no dividends in index funds!

[riptide]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

[magicrat]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

Why would you want dividends?

[barnaclebob]

Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.

[JoMoney]

There are index funds that focus on dividends.
Vanguard has the ETF VYM, which is a high-dividend fund, market-cap weighted (no REITs)
SPYD is a high-dividend fund that is heavy in REITs, appears to be equal-weighted

...buy why? Why do you want to focus on dividends?

[oldcomputerguy]

When a mutual fund or ETF pays a dividend, the price of the fund share falls by the amount of the dividend, so the net gain is zero. But you're still on the hook for taxes for the dividends, and if you reinvest those dividends (as you should if you're after total return growth) you'll have to come up with funds out of your pocket to pay those taxes.

True, dividends are part of total return, but they are not the be-all and end-all of investing.

[Random Walker]

Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave

[alex_686]

Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave

Modigliani- Miller Theory. Published in the 50s, won in the 80s, a foundational theory in textbooks today.

It makes lots of assumptions, like no taxes and no agent issues, but it is the correct place to start.

[Mountain Doc]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

I wish my index funds paid smaller dividends.

[Tamalak]

When you're paid a dividend, it's like taking a dollar out of your wallet and putting it in your pocket. You already owned the thing that had the money in it so you already owned the money before the dividend.

We all buy shares of companies because we want to profit, and profit feels 'real' when it's paid out in a dividend. But it's actually 'real' when the company makes the money - it gets added to the value of the share.

[Jack FFR1846]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

I wish my index funds paid smaller dividends.

BRK/B

[Mountain Doc]

I wish my index funds paid smaller dividends.

BRK/B

I gave that serious consideration for my taxable account, but decided the tax savings wasn't worth the decreased diversification. I also have little certainty that Berkshire will remain dividend-free.

[riptide]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

[ResearchMed]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

If you need the extra $500, then sell $500 worth of holdings.
As mentioned above, it's like taking the money out of your wallet (the investment account) and putting it into your pocket (the cash account).

Or, if you don't really need it, then it's like enforced extra savings
Just keep it there and let it build.

RM

[dkturner]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

Your index fund manager is doing you a favor. He’s saving you the taxes on $500. If you really need the extra $500 why not just sell a few shares of one of your index funds? You will only owe taxes on the gain from the sale, not on the whole $500.

[magicrat]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

Is it also great to pay taxes on the dividends now rather than deferring them?

[alex_686]

If you need the extra $500, then sell $500 worth of holdings.
As mentioned above, it's like taking the money out of your wallet (the investment account) and putting it into your pocket (the cash account).

Or, if you don't really need it, then it's like enforced extra savings
Just keep it there and let it build.

I will take the flip side. First, ResearchMed is absolutely technically right and it is a position that I take - if the person is a "homo economicus" - a truly rational man. However, few people truly are rational. From a behavioral economist viewpoint, if one is in the draw down phase of one's life and needs to withdraw from one's investment account, dividends can provided emotional reinforcement.

However, as OP hints at, it does remove control and places it into the market. IIRC, the dividend payout ratio has not changed much over the past 20 years - even if we factor in stock buy backs. However, the market is expecting low risk low returns for the next 10 years, which is pushing up stock prices while dividends remain constant. The market also loves high risk tech companies that reinvest in themselves. So the yield falls.

Hazards of turning control of one's income stream over to the market.

[beyou]

Amazon stock pays no dividends. Is that a bad investment ?
It earned 40%/year for last decade, but you prefer dividends ?

[vineviz]

If you need the extra $500, then sell $500 worth of holdings.
As mentioned above, it's like taking the money out of your wallet (the investment account) and putting it into your pocket (the cash account).

Or, if you don't really need it, then it's like enforced extra savings
Just keep it there and let it build.

I will take the flip side. First, ResearchMed is absolutely technically right and it is a position that I take - if the person is a "homo economicus" - a truly rational man. However, few people truly are rational. From a behavioral economist viewpoint, if one is in the draw down phase of one's life and needs to withdraw from one's investment account, dividends can provided emotional reinforcement.

I agree.

My personal view is what I would classify as the more "rational" view, which is that total return is what ultimately matters. A dollar from dividends and a dollar from stock sales are equivalent in my mind.

However, it is well documented that many investors have a strong preference for dividend income over capital gains. Rather than spending so much energy trying to convince these investors that their preference is wrong (how often does that really work anyway), why not just meet them where they are?

Especially since, according to both theory and empirical evidence, it probably doesn't matter much anyway. For example, since its inception in 1988 the Vanguard Equity Income Fund (VEIPX) has produced nearly the same total return as Vanguard 500 Index Fund (VFINX), but VEIPX generated between 2x and 2.5x as much "income" each year.

I'd say for an investor who prefers dividend income, choosing a low-cost diversified fund that has that characteristic more than meets the definition of "good enough".

[bloom2708]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

The $800 isn't income, it is a withdrawal (if you do not re-invest). Plus you owe tax on the dividend.

If you put the $800 into your checking account, it is a withdrawal of $800. As mentioned, just sell a bit more and send it to your checking account.

[vineviz]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

I would suggest, as others have, simply replacing some of your low dividend index funds with low cost, diversified index funds that pay more in dividends.

For large cap stocks, three ETF choices I think are great are Vanguard High Dividend Yield ETF (VYM), iShares Core High Dividend ETF (HDV), and SPDR Portfolio S&P 500 High Div ETF (SPYD).

Although the expense ratio is a little on the high side, Invesco S&P SmallCap Utilities & Communication Services ETF (PSCU) has a pretty good yield.

[bhsince87]

When i read the title to this thread, I thought, "Yay! another person like me is looking for an index fund that doesn't pay dividends!"

Alas, no.

At one point, I actually researched starting up such a fund. I think there would be a market for it.

For folks who want or NEED to control their yearly incomes, dividends can be a huge headache. The ability to time and control my income has a lot of advantages.

[riptide]

Ok, thanks all, for the points. I still considering switching to Wellington fund.

[riptide]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

I would suggest, as others have, simply replacing some of your low dividend index funds with low cost, diversified index funds that pay more in dividends.

For large cap stocks, three ETF choices I think are great are Vanguard High Dividend Yield ETF (VYM), iShares Core High Dividend ETF (HDV), and SPDR Portfolio S&P 500 High Div ETF (SPYD).

Although the expense ratio is a little on the high side, Invesco S&P SmallCap Utilities & Communication Services ETF (PSCU) has a pretty good yield.

Thank you.

[delamer]

Ok, thanks all, for the points. I still considering switching to Wellington fund.

I inherited some high dividend stocks and I too enjoy seeing the dividends move into my settlement account each quarter. Something about it is psychologically satisfying.

But I don’t let those brief moments of enjoyment get in the way of moving toward a portfolio that focuses on total return, not dividend payouts.

To me, it is the same as not allowing the allure of a nightly bowl of ice cream to get in the way of eating a healthy, balanced diet. The ice cream is great for a short-term jolt, but isn’t in my best interest in the long run.

[BigMoneyNoWhammies]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

How is selling shares of the index funds in which you're invested any different in outcome than receiving a dividend check? If you want $800 quarterly, just sell $800 worth of the funds quarterly. The dividend thing is purely psychological. Total return is what matters. I don't care if the return is from dividends or capital appreciation; at the end of the day it's all part of the same pie.

[beyou]

A classic argument is that companies that pay large dividends, have no better ideas to grow the firm, at least ideas that require capital to expand.

So you prefer a company (or fund of such companies) that has “run out of ideas” ? Instead of building new factories, new labs, hiring the right people, just give cash away ?
Hopefully some are just so flush with cash they can do both. But you missing out on companies that have aggressive growth plans.

[rkhusky]

A classic argument is that companies that pay large dividends, have no better ideas to grow the firm, at least ideas that require capital to expand.

So you prefer a company (or fund of such companies) that has “run out of ideas” ? Instead of building new factories, new labs, hiring the right people, just give cash away ?
Hopefully some are just so flush with cash they can do both. But you missing out on companies that have aggressive growth plans.

I don't mind a company that has a product that people want and will continue to want and all the company does is make money year after year. And then they send me a cut of the profits year after year.

Paying a dividend is the cornerstone of investing in the big picture sense. Who would invest in the stock market if there were no dividends and the only way to get your money back was to find someone else to buy your stock shares or have the companies go out of business and liquidate their equipment and real estate? It would essentially be a Ponzi scheme.

On the other hand, as an individual investor, dividends don't matter to me in my tax-advantage accounts and are an annoyance in my taxable account because I have to pay tax on them.

[MotoTrojan]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

Simply withdraw the extra $500/quarter from your shares. Assuming qualified dividends, these are identical situations. If non-qualified, you actually could come out ahead with the index.

[The Wizard]

Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.

Selling the chickens that lay your golden eggs?
Wow...

[Artsdoctor]

Ok, thanks all, for the points. I still considering switching to Wellington fund.

Make sure that you always take into consideration the after-tax return to you. Wellington is not particularly tax-efficient but if your marginal investment tax rate is low, you might get away with it. But comparing Wellington to high-dividend stock funds isn't helpful.

[retiredjg]

Ok, thanks all, for the points. I still considering switching to Wellington fund.

Riptide, you are completely missing the point.

Would you consider taking $800 out of the TSP so you could have some spending money? Taking and spending your dividends is exactly the same thing as taking money out of your retirement account.

If you owned a share of something worth $100 a share and it pays you a 2% dividend, you share is now worth $98 and you have $2 in your pocket to spend. You still have only $100 except that $2 of it is probably about to be gone.

Putting Wellington into a taxable account is a poor move tax wise. Spending the dividends is even dumber. You have a perfectly fine portfolio. Stop messing with it.

[utvolfan]

So since you are taxed on dividends anyway, if you need to withdrawal retirement money doesn't it make sense to take the dividends instead of reinvesting since they are going to be taxed that year regardless of what you do with them? Then if you need more than what the dividends provide you would sell shares? Or am I missing something...which is definitely a possibility! Like always reinvest dividends, no matter what?

Still trying to learn and am thankful for any input.

[All Seasons]

Some people in this thread have commented on the potential benefits of a fund with stocks that paid no dividends.

For those that aren't aware, there exist synthetic funds that have no capital gain or dividend distributions at all. They use derivatives to track an underlying index rather than holding the underlying securities. This way you can track the market index and "hold" everything while having the no-distribution benefit. You only potentially get hit with taxes when you sell the security.

The flip side of course is that there's an extra layer of risk with the derivative counterparty. Since most of these funds have minimum 90% cash collaterlization, the risk is small though.

[retiredjg]

So since you are taxed on dividends anyway, if you need to withdrawal retirement money doesn't it make sense to take the dividends instead of reinvesting since they are going to be taxed that year regardless of what you do with them? Then if you need more than what the dividends provide you would sell shares? Or am I missing something...which is definitely a possibility! Like always reinvest dividends, no matter what?

Still trying to learn and am thankful for any input.

If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.

This person is still accumulating. Definitely not in retirement yet.

[Wakefield1]

Ok, thanks all, for the points. I still considering switching to Wellington fund.

Make sure that you always take into consideration the after-tax return to you. Wellington is not particularly tax-efficient but if your marginal investment tax rate is low, you might get away with it. But comparing Wellington to high-dividend stock funds isn't helpful.

Wellington has some of its dividend payout from bonds and therefor not "qualified"?
Wellington in tax-deferred or Roth?

[bottlecap]

As others have indicated, this is just mental accounting.

The form of your return is immaterial, except under tax law, in which case, dividends are less advantageous.

JT

[arcticpineapplecorp.]

So you want to replace 5 index funds with one actively managed fund? Do you have a philosophy towards investing or is it just go for the highest dividends?

You bought index funds for a reason. Now you want to abandon index funds for an actively managed fund. I think you should read more on dividends to understand why you're chasing the wrong thing:

viewtopic.php?f=1&t=225546&hilit=divide ... d#p3490496
viewtopic.php?f=10&t=242939&hilit=divid ... d#p3806231

[MotoTrojan]

So since you are taxed on dividends anyway, if you need to withdrawal retirement money doesn't it make sense to take the dividends instead of reinvesting since they are going to be taxed that year regardless of what you do with them? Then if you need more than what the dividends provide you would sell shares? Or am I missing something...which is definitely a possibility! Like always reinvest dividends, no matter what?

Still trying to learn and am thankful for any input.

You’re correct but focusing on an index that has enough dividends to only spend them is less diversified than a total market fund holder who spends dividends and shares.

[fennewaldaj]

Paying a dividend is the cornerstone of investing in the big picture sense. Who would invest in the stock market if there were no dividends and the only way to get your money back was to find someone else to buy your stock shares or have the companies go out of business and liquidate their equipment and real estate? It would essentially be a Ponzi scheme.

Right in a certain sense the whole point of investing in stocks is to receive dividends (or buy backs) eventually. Of course there will always be some companies in early stages that reinvest everything as there should be. If mature companies stopped paying shareholders we would have a problem.

[FoolMeOnce]

Who would invest in the stock market if there were no dividends and the only way to get your money back was to find someone else to buy your stock shares or have the companies go out of business and liquidate their equipment and real estate?

I would guess a good 90% of the thousands of members of this board, who seem to know a thing or two.

[fennewaldaj]

Who would invest in the stock market if there were no dividends and the only way to get your money back was to find someone else to buy your stock shares or have the companies go out of business and liquidate their equipment and real estate?

I would guess a good 90% of the thousands of members of this board, who seem to know a thing or two.

I doubt that is true. I would assume that most would recognize that it would be a serious problem if no companies ever paid dividends (or bought back shares). Of course it being a problem if no companies pay dividends is not an argument to overweight high dividend payers it is simply acknowloging the ultimate point of partial company ownership.

[naha66]

Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave

Really Dave?

[PFInterest]

I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....

Do you not understand? Its not additional. Its not free. Its behavioral.

[Toons]

Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.

Is there a transaction cost to take a dividend?

[Random Walker]

Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave

Really Dave?

I’m guessing I was wrong?

Dave

[JoMoney]

Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave

Really Dave?

I’m guessing I was wrong?

Dave

It depends on the dividend. Under current tax law, "qualified" dividends may get the same treatment as long-term capital gains. Dividends from REITs, bond funds, many foreign stocks, and depending on how long you've held the stock, may not be "qualified".
https://www.bogleheads.org/wiki/Qualified_dividend

[TropikThunder]

Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.

Is there a transaction cost to take a dividend?

Transaction costs are so 20th century.

[White Coat Investor]

I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.

Just get GE and Sears.

[marcopolo]

Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave

Really Dave?

I’m guessing I was wrong?

Dave

Dave,
Please tell me this was just a momentary brain lapse!
For someone who spends so much time thinking about constructing an efficient portfolio, and pays high fees to have tax-inefficient ALTs in their portfolio towards that end, it would be rather shocking to me if you did not fully understand every nuance of how dividends (qual and non-qual), cap gains, interest, etc. are taxed.

[JoMoney]

Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.

Is there a transaction cost to take a dividend?

Usually not explicitly, but it does cost the company something to calculate and distribute (or pay their agent to), there are some more explicit costs with dividends on foreign stocks/ADRs where an intermediary bank is taking some fees to hold the stock and convert the dividends and distribute.