept.)
is reading this, I think my sequence of events is pretty typical for the
majority of potential investors.***

I think I' am doing great...I' am in the right place at the right time...
I have no complaints & I have learned a lot from you. Thank you.

pkcrafter
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by pkcrafter » Wed Oct 18, 2017 10:19 am

jack, this is the one single point that explains your stance on dividends:
4). Once my dividends are greater than my expenses I' am essentially free.
It gives me greater options. I' am not always checking my account values
I follow the trend line of the dividend payments. I' am much calmer &
less stressed about the stock market. I could care less what the
"talking heads on t.v. say". My life is serene...
It comes down to emotions. Avalpert calls it Willful Ignorance, I call it Faulty Rationalization. In either case, emotional well-being is what drives your position on dividends, and I might add it is what drives everyone else who believe dividends are greatly important.

My final comment is , it's fine to hold dividend paying funds, just don't withdraw the dividends. This rule is not as critical in retirement when you need to withdraw anyway, but I choose to not take divys in retirement because then I can't control when or from where I make withdrawals.

The good thing here is you are now a member of the Bogleheads, and that will ultimately pay off.

Table

http://www.arborinvestmentplanner.com/d ... mpounding/

You like Coke stock. Here's a graph of coke stock with and without taking dividends. Click on it to enlarge.

https://www.joshuakennon.com/wp-content ... -Years.png

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Wed Oct 18, 2017 4:15 pm

Paul,

Thank you for that...
I' am learning & tweaking my portfolio. Currently, it is
100,000 VHDYX (just let it ride, reinvest all dividends).
150,000 VTSAX (reinvesting all dividends & dca into monthly).

Your charts are very accurate to my situation (Thanks).
I' am trying to get the portfolio extremely efficient. Unfortunately,
I will have to pay some tax on dividends. I' am trying to get my
"emotions & willful ignorance" under control, which I think I have.
I' am very excited about VTSAX as a super long term hold. It's a
very nice portfolio that I' am very excited about.

Vanguard is a excellent company, my funds are excellent, super efficient
with low ER's. The Bogleheads have been great & yes I' am a member.
It's already paid off in numerous ways (financial, emotional, friendship, etc).

Once again, Thank you for all your help...I made the right choice's & I' am very pleased.
Even tho Avalpert & Triceratop gave me a hard time they were right & I realize that... :sharebeer

Longtermgrowth
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Longtermgrowth » Thu Oct 19, 2017 3:25 am

snarlyjack, I think exchanging the VDADX, VIG ETF equivalent Dividend Appreciation for Total Stock Market makes a lot of sense, though my previous question about the tax efficiency of Total Stock Index compared to the S&P 500 Index goes ignored.
I think keeping the VHDYX index fund or VYM (Vanguard High Dividend Yield ETF) equivalent slice isn't necessarily a mistake either, since it does give just as much large value exposure as Vanguard's Value ETF, VTV. The value exposure that VHDYX or VYM ETF gives, may just give enough excess returns to more than make up for the tax drag even while in a higher tax bracket...

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Thu Oct 19, 2017 7:12 am

Good Morning Longtermgrowth,

I analyzed both the S & P 500 and the TSM Fund.
(As you know both funds are different from each other.
The S & P is 500 large companies where the TSM has
everything in it).

I went to Portfolio visualizer & ran the numbers from
1985 to 2017, $10,000 invested, no rebalance.
VFIAX (S & P) CAGR 5.99 Total $26.498.
VTSAX (TSM) CAGR 6.62 Total $29,277.

I then went on Vanguard web site:
Average annual return-after taxes on distributions.
S & P 500 5.40%
TSM 6.01%
Dividends (current):
S & P 500 1.95%
TSM 1.85%

My conclusion with this analysis using these numbers:
The TSM Fund has a greater growth rate & a slightly
lower dividend level. The turnover rate is the same at
4%, no capital gain's paid out. I think the TSM Fund is
the more tax efficient fund. I also like the idea that the
TSM fund holds all the large cap, medium cap & small cap
stocks. Where the S & P is large company stocks.
This is the analysis I came up with, it was interesting analyzing
the 2 funds.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Wakefield1 » Thu Oct 19, 2017 10:00 am

Also compare "Extended Market" with Total Stock and S&P 500 Idx--I believe in proper proportions owning Extended Market along with S&P 500 simulates Total -you could even overweight "Extended Market"
It looks like you are using "Compare Funds" on Vanguard's web site for the after tax returns vs. pre tax-I think it assumes that you are in a certain bracket (does not pertain to assets held in a 401 or an IRA)

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by dbr » Thu Oct 19, 2017 10:02 am

Wakefield1 wrote:
Thu Oct 19, 2017 10:00 am
Also compare "Extended Market" with Total Stock and S&P 500 Idx--I believe in proper proportions owning Extended Market along with S&P 500 simulates Total -you could even overweight "Extended Market"
It looks like you are using "Compare Funds" on Vanguard's web site for the after tax returns vs. pre tax-I think it assumes that you are in a certain bracket (does not pertain to assets held in a 401 or an IRA)
After tax performance as published by mutual fund companies is meaningless as individual tax situations vary considerably.

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TD2626
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Thu Oct 19, 2017 10:07 am

TD2626 wrote:
Sat Oct 07, 2017 10:41 pm
avalpert wrote:
Sat Oct 07, 2017 10:04 pm
TD2626 wrote:
Sat Oct 07, 2017 9:45 pm
avalpert wrote:
Sat Oct 07, 2017 9:33 pm
TD2626 wrote:
Sat Oct 07, 2017 9:16 pm
Some funds distribute capital gains and you have to pay taxes on those too. Selecting funds that trade infrequently or using Vanguard funds that funnel gains to in-kind etf redemptions can limit distributions. However, broad index funds (such as those at Fidelity) can distribute capital gains.

I agree that there is little short-term difference between a reinvested dividend and a share buyback. Over the long run, though, people invest in companies with an expectation of a return. I realize growth companies can grow and you get returns from rising share prices. But investors are assuming the company will eventually stop growing and start paying out, and isn't valuation predicated on that? If a company was committed to never paying a dividend untill bankruptcy, would it be worth it to own the stock? Or am I mistaken?
Look at Berkshire Hathaway - they are committed to never returning cash to shareholders via dividends - has it been worth it to own the stock and do you think it will continue to be?

Real valuation is not predicated on returning cash via actual 'dividend payments' - there are other ways to return value to shareholders.
How exactly would this work? If a company never pays a dividend, and goes bankrupt after decades of buybacks, aren't the only people who earned money those who sold to "greater fools"?
If a company goes bankrupt the only people who will have received something from their investment are people who withdrew their earnings from the investment along the way - whether that withdrawal was via dividend distributions or share sales is irrelevant. Someone who reinvested dividends is in the same position as someone who didn't sell their shares in a share repurchase (or other transaction).
I know it is worth something to own a fraction of an entity that has a lot of cash sitting around - but if that cash is only yours in theory, and will never be distributed in practice, what does that ownership amount to?
It amounts to a fractional ownership of the cash, even though that ownership doesn't include ultimate control. We can place a value on that ownership based on our expectations of what those who do control it will do (and earn) with that cash. That those expectations may not be realized doesn't invalidate the value today - if it did we wouldn't be investing in equities at all as even future dividend payments are predicated on our expectations of what those who control the asset will be able to do with it. This is of course why equity investments are risky.
I know Berkshire's total return history, and it's of course impressive - but aren't investors just valuing things based on the possibility that a distribution might be made in the future?
I hope not, they have been pretty clear about that so anyone basing their valuation on that possibility seems to be divorced from reality (I suppose it is possible that Buffet and Munger's successor will have a different perspective on that but I wouldn't place a bet on it).
Are there any good articles or research papers that you would recommend for learning more about the mechanics of how things work?
I wish I did, I don't know how you like to learn but the chapter in any Intro to Corporate Finance textbook that covers capital structure and dividend policy in particular should give it to you. If you want to dive into the research I think the best place to start is still with Modigliani and Miller's Dividend Policy, Growth, and the Valuation of Shares.
Thank you for your clear and helpful answers. I will look into the research, (Modigliani and Miller's Dividend Policy, Growth, and the Valuation of Shares) and see if that helps.
It took a while, but I finally got a chance to read over, in its entirety, Modigliani and Miller's "Dividend Policy, Growth, and the Valuation of Shares". It was long and the math was difficult, but ultimately things are spelled out very clearly. Given the assumptions specified in the paper, the amount of an investment's return is unaffected by how return comes about (dividends vs capital gains). There's a reason why both authors eventually won Nobel prizes in economics.

I am mostly concerned by the issue mentioned in footnote 12, on the bottom right of page 419. Essentially, in the case of a company that never pays a dividend, there is an "error" in the dividend discount model of firm valuation. If there is any hint that there might be a dividend in the future, the dividend discount model can still value the firm - it's only if there is no possibility of dividends that this issue occurs. Still, this discontinuity is unsettling.

It's sort of like the "what if everyone indexed" discontinuity. If 100% of people indexed, there would be major issues. But if nearly, but not exactly, 100% indexed, these problems largely go away. This discontinuity is unsettling and is a reason why I keep a small allocation to active funds.

Of course, these are theoretical discontinuities, only applicable in the limit of 100% indexing or 0 dividends forever. They do exist, though.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by patrick013 » Thu Oct 19, 2017 12:44 pm

TD2626 wrote:
Thu Oct 19, 2017 10:07 am
It took a while, but I finally got a chance to read over, in its entirety, Modigliani and Miller's "Dividend Policy, Growth, and the Valuation of Shares". It was long and the math was difficult, but ultimately things are spelled out very clearly. Given the assumptions specified in the paper, the amount of an investment's return is unaffected by how return comes about (dividends vs capital gains). There's a reason why both authors eventually won Nobel prizes in economics.
How would you value Century Link, for example ?
age in bonds, buy-and-hold, 10 year business cycle

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TD2626
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Thu Oct 19, 2017 1:15 pm

patrick013 wrote:
Thu Oct 19, 2017 12:44 pm
TD2626 wrote:
Thu Oct 19, 2017 10:07 am
It took a while, but I finally got a chance to read over, in its entirety, Modigliani and Miller's "Dividend Policy, Growth, and the Valuation of Shares". It was long and the math was difficult, but ultimately things are spelled out very clearly. Given the assumptions specified in the paper, the amount of an investment's return is unaffected by how return comes about (dividends vs capital gains). There's a reason why both authors eventually won Nobel prizes in economics.
How would you value Century Link, for example ?
I avoid needing to consider valuation much myself with a fairly strong belief in the efficient market hypothesis and by using index funds. I do think having a little in low-cost active may be reasonable, too - but in this case the fund manager would be doing valuation. So I know little about this area. That being said, would it be the case that a company like Berkshire with no dividend would be valued based off hazy potential future payoffs in the distant future, while a company with an unsustaniably high dividend would be valued with the assumption that the dividend will stop or be cut at some point in the future?

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patrick013
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by patrick013 » Thu Oct 19, 2017 1:50 pm

TD2626 wrote:
Thu Oct 19, 2017 1:15 pm
That being said, would it be the case that a company like Berkshire with no dividend would be valued based off hazy potential future payoffs in the distant future, while a company with an unsustaniably high dividend would be valued with the assumption that the dividend will stop or be cut at some point in the future?
There's alot of smallish factors but I think the main thing is the earning
power of the company. Secondly, the debt/equity ratio. Can the company's
profit survive competition in it's industry if it has the highest D/E ratio ?

I haven't seen the perfect formula for a dividend payer. Some balance between
forward PE and the price of the dividend related to a BBB bond can generate a
value, an averaged price. You'd be surprised how many dividend payers have a
BBB bond rating. Or like AT&T a steady 5% dividend usually but little or no
price appreciation.

Century Link is probably paying a high dividend to avoid a tax penalty so the price
needs to be averaged out for when that payment will stop, probably a year or two,
then a setting of the price for a normal lower payout ratio. But the dividend fund
is one of the best index ideas around if that suits the investor. Individual stock
selections in that category are certainly more work where some price appreciation
is needed to be competitive with the 500's total return.
age in bonds, buy-and-hold, 10 year business cycle

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