Dividend / no dividend index funds?

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MrBeaver
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Dividend / no dividend index funds?

Post by MrBeaver » Sat May 19, 2018 12:32 pm

Here’s an idea. Are any funds available like this?
  • No dividend capital appreciation fund. Contains market cap weighted stocks from US Total Stock Market, but only those that do not pay any dividend. Tries to liquidate stocks that transition to paying a dividend to institutional investors through ETF strategies to minimize capital gains.
  • All dividend fund. Contains market cap weighted stocks from US Total Stock Market, but only those which do pay a dividend. Tries to liquidate stocks that stop paying dividends to insututional investors through ETF strategies to minimize capital gains.
It would essentially be similar to the split of SP500 / Extended market funds, but with a much more actionable purpose: hold no-dividend in taxable and only-dividend in tax advantaged (Roth or Traditional).

Do any funds like this exist? I for one would love to use them, assuming expenses are low.

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patrick013
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Re: Dividend / no dividend index funds?

Post by patrick013 » Sat May 19, 2018 1:44 pm

MrBeaver wrote:
Sat May 19, 2018 12:32 pm
Do any funds like this exist? I for one would love to use them, assuming expenses are low.
https://us.spindices.com/documents/rese ... nload=true

These usually outperform and I will probably buy some when interest rates
peak. Have to look at Scwab and iShares etc. to find them. Good for some
tilt if so interested.
age in bonds, buy-and-hold, 10 year business cycle

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Doc
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Re: Dividend / no dividend index funds?

Post by Doc » Sat May 19, 2018 2:59 pm

MrBeaver wrote:
Sat May 19, 2018 12:32 pm
Do any funds like this exist? I for one would love to use them, assuming expenses are low.
You could try using Vanguard's "Chose your mutual funds" screen at

https://investor.vanguard.com/mutual-fu ... nd-returns

and near the bottom of the "filter" put a check in the box labeled make a check in the box "Tax-managed" :D

Also Morningstar has a metric called "Tax Loss Ratio" that you can screen on.
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.

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arcticpineapplecorp.
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Re: Dividend / no dividend index funds?

Post by arcticpineapplecorp. » Sat May 19, 2018 3:16 pm

From the wiki (regarding tax-managed funds with Vanguard):
Vanguard offers three mutual funds which are explicitly tax-managed. However, index funds and exchange-traded funds (ETFs) are inherently tax-efficient, and are sometimes less expensive; therefore, the tax-managed mutual funds may not always be the best options even for taxable investors.

source: https://www.bogleheads.org/wiki/Tax-man ... comparison
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

tibbitts
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Re: Dividend / no dividend index funds?

Post by tibbitts » Sat May 19, 2018 3:19 pm

Doc wrote:
Sat May 19, 2018 2:59 pm
MrBeaver wrote:
Sat May 19, 2018 12:32 pm
Do any funds like this exist? I for one would love to use them, assuming expenses are low.
You could try using Vanguard's "Chose your mutual funds" screen at

https://investor.vanguard.com/mutual-fu ... nd-returns

and near the bottom of the "filter" put a check in the box labeled make a check in the box "Tax-managed" :D

Also Morningstar has a metric called "Tax Loss Ratio" that you can screen on.
Yes but the OP wants ZERO dividends, so I'm sure Vanguard tax-managed funds, which their marginally-lower dividends vs. conventional index funds, wouldn't work for him.

MrBeaver
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Re: Dividend / no dividend index funds?

Post by MrBeaver » Sat May 19, 2018 4:13 pm

tibbitts wrote:
Sat May 19, 2018 3:19 pm
Yes but the OP wants ZERO dividends, so I'm sure Vanguard tax-managed funds, which their marginally-lower dividends vs. conventional index funds, wouldn't work for him.
So, I understand that there are these tax managed funds typically with higher fees. But yes, I’m wondering whether I can essentially own the total market while putting all dividend income into tax advantaged and realizing no dividend income in taxable. In essence, I see the dividend/no dividend split as a more obvious split of TSM than the SP500 / non-SP500 split of TSM. And I’m surprised that something doesn’t exist as this seems like an obvious strategy to reduce tax drag in taxable while maintaining a simple allocation (entire market).

MrBeaver
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Re: Dividend / no dividend index funds?

Post by MrBeaver » Sat May 19, 2018 4:19 pm

patrick013 wrote:
Sat May 19, 2018 1:44 pm
MrBeaver wrote:
Sat May 19, 2018 12:32 pm
Do any funds like this exist? I for one would love to use them, assuming expenses are low.
https://us.spindices.com/documents/rese ... nload=true

These usually outperform and I will probably buy some when interest rates
peak. Have to look at Scwab and iShares etc. to find them. Good for some
tilt if so interested.
I know about the high dividend / dividend aristocrat funds. But I have never seen a compliment of these funds that pays no dividends and completes a Total Stock Market allocation along with these funds.

drk
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Re: Dividend / no dividend index funds?

Post by drk » Sat May 19, 2018 4:44 pm

It won't be perfect, but you could try Vanguard small/mid/large growth funds in taxable and their value complements in tax-advantaged. That would get you:

Taxable:
  • VBK: 0.8%
  • VOT: 0.78%
  • VUG: 1.23%
Tax-advantaged:
  • VBR: 1.99%
  • VOE: 2.21%
  • VTV: 2.5%

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Doc
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Re: Dividend / no dividend index funds?

Post by Doc » Sat May 19, 2018 6:48 pm

drk wrote:
Sat May 19, 2018 4:44 pm
It won't be perfect, but you could try Vanguard small/mid/large growth funds in taxable and their value complements in tax-advantaged.
That's an idea worth considering
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.

MrBeaver
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Re: Dividend / no dividend index funds?

Post by MrBeaver » Sat May 19, 2018 8:12 pm

Doc wrote:
Sat May 19, 2018 6:48 pm
drk wrote:
Sat May 19, 2018 4:44 pm
It won't be perfect, but you could try Vanguard small/mid/large growth funds in taxable and their value complements in tax-advantaged.
That's an idea worth considering
Do growth + value indexes comprise the total market? Or are there stocks in the middle that are non-growth and non-value which this would leave out?

drk
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Re: Dividend / no dividend index funds?

Post by drk » Sat May 19, 2018 8:58 pm

MrBeaver wrote:
Sat May 19, 2018 8:12 pm
Do growth + value indexes comprise the total market? Or are there stocks in the middle that are non-growth and non-value which this would leave out?
You'll get full coverage with the CRSP indexes. They split the market into two buckets, assign each security two scores (value rank and growth rank), and take the average of the value rank and the inverse of the growth rank:

Code: Select all

(RV + 1/RG) / 2
Then they drop the security into growth (value) if its average is less (greater) than 0.5.*

You can find a description on on page 32 of their methodology guide.

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vineviz
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Re: Dividend / no dividend index funds?

Post by vineviz » Sat May 19, 2018 9:00 pm

MrBeaver wrote:
Sat May 19, 2018 8:12 pm
Do growth + value indexes comprise the total market? Or are there stocks in the middle that are non-growth and non-value which this would leave out?
Most growth/value indices are not mutually exclusive: stocks in the middle are held by both the growth and value index.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ThrustVectoring
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Re: Dividend / no dividend index funds?

Post by ThrustVectoring » Sun May 20, 2018 4:45 am

Berkshire Hathaway is a large multinational conglomerate rather than an index fund, but it is fairly well-diversified and is committed to paying zero dividends.

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JoMoney
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Re: Dividend / no dividend index funds?

Post by JoMoney » Sun May 20, 2018 7:19 am

patrick013 wrote:
Sat May 19, 2018 1:44 pm
... I will probably buy some when interest rates peak...
Please let us know "when interest rates peak", it will be interesting to see how your prediction works out.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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patrick013
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Re: Dividend / no dividend index funds?

Post by patrick013 » Sun May 20, 2018 2:18 pm

JoMoney wrote:
Sun May 20, 2018 7:19 am
patrick013 wrote:
Sat May 19, 2018 1:44 pm
... I will probably buy some when interest rates peak...
Please let us know "when interest rates peak", it will be interesting to see how your prediction works out.
Will do. Mostly just Fed watching as to when a long term trend
expected would be inclusive of rate decreases after a period of
higher rates.
age in bonds, buy-and-hold, 10 year business cycle

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patrick013
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Re: Dividend / no dividend index funds?

Post by patrick013 » Sun May 20, 2018 2:23 pm

MrBeaver wrote:
Sat May 19, 2018 4:19 pm
patrick013 wrote:
Sat May 19, 2018 1:44 pm
MrBeaver wrote:
Sat May 19, 2018 12:32 pm
Do any funds like this exist? I for one would love to use them, assuming expenses are low.
https://us.spindices.com/documents/rese ... nload=true

These usually outperform and I will probably buy some when interest rates
peak. Have to look at Scwab and iShares etc. to find them. Good for some
tilt if so interested.
I know about the high dividend / dividend aristocrat funds. But I have never seen a compliment of these funds that pays no dividends and completes a Total Stock Market allocation along with these funds.
Look at Exhibit 10 in the above Pdf link. They are just concentrated dividend
funds kinda like a dividend factor fund. I don't think there is an index that pays
100% no dividends but there might be.
age in bonds, buy-and-hold, 10 year business cycle

jalbert
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Re: Dividend / no dividend index funds?

Post by jalbert » Sun May 20, 2018 2:31 pm

patrick013 wrote:
Sat May 19, 2018 1:44 pm
https://us.spindices.com/documents/rese ... nload=true

These usually outperform and I will probably buy some when interest rates peak.
Perhaps you meant to say they usually outperform when interest rates fall.

How will you know when interest rates have peaked?
Index fund investor since 1987.

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patrick013
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Re: Dividend / no dividend index funds?

Post by patrick013 » Sun May 20, 2018 2:41 pm

jalbert wrote:
Sun May 20, 2018 2:31 pm
patrick013 wrote:
Sat May 19, 2018 1:44 pm
https://us.spindices.com/documents/rese ... nload=true

These usually outperform and I will probably buy some when interest rates peak.
Perhaps you meant to say they usually outperform when interest rates fall.

How will you know when interest rates have peaked?
Just Fed watching like I usually do. They usually provide some direction.
age in bonds, buy-and-hold, 10 year business cycle

drk
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Re: Dividend / no dividend index funds?

Post by drk » Sun May 20, 2018 7:14 pm

patrick013 wrote:
Sun May 20, 2018 2:41 pm
jalbert wrote:
Sun May 20, 2018 2:31 pm
patrick013 wrote:
Sat May 19, 2018 1:44 pm
https://us.spindices.com/documents/rese ... nload=true

These usually outperform and I will probably buy some when interest rates peak.
Perhaps you meant to say they usually outperform when interest rates fall.

How will you know when interest rates have peaked?
Just Fed watching like I usually do. They usually provide some direction.
It'll likely require a bit more reading-of-tea-leaves if John Williams gets his wish.

jalbert
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Re: Dividend / no dividend index funds?

Post by jalbert » Sun May 20, 2018 7:53 pm

Just Fed watching like I usually do. They usually provide some direction.
First, you specifically mean when the Fed funds rate has peaked not interest rates in general. Second, at any point in time, future Fed actions are guided by future outcomes not yet known at the point in time.
Last edited by jalbert on Sun May 20, 2018 11:35 pm, edited 1 time in total.
Index fund investor since 1987.

Quickfoot
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Re: Dividend / no dividend index funds?

Post by Quickfoot » Sun May 20, 2018 7:59 pm

You really have to think about where to hold dividend equities (or whether to hold them at all). Holding dividend funds in tax deferred space can be a terrible idea because you have now successfully converted qualified dividends to fully taxable income and will pay more taxes than if you held them in taxable.

If you are investing for the long term no dividends could be preferable in either space because dividends take capital away from the company, that limits the ability of the company to grow and generate higher stockholder value. If you perceive dividends to be more stable than stock prices you may prefer dividend paying stocks BUT companies tend to cut or suspend dividends during economically stressful times so they really don't protect you any more than a non dividend equity. So with dividend equities you have an asset that appreciates more slowly than a non dividend paying equity and that probably doesn't provide you any significant protection in a major downturn.

I don't avoid dividends but I also don't seek them out.

MrBeaver
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Re: Dividend / no dividend index funds?

Post by MrBeaver » Sun May 20, 2018 9:32 pm

Quickfoot wrote:
Sun May 20, 2018 7:59 pm
You really have to think about where to hold dividend equities (or whether to hold them at all). Holding dividend funds in tax deferred space can be a terrible idea because you have now successfully converted qualified dividends to fully taxable income and will pay more taxes than if you held them in taxable.
This is interesting and somewhat confusing to me. I’ll have to go run some numbers, but offhand this seems to be true only for a non-deductible traditional IRA, correct?

If it’s a Roth, no taxes on earnings or withdrawals so it doesn’t matter how the return of capital is realized.

If it’s a taxable account, dividends are taxed at capital gains rate (which might be lower than earned income rate, but may also (usually) be higher than capital gains rate in retirement. So returning capital via qualified dividends in a taxable account represents a tax drag if your current qualified dividend/capital gains rate is higher now than in retirement (or also if it forces earned income to move to a higher tax bracket than it otherwise would be taxed at).

Traditional deductible tax-deferred accounts have zero tax basis, so whether they return capital via Qualified dividends or through appreciation doesn’t change the amount of taxes which are owed.

I think that since qualified dividends are taxed on assets purchased with money that was already taxed, it’s not accurate to say you’re “converting” qualified dividends to taxable income by holding in tax-deferred, but rather that you are converting earnings taxed as ordinary income plus long-term capital gains rate on the qualified dividends to tax-deferred assets that only get taxed as ordinary income in retirement. Correct?

If this is wrong, my mind might get blown soon.

bradpevans
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Re: Dividend / no dividend index funds?

Post by bradpevans » Mon May 21, 2018 8:46 am

MrBeaver wrote:
Sun May 20, 2018 9:32 pm
Quickfoot wrote:
Sun May 20, 2018 7:59 pm
You really have to think about where to hold dividend equities (or whether to hold them at all). Holding dividend funds in tax deferred space can be a terrible idea because you have now successfully converted qualified dividends to fully taxable income and will pay more taxes than if you held them in taxable.
This is interesting and somewhat confusing to me. I’ll have to go run some numbers, but offhand this seems to be true only for a non-deductible traditional IRA, correct?

If it’s a Roth, no taxes on earnings or withdrawals so it doesn’t matter how the return of capital is realized.

If it’s a taxable account, dividends are taxed at capital gains rate (which might be lower than earned income rate, but may also (usually) be higher than capital gains rate in retirement. So returning capital via qualified dividends in a taxable account represents a tax drag if your current qualified dividend/capital gains rate is higher now than in retirement (or also if it forces earned income to move to a higher tax bracket than it otherwise would be taxed at).

Traditional deductible tax-deferred accounts have zero tax basis, so whether they return capital via Qualified dividends or through appreciation doesn’t change the amount of taxes which are owed.

I think that since qualified dividends are taxed on assets purchased with money that was already taxed, it’s not accurate to say you’re “converting” qualified dividends to taxable income by holding in tax-deferred, but rather that you are converting earnings taxed as ordinary income plus long-term capital gains rate on the qualified dividends to tax-deferred assets that only get taxed as ordinary income in retirement. Correct?

If this is wrong, my mind might get blown soon.
I think there is some truth in both posts. Dividends in pre-tax/401k will come out taxed as ordinary income. But they went in pre-tax, and they had zero tax drag while in there. If a $1,000 pre-tax investment becomes $2,000 due to growth or due to grow + dividends, it really doesn't matter.

In the after tax version, the $1000 would of course be taxed down before investing, so maybe a $600 investment is now 1,200. Or $600 + re-invested dividends is now $1200. These two are different from each other. But i don't think either is directly comparable to the pre-tax version.

not4me
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Re: Dividend / no dividend index funds?

Post by not4me » Mon May 21, 2018 9:46 am

MrBeaver wrote:
Sun May 20, 2018 9:32 pm

I think that since qualified dividends are taxed on assets purchased with money that was already taxed, it’s not accurate to say you’re “converting” qualified dividends to taxable income by holding in tax-deferred, but rather that you are converting earnings taxed as ordinary income plus long-term capital gains rate on the qualified dividends to tax-deferred assets that only get taxed as ordinary income in retirement. Correct?
I didn't follow what you were saying in the phrase I underlined & would like some clarification. To qualify as "qualified dividend" the corporation classifies it as qualified or not & the investor has held it for the minimum holding period. There are endless number of scenarios, but to illustrate with a simple example...say I'm taking RMDs currently in 2018 & I'm at a "sweet" (relatively speaking for taxes) spot in taxes where my ordinary income is taxed at 22%, but my qualified dividends are taxed at 0%. Say I have identical holdings in a taxable account & tax-deferred account, both of which I've had for years. That same holding generates $100 in qualified dividends in each of the two accounts, yet won't be taxed the same in 2018 (assuming that $100 is distributed to me)

Now I get your point about how you got to the point in 2018, but to me that is what is referenced as "converting".

MrBeaver
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Re: Dividend / no dividend index funds?

Post by MrBeaver » Mon May 21, 2018 10:49 am

not4me wrote:
Mon May 21, 2018 9:46 am
MrBeaver wrote:
Sun May 20, 2018 9:32 pm

I think that since qualified dividends are taxed on assets purchased with money that was already taxed, it’s not accurate to say you’re “converting” qualified dividends to taxable income by holding in tax-deferred, but rather that you are converting earnings taxed as ordinary income plus long-term capital gains rate on the qualified dividends to tax-deferred assets that only get taxed as ordinary income in retirement. Correct?
I didn't follow what you were saying in the phrase I underlined & would like some clarification. To qualify as "qualified dividend" the corporation classifies it as qualified or not & the investor has held it for the minimum holding period. There are endless number of scenarios, but to illustrate with a simple example...say I'm taking RMDs currently in 2018 & I'm at a "sweet" (relatively speaking for taxes) spot in taxes where my ordinary income is taxed at 22%, but my qualified dividends are taxed at 0%. Say I have identical holdings in a taxable account & tax-deferred account, both of which I've had for years. That same holding generates $100 in qualified dividends in each of the two accounts, yet won't be taxed the same in 2018 (assuming that $100 is distributed to me)

Now I get your point about how you got to the point in 2018, but to me that is what is referenced as "converting".
Certainly my definitions and semantics are lacking, sorry. :?

Quickfoot claimed that qualified dividends are taxed at taxable income rates if held in tax-deferred, and taxed less if held in taxable. If you think conceptually where total return = qualified dividends + appreciation, then we have the following:
  • Taxable: Capital used to invest – ordinary income tax already paid; qualified dividends: LTCG rate during accumulation; appreciation: LTCG rate during drawdown.
  • Deductible tax-deferred: Capital used to invest – no taxation (pre-tax); qualified dividends: ordinary income tax during drawdown; appreciation: ordinary income tax during drawdown
The point is that while LTCG rate on qualified dividends 'seems' lower than ordinary income tax rates, it's actually a tax paid on top of the ordinary income tax paid on the dollars used to purchase the investment in the first place. If this were not the case, then holding ANYTHING in tax-deferred would be worse than taxable. If roth vs traditional is at a break-even point where tax rate at accumulation equals tax rate at drawdown, then this becomes more obvious: For Roth you pay income tax on the capital used to invest and do not pay any capital gains / dividend taxes. Taxable pays both income tax on the capital used to invest, and capital gains/dividend taxes on the growth.

Essentially, when you say:
not4me wrote: Say I have identical holdings in a taxable account & tax-deferred account, both of which I've had for years. That same holding generates $100 in qualified dividends in each of the two accounts, yet won't be taxed the same in 2018 (assuming that $100 is distributed to me)
You are forgetting that having identical holdings in taxable and tax-deferred requires a different amount of original income to invest because of the original income taxes.

Certainly if at all points from accumulation to distribution the person's LTCG rate is 0%, then taxable is equivalent to tax-deferred or Roth for that matter. But if the LTCG rate is higher than that (or it forces other earned income to be taxed at a higher rate) then taxable is worse than tax-deferred. Theoretically (assuming returns are similar to stocks with dividends), stocks that do not pay dividends (like BRK) allow the investment to grow without dividend taxes during accumulation. If one's LTCG rate* during distribution is lower than it was during accumulation, this should provide additional after-tax returns.

*Technically the tax paid in accumulation includes the LTCG rate and any increased income taxes paid as a result of dividend income increasing one's income tax bracket. However, this is also true during distribution, so I think this is a wash?

not4me
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Re: Dividend / no dividend index funds?

Post by not4me » Mon May 21, 2018 11:48 am

MrBeaver wrote:
Mon May 21, 2018 10:49 am

The point is that while LTCG rate on qualified dividends 'seems' lower than ordinary income tax rates, it's actually a tax paid on top of the ordinary income tax paid on the dollars used to purchase the investment in the first place.

You are forgetting that having identical holdings in taxable and tax-deferred requires a different amount of original income to invest because of the original income taxes.
I'm not sure if we are in disagreement or not, but thought I'd take one more run at it. I may well be the one using terminology that isn't right & look to be corrected as that occurs. One stumbling point I've had: to me there is a tax rate for dividends and another for capital gains, Each of those have variations (qualified vs ordinary, long term vs short term, etc). Under current tax law, these happen to be the same, but I believe that has not always been the case (& may not be in the future?). But, that isn't the main difficulty I have in following your points. I excised out a couple of sentences & start with the 2nd one 1st.

I would agree that if identical dividend-paying stocks were bought at the same price & time & one put in a brokerage account & the other in a tax-deferred account, & then if the regular account paid taxes each year, then after 40 years the 2 accounts have different amounts. In essence, the tax-deferred account has a "pending tax" component. So, I didn't forget that & my last sentence of previous post I was trying to say that I understood the difference in getting there.

But your comment about a "tax paid on top" that I stumble on. To me, the 2 paths under discussion do not change "what" is taxed, but mostly "when" it is taxed. By changing when, it can (likely will) affect the tax rate applied. The difference in rates isn't known upfront & varies based on ones circumstances. In the above example, during the 40 years the taxable account would have perhaps paid different dividend tax rates as tax law changes and their income bracket changes.

The point on "conversion" (& I only use that term since it has been used upthread) is that there is also a classification change that applies when a distribution is taxed from a tax-deferred account. Whether that is a move up, down, or neither varies.

At the risk of muddying things more, consider the affect when the investor dies. While not always the case, in many or most cases there is a step-up in basis for assets outside the tax-deferred account. Any capital gain is wiped out. The tax-deferred account doesn't get a basis change & tax will be due based on the new recipient.

MrBeaver
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Re: Dividend / no dividend index funds?

Post by MrBeaver » Mon May 21, 2018 1:35 pm

not4me wrote:
Mon May 21, 2018 11:48 am
I'm not sure if we are in disagreement or not, but thought I'd take one more run at it. I may well be the one using terminology that isn't right & look to be corrected as that occurs.
Likewise. I'm wondering if we need someone with better communication skills and understanding than me to come clear this up :)
not4me wrote: One stumbling point I've had: to me there is a tax rate for dividends and another for capital gains, Each of those have variations (qualified vs ordinary, long term vs short term, etc). Under current tax law, these happen to be the same, but I believe that has not always been the case (& may not be in the future?).
Completely agree here. As with all things, future laws can change.
not4me wrote: I would agree that if identical dividend-paying stocks were bought at the same price & time & one put in a brokerage account & the other in a tax-deferred account, & then if the regular account paid taxes each year, then after 40 years the 2 accounts have different amounts. In essence, the tax-deferred account has a "pending tax" component. So, I didn't forget that & my last sentence of previous post I was trying to say that I understood the difference in getting there.
Ok, sorry for misunderstanding. Do keep in mind also, that the taxable account also has a "pending tax" component: the capital gains. Albeit taxed at a potentially different rate.
not4me wrote: But your comment about a "tax paid on top" that I stumble on.
This may have been a poor choice of words. My intuition tells me that dividends in tax-deferred accounts are equivalent to not paying any dividend or capital gains tax, but let's see with an example. This uses the following assumptions:
Initial income to be invested: $10k
Income tax rate: 25%
LTCG rate: 15%
Dividend yield: 3%
Appreciation (capital gain): 7%

Code: Select all

Year    Taxable         Trad.   Roth
        Balance CostBas Balance Balance
0       7500    7500    10000   7500
1       8216    7607    11000   8250
2       9001    7725    12100   9075
3       9860    7854    13310   9983
4       10802   7995    14641   10981
5       11834   8150    16105   12079
6       12964   8320    17716   13287
7       14202   8505    19487   14615
8       15558   8709    21436   16077
9       17044   8932    23579   17685
10      18672   9176    25937   19453
postTax 17247   0       19453   19453
I think this shows the clear tax drag, even after accounting for paying income tax on all of the dividends + appreciation at drawdown. Functionally, this is also why it's advantageous for high-earners to do back-door Roth conversions: having the already taxed money in a Roth eliminates the tax drag from both dividends while invested, and capital gains when withdrawn.
not4me wrote: At the risk of muddying things more, consider the affect when the investor dies. While not always the case, in many or most cases there is a step-up in basis for assets outside the tax-deferred account. Any capital gain is wiped out. The tax-deferred account doesn't get a basis change & tax will be due based on the new recipient.
This is a good point to be aware of. If the effective tax rate of the receiver after the 10 years in the above example is 34.5% or higher (compared to 25% for the giver) then the receiver has more after-tax money if it were given with step-up bases than in a tax-deferred account. There may be other considerations since the growth could be larger if it were inherited as an inherited IRA, but it's still a valid point. At the same time, if I'm a giver trying to decide whether to give money to someone with a much higher effective tax rate than me, I may be more inclined to give the money to charity instead :wink:

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patrick013
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Re: Dividend / no dividend index funds?

Post by patrick013 » Mon May 21, 2018 3:01 pm

jalbert wrote:
Sun May 20, 2018 7:53 pm
Just Fed watching like I usually do. They usually provide some direction.
First, you specifically mean when the Fed funds rate has peaked not interest rates in general. Second, at any point in time, future Fed actions are guided by future outcomes not yet known at the point in time.
Quote from the Fed Bank - San Francisco
"........and the Fed continues to say rates will remain below levels
likely to prevail over the longer run, even as it lifts borrowing costs
to prevent overheating."
age in bonds, buy-and-hold, 10 year business cycle

dkturner
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Re: Dividend / no dividend index funds?

Post by dkturner » Mon May 21, 2018 3:24 pm

MrBeaver wrote:
Sat May 19, 2018 12:32 pm
Here’s an idea. Are any funds available like this?
  • No dividend capital appreciation fund. Contains market cap weighted stocks from US Total Stock Market, but only those that do not pay any dividend. Tries to liquidate stocks that transition to paying a dividend to institutional investors through ETF strategies to minimize capital gains.
  • All dividend fund. Contains market cap weighted stocks from US Total Stock Market, but only those which do pay a dividend. Tries to liquidate stocks that stop paying dividends to insututional investors through ETF strategies to minimize capital gains.
It would essentially be similar to the split of SP500 / Extended market funds, but with a much more actionable purpose: hold no-dividend in taxable and only-dividend in tax advantaged (Roth or Traditional).

Do any funds like this exist? I for one would love to use them, assuming expenses are low.
Back in the 1980s Vanguard had a fund called the Vanguard Gemini Fund with two asset classes - an income class that got dividend income and a capital class that got capital appreciation. The fund was liquidated, probably because of insufficient interest in the concept.

not4me
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Re: Dividend / no dividend index funds?

Post by not4me » Tue May 22, 2018 7:27 am

MrBeaver wrote:
Mon May 21, 2018 1:35 pm

My intuition tells me that dividends in tax-deferred accounts are equivalent to not paying any dividend or capital gains tax, but let's see with an example.
I think we may be talking past each other as we are looking at different aspects. I didn't follow the math in your example. I did a quick mental calculation in my mind & realized you were getting a different basis than I; so I stopped looking. Because I really don't see the point in the example. The sentence quoted above gets to part of the difference -- although really covered in previous posts, I'll try again. In one sense I agree -- they don't pay "dividend" tax they pay "ordinary income" tax. That's the point mentioned posts before about "converting".

That's not to say that tax-deferred accounts are bad or should be avoided. At any given point in time, ordinary income rates are never lower, but MAY be higher than dividend rates. But the tax-deferred account changes when the tax is applied & those rates may be higher or lower than when the dividend received. Plus, you get to have some gain from the $ that would have gone out in taxes. This becomes more pronounced the longer the deferral takes.

So, it is easy to come up with scenarios where it is better....or worse. In the example you used, the increase in tax rate exactly matched the annual gain which will distort differences. And if you knew in advance, it would be easy to chart which is better. You might want to play around with other scenarios that might be more "real world". For instance, a 25 year old starts with low income & pays 0% dividend rate, rises to high income at age 50 & pays 20%, then in retirement goes back down. Or stays high. Again endless scenarios to prove either way.

One last point. I wasn't quite sure you got my point about step-up in basis. That doesn't apply for gifts or tax-deferred accounts.

Please understand that I'm not opposed to tax-deferred accounts!

not4me
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Re: Dividend / no dividend index funds?

Post by not4me » Tue May 22, 2018 7:29 am

dkturner wrote:
Mon May 21, 2018 3:24 pm
probably because of insufficient interest in the concept.
I think this gets to the heart of it...once you understand dividends, it isn't surprising to me

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