Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

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Phineas J. Whoopee
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Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by Phineas J. Whoopee » Fri Oct 06, 2017 1:59 pm

Dividend misunderstandings persist among some posters, and therefore no doubt among some lurkers. Perhaps we should change the words we use, without doing violence to them.

Might it help, and maybe it wouldn't but I'm asking the question, would it help if instead of saying sell shares to create your own dividends, we wrote sell shares to withdraw any additional cash you need?

I'll say again I think referring to capital gains is just making the misunderstandings worse. There might be capital losses for an extended period of time.

What if we collapsed it all down and wrote withdraw capital from your portfolio to meet your cash needs? We could explain the difference between capital and principal as often as necessary. If it comes up constantly maybe it would be worth writing a wiki article.

I'm trying to figure out how to genuinely help people, as I think many of us are.

PJW
Last edited by Phineas J. Whoopee on Fri Oct 06, 2017 3:37 pm, edited 1 time in total.

mega317
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Re: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by mega317 » Fri Oct 06, 2017 2:47 pm

would it help if instead of saying sell shares to create your own dividends, we wrote sell shares to withdraw any additional cash you need?
I think a big issue is when people believe that number of shares owned is more important than dollars invested. So withdrawing additional cash from selling shares is inherently different than receiving dividends where the number of shares owned doesn't change. Related: the argument that dividends are paid per share and don't decline as far or as often as stock prices.

I do believe capital vs. principal is helpful (or at least it was for me), and I don't recall many posters aside from yourself explicitly discuss this.

I look forward to the next 300 posts in this thread.

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triceratop
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Re: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by triceratop » Fri Oct 06, 2017 2:55 pm

It's a good question. I do not believe this will be effective. In principal (heh) there is not particular difficulty with the idea that dividends are forced cash distributions from your portfolio's value. The dividend proponents simply do not engage with the facts. Or worse, they position it as a behavorial crutch but still do not acknowledge the after-tax returns cost that this behavorial strategy bears.

I think to avoid confusion I'll carry on as I always have, because when there is disagreement over really basic things it helps to hew closely to the reality and the terms that are agreed upon.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Phineas J. Whoopee
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Re: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by Phineas J. Whoopee » Fri Oct 06, 2017 3:02 pm

triceratop wrote:
Fri Oct 06, 2017 2:55 pm
...
I think to avoid confusion I'll carry on as I always have, because when there is disagreement over really basic things it helps to hew closely to the reality and the terms that are agreed upon.
Fair enough, triceratop. Just to be sure, I was using terms that are agreed upon, but different ones chosen to address dividend misunderstandings and portfolio withdrawals specifically, not for other purposes. It doesn't mean I think the terms dividend or capital gain change. It also doesn't mean your answer to my question has to be yes, of course. I am asking. Thanks for sharing your view.

[Edited to add] I put the word Withdrawals in front of the other words in the subject line. That may help clarify my meaning. Thanks again.

PJW

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Doc
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Re: Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by Doc » Fri Oct 06, 2017 4:22 pm

How about just "Need Money? Just sell stuff."

OK I was being facetious. But saying "sell shares to create your own dividends" should not be used at all. It's terribly misleading.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

dbr
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Re: Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by dbr » Fri Oct 06, 2017 4:35 pm

I agree that the essence of the discussion is an understanding of the concept of withdrawal. There are discussions here where there may be some inability to come to grips with simple arithmetic but I think most readers can grab on to this fairly directly.

Part of what is involved is operating with a mental picture of a portfolio as a thing that has properties rather than bring a mysterious machine that gives a person money. Income, spending, cash, all that is stuff that you have either before you invest it in a portfolio or after you have withdrawn it. Among the properties of a portfolio is that the value goes up and down and that we follow that by computing return. Thus return is an essential concept in how we understand what happens to a portfolio. Every time we discuss dividend strategy vs total return strategy we obscure this point and wander off into bad math.

longinvest
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Re: Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by longinvest » Fri Oct 06, 2017 4:48 pm

I think that it would be useful to clearly distinguish between:
  • internal portfolio events: dividend and interest payments, buy and sell transactions, etc., and
  • portfolio contributions and withdrawals: adding (contribution) and removing (withdrawal) money from the portfolio.
It's usually pretty simple to see the difference in tax-advantaged accounts because contributions (and withdrawals) often involve a separate process, different from the investing process.

Where things get confusing, sometimes, is when people set up their taxable investments to pay dividends and interest directly into their bank account, instead of into their investment account. In the case of a dividend payment sent directly into one's bank account, both an internal event and a withdrawal happen.

Making the distinction between internal portfolio events and contributions/withdrawals is crucial to accurately calculate returns and withdrawal rates.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

dbr
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Re: Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by dbr » Fri Oct 06, 2017 4:50 pm

longinvest wrote:
Fri Oct 06, 2017 4:48 pm
I think that it would be useful to clearly distinguish between:
  • internal portfolio events: dividend and interest payments, buy and sell transactions, etc., and
  • portfolio contributions and withdrawals: adding (contribution) and removing (withdrawal) money from the portfolio.
It's usually pretty simple to see the difference in tax-advantaged accounts because contributions (and withdrawals) often involve a separate process, different from the investing process.

Where things get confusing, sometimes, is when people set up their taxable investments to pay dividends and interest directly into their bank account, instead of into their investment account. In the case of a dividend payment sent directly into one's bank account, both an internal event and a withdrawal happen.

Making the distinction between internal portfolio events and contributions/withdrawals is crucial to accurately calculate returns and withdrawal rates.
Well said and my opinion also. This latter process is an example of confusing a portfolio and its properties with a money machine, which it can seem to be to the naive investor.

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patrick013
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Re: Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by patrick013 » Fri Oct 06, 2017 5:01 pm

Well a stock fund that has 7% TR and a dividend fund that has
7% TR shows that the dividend fund would have to earn 8% TR
to really out pace the stock fund after taxes. Many do earn 8%
TR while the stock fund earns 7% but the dividend fund needs to
be in a Roth. Only good place for it.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Withdrawals: Maybe Write Capital & Cash vs. Dividends & Capital Gains?

Post by jebmke » Fri Oct 06, 2017 5:07 pm

Doc wrote:
Fri Oct 06, 2017 4:22 pm
How about just "Need Money? Just sell stuff."

This is my method. At the end of the month, I look at what I owe for next month and then decide what to sell ("Honey, you using that couch?" :P ). The first month of the quarter the answer is usually "nothing" due to quarterly dividends paid the prior quarter. I don't care what you call it, except as it relates to taxes. It is all just money.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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