Embarrassed to ask... dividends and Total Return

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SSeeling
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Embarrassed to ask... dividends and Total Return

Post by SSeeling » Sun Jan 06, 2019 10:06 pm

I apologize in advance for this question, but after research, still confused.
I understand that in the Vanguard Total Stock Fund, for example, when dividends are reinvested, that the NAV is reduced accordingly. In other words, the investor experiences no gain in the value of the fund as a result. If this 'no gain" assumption is correct, then how do reinvested dividends contribute to the overall Total Return of the fund? Hope my question clearly captures my confusion!

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Re: Embarrassed to ask... dividends and Total Return

Post by drk » Sun Jan 06, 2019 10:21 pm

Your confusion arises from thinking that reinvested dividends are something special about the fund. They aren't. It's just your broker taking your dividend and automatically buying additional shares on your behalf. Those dividend-reinvestment purchases don't increase the fund's per-share NAV for the same reason that your regular purchases don't. So:
SSeeling wrote:
Sun Jan 06, 2019 10:06 pm
how do reinvested dividends contribute to the overall Total Return of the fund?
They don't. The dividends contribute to the fund's total return because you get the dividend while keeping your existing shares. The reinvestment is just you purchasing the right to more shares of the fund's future returns.

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Duckie
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Re: Embarrassed to ask... dividends and Total Return

Post by Duckie » Sun Jan 06, 2019 10:30 pm

SSeeling wrote:how do reinvested dividends contribute to the overall Total Return of the fund?
The NAV is reduced when the dividend is paid out, regardless of whether it is reinvested or spent. By choosing to reinvest you are buying more shares and next time the dividend will be higher (not always, things happen, but generally). Since historically stocks have gone up more than they've gone down, your total return will go up partly from the underlying assets going up and partly from buying more shares (reinvesting).

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bluquark
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Re: Embarrassed to ask... dividends and Total Return

Post by bluquark » Sun Jan 06, 2019 10:40 pm

Let's take Amazon stock as an example. It has never distributed a dividend, so if you hold Amazon then "total return" = "capital gain".

Let's say that in 2025 Amazon distributes a dividend for the first time. Your total return doesn't change at all the day after dividends are distributed, because of the NAV decline. In that sense, the dividend distribution is a nonevent. The dividend doesn't create any return, it merely redistributes profits that were already on the company's books and incorporated in the stock price.

However, it does mean that a proportion of your total return suddenly moved from the "capital gain" bucket to the "dividend" bucket. Because money was removed from it, your "capital gain" bucket now undercounts your total return. In 2026, in order to calculate your total return on Amazon stock, you will now have to add "capital gain" + "dividends".
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JustinR
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Re: Embarrassed to ask... dividends and Total Return

Post by JustinR » Mon Jan 07, 2019 12:04 am

They don't.

Dividends don't make you wealthier at all. They do just the opposite: reduce your return.

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Re: Embarrassed to ask... dividends and Total Return

Post by kolea » Mon Jan 07, 2019 2:50 am

SSeeling wrote:
Sun Jan 06, 2019 10:06 pm
I apologize in advance for this question, but after research, still confused.
I understand that in the Vanguard Total Stock Fund, for example, when dividends are reinvested, that the NAV is reduced accordingly.
The NAV is reduced when the dividend is paid, not when the dividend is reinvested. When the dividend is reinvested, the NAV will stay the same - but only temporarily, as the market will affect the NAV also.
In other words, the investor experiences no gain in the value of the fund as a result. If this 'no gain" assumption is correct, then how do reinvested dividends contribute to the overall Total Return of the fund? Hope my question clearly captures my confusion!
Total return = capital gain + dividend return, so dividends always contribute to the total return, by definition.

But just because some stocks don't pay dividends does not mean dividend stocks have higher returns - it's just a different way of sharing profits with investors - some companies do it with dividends, others do it by increasing share price. But both come out the same in the end.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: Embarrassed to ask... dividends and Total Return

Post by MrJones » Mon Jan 07, 2019 2:55 am

drk wrote:
Sun Jan 06, 2019 10:21 pm
Your confusion arises from thinking that reinvested dividends are something special about the fund. They aren't. It's just your broker taking your dividend and automatically buying additional shares on your behalf.
drk nailed it. Turn off reinvested dividends, and instead take the dividends that you receive and buy more of your fund. There's no difference between these two. NAV has nothing to do with reinvestment of dividends.

There are three concepts here: NAV, dividends, and automatic reinvestment. Dividends affect NAV. Automatic reinvestments do not affect NAV. You are confusing dividends with automatic reinvestments.

it seems to me that some of the posts above, while well intentioned, are adding to the confusion by discussing the first two when your question is about the 1st and the 3rd.

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Re: Embarrassed to ask... dividends and Total Return

Post by The Wizard » Mon Jan 07, 2019 4:04 am

JustinR wrote:
Mon Jan 07, 2019 12:04 am
They don't.

Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
Sorry, this is incorrect...
Attempted new signature...

Miriam2
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Re: Embarrassed to ask... dividends and Total Return

Post by Miriam2 » Mon Jan 07, 2019 4:12 am

JustinR wrote: They don't.
Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
How do dividends "reduce your return?"

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Re: Embarrassed to ask... dividends and Total Return

Post by The Wizard » Mon Jan 07, 2019 4:18 am

And when we say "NAV is reduced" when dividends are paid, that doesn't necessarily mean the NAV declines that day compared to the previous day.
On Friday, the S&P 500 had a large 3.4% increase in value, so an index fund such as VFIAX had the same increase in NAV.
But if VFIAX had issued a quarterly dividend of 0.5% on Friday, then its NAV increase would have been just 2.9%...
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red5
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Re: Embarrassed to ask... dividends and Total Return

Post by red5 » Mon Jan 07, 2019 4:39 am

SSeeling wrote:
Sun Jan 06, 2019 10:06 pm
I apologize in advance for this question, but after research, still confused.
I understand that in the Vanguard Total Stock Fund, for example, when dividends are reinvested, that the NAV is reduced accordingly. In other words, the investor experiences no gain in the value of the fund as a result. If this 'no gain" assumption is correct, then how do reinvested dividends contribute to the overall Total Return of the fund? Hope my question clearly captures my confusion!
Here is another way to look at this. Let's say you choose not to reinvest your dividends while an identical other investor chooses to reinvest.

Not reinvesting your dividends would cause your shares to remain the same while the NAV would still reflect the dividend payout (which went to your settlement fund, or wherever).

At the same time the other investor is accumulating more shares as he or she reinvests.

Thus over time the other person's fund value will be larger since he or she will have more shares. Their total return of the fund will match the Total Return that you see on the Vanguard site. Your total return will not and it will be lower.

This isn't to say you've lost money. You've chosen to take this dividend money and put it elsewhere.

sambb
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Re: Embarrassed to ask... dividends and Total Return

Post by sambb » Mon Jan 07, 2019 4:46 am

dividends just increase your taxes

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Re: Embarrassed to ask... dividends and Total Return

Post by The Wizard » Mon Jan 07, 2019 5:24 am

sambb wrote:
Mon Jan 07, 2019 4:46 am
dividends just increase your taxes
That's certainly true and one reason that we recommend a TSM fund with modest dividends instead of a Dividend Aristocrat fund with much higher dividends...
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JustinR
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Re: Embarrassed to ask... dividends and Total Return

Post by JustinR » Mon Jan 07, 2019 5:59 am

Miriam2 wrote:
Mon Jan 07, 2019 4:12 am
JustinR wrote: They don't.
Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
How do dividends "reduce your return?"
Taxes.
The Wizard wrote:
Mon Jan 07, 2019 4:04 am
JustinR wrote:
Mon Jan 07, 2019 12:04 am
They don't.

Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
Sorry, this is incorrect...
You're right, you can either lose money or make zero money, which isn't technically "reducing" I guess.

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Re: Embarrassed to ask... dividends and Total Return

Post by Silk McCue » Mon Jan 07, 2019 6:45 am

JustinR wrote:
Mon Jan 07, 2019 5:59 am
Miriam2 wrote:
Mon Jan 07, 2019 4:12 am
JustinR wrote: They don't.
Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
How do dividends "reduce your return?"
Taxes.
The Wizard wrote:
Mon Jan 07, 2019 4:04 am
JustinR wrote:
Mon Jan 07, 2019 12:04 am
They don't.

Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
Sorry, this is incorrect...
You're right, you can either lose money or make zero money, which isn't technically "reducing" I guess.
Too late to try to spin your glib answer.

Cheers

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Re: Embarrassed to ask... dividends and Total Return

Post by Longdog » Mon Jan 07, 2019 6:58 am

JustinR wrote:
Mon Jan 07, 2019 5:59 am
Miriam2 wrote:
Mon Jan 07, 2019 4:12 am
JustinR wrote: They don't.
Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
How do dividends "reduce your return?"
Taxes
Any time you sell shares or receive a dividend taxes are involved. Assuming at some point you want to use your assets for some tangible purpose, taxes will be involved. If you simply want to see assets grow but have no intention of ever using them then I suppose having a dividend payout is harmful. Otherwise it’s just paying some taxes now rather than later.
Steve

JustinR
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Re: Embarrassed to ask... dividends and Total Return

Post by JustinR » Mon Jan 07, 2019 7:19 am

Silk McCue wrote:
Mon Jan 07, 2019 6:45 am
JustinR wrote:
Mon Jan 07, 2019 5:59 am
You're right, you can either lose money or make zero money, which isn't technically "reducing" I guess.
Too late to try to spin your glib answer.

Cheers
Err, you either gain $0 or lose money. Is this an advanced concept or something?


Longdog wrote:
Mon Jan 07, 2019 6:58 am
JustinR wrote:
Mon Jan 07, 2019 5:59 am
Miriam2 wrote:
Mon Jan 07, 2019 4:12 am
How do dividends "reduce your return?"
Taxes
Any time you sell shares or receive a dividend taxes are involved. Assuming at some point you want to use your assets for some tangible purpose, taxes will be involved. If you simply want to see assets grow but have no intention of ever using them then I suppose having a dividend payout is harmful. Otherwise it’s just paying some taxes now rather than later.
No. Dividends are even worse than selling shares yourself.

Read this:
TropikThunder wrote:
Sat Nov 03, 2018 7:00 pm
MNS CA wrote:
Sat Nov 03, 2018 7:33 am
barnaclebob wrote:
Fri Nov 02, 2018 9:04 am
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.
Actually, dividends are worse than selling shares because you end up paying more in taxes. No recovery of basis with dividends. Plus you can't control the timing of taxes the way you can when you sell.

I'd like to find an index fund that pays no dividends to hold in a taxable account. Any suggestions?
This point seems to be constantly missed when people argue over which tax rate applies to dividends (regular income vs LTCG, qualified vs non-qualified, etc). The fact the entire dividend is taxed as opposed to just the gain on a sale (proceeds minus basis) makes a big difference on tax liability, regardless of the rates.


There's literally nothing good about dividends. Why do people keep defending them?

Dividends should be reframed as: An annoying guy randomly sells off portions of your investments a few times a year, giving you extra taxes and lowering your return.

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Re: Embarrassed to ask... dividends and Total Return

Post by goblue100 » Mon Jan 07, 2019 7:34 am

JustinR wrote:
Mon Jan 07, 2019 7:19 am

There's literally nothing good about dividends. Why do people keep defending them?

Dividends should be reframed as: An annoying guy randomly sells off portions of your investments a few times a year, giving you extra taxes and lowering your return.
I understand the dividend argument, I do. On the other hand, I'll never turn down a dividend. I don't actively seek them, but if a business thinks they cannot increase the shareholder value with the money then I want it paid to me.

What if we reframe dividends as business profits? Business's have a life cycle. They grow, they get to a point where they have a hard time growing, and then they start to decline. If we want to participate in the latter two thirds of the business a nice dividend is often the best way.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: Embarrassed to ask... dividends and Total Return

Post by nisiprius » Mon Jan 07, 2019 7:35 am

Do not feel embarrassed to ask. "The only stupid question is the one you don't ask." Indeed, a salespeople often like to hide the stuff you really should be asking questions about, glossing over them quickly, and pretending to get irritated at questions--as if the answers went without saying. This can apply at a very high level! During the global financial crisis, Vanguard was one of the few firms that did not buy any shaky, inappropriately AAA-rated subprime bond products, because analyst Mabel Yu was willing to keep asking stupid questions and not willing to buy the bonds without getting answers she felt were good enough. Link to story. is worth reading.
"I got names of the rating agency analysts, and I asked them lots of questions," she says. "In the beginning, the questions would be 15 minutes to half an hour. But then it turned into hours, and many hours." She asked them about the possibility of house prices falling, of interest rates rising, of people not being able to refinance their mortgages. "If all of those things happen at same time, what would happen to our investment? I could not get a straight answer."

Yu says she was told repeatedly that she worried too much. "I felt so dumb," she says, adding that she was told, "Don't worry about it. Have a life."
Anyway.

If you have a dividend-oriented fund and you do not take the reinvestment option, then the dividends flow as money into your settlement account. In the fund itself, you hold the same number of shares of the fund. The value of each share probably increases because the market prices of the stocks in the fund increase. So, in your fund account, your number of fund shares does not change, the value of the fund probably increases--this is "capital appreciation"--and the number of dollars in your settlement account increases, often quarterly.

When you buy a fund at a brokerage, there is usually a checkbox where you indicate if you want to reinvest or not, and the default is to reinvest.

If you reinvest, the dividends are used to buy new shares. When a dividend payment occurs, often quarterly, nothing happens in your settlement account, but the number of shares you hold of the fund increases.

The "total return" includes both capital appreciation and dividends. It is in fact the total you actually receive if you choose to reinvest.

"Growth charts," sometimes labeled "hypothetical growth of $10,000," includes total return, both dividends and capital appreciation. If you compare growth charts for e.g. a dividend-focussed fund (blue) and a total market fund (orange), you will see that total return is not hugely different; it's the usual thing, they leapfrog, sometimes one is better, sometimes the other.

Source

Image

There are various clubs or cults or schools of thought in investing, as you'll see if you follow this forum for any length of time. Some of them a fairly simple and consist of a belief that some subset of the stock market is just consistently better than the market as a whole. This is what some dividend investors argue, but it's a weak argument. It is not as if you had a choice of two kinds of stocks that were equally good in terms of capital appreciation, but one of them also pays dividends. Generally speaking, a company that pays out dividends has less money to work with and would be expected to have slower capital appreciation. Both of the funds in the picture have about the same total return, but they get them in different ways. The blue fund gets more of its return from dividends and the orange fund gets less, yet overall it's about the same.
Last edited by nisiprius on Mon Jan 07, 2019 8:30 am, edited 3 times in total.
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Re: Embarrassed to ask... dividends and Total Return

Post by UpperNwGuy » Mon Jan 07, 2019 7:38 am

goblue100 wrote:
Mon Jan 07, 2019 7:34 am
I'll never turn down a dividend. I don't actively seek them, but if a business thinks they cannot increase the shareholder value with the money then I want it paid to me.

What if we reframe dividends as business profits? Business's have a life cycle. They grow, they get to a point where they have a hard time growing, and then they start to decline. If we want to participate in the latter two thirds of the business a nice dividend is often the best way.
What if the business decided to buy back some of its stock with those profits? How would you compare that to a dividend in your order of preference?

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Re: Embarrassed to ask... dividends and Total Return

Post by goblue100 » Mon Jan 07, 2019 7:58 am

UpperNwGuy wrote:
Mon Jan 07, 2019 7:38 am
goblue100 wrote:
Mon Jan 07, 2019 7:34 am
I'll never turn down a dividend. I don't actively seek them, but if a business thinks they cannot increase the shareholder value with the money then I want it paid to me.

What if we reframe dividends as business profits? Business's have a life cycle. They grow, they get to a point where they have a hard time growing, and then they start to decline. If we want to participate in the latter two thirds of the business a nice dividend is often the best way.
What if the business decided to buy back some of its stock with those profits? How would you compare that to a dividend in your order of preference?
That has certainly come into fashion since about the turn of the century. I'm ambivalent about the choice of a share buyback vs. a dividend. Obviously taxes are not due on a share buyback, but from what I see in actual practice is business's buyback shares and then issue options to the executives, so I'm not sure how much the actual pool of stocks shrinks on the buyback.
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Re: Embarrassed to ask... dividends and Total Return

Post by Shallowpockets » Mon Jan 07, 2019 8:13 am

Simply.
You have 100 shares of XYZ. Dividend is paid. Reinvested, now you have 105 shares. NAV drops. You pay taxes on the dividend amount. Now your cost basis is 105 shares. Stocks go up. Sometimes the NAV goes back up to the dividend price the same day. No matter, you have more shares. This is where the value comes in. Each time a dividend is paid and reinvested your number of shares rises.
Any fund/stock you own you want to go up in NAV value. That is the point of investing. With dividend stocks you own more and more stock.

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Re: Embarrassed to ask... dividends and Total Return

Post by Longdog » Mon Jan 07, 2019 8:31 am

goblue100 wrote:
Mon Jan 07, 2019 7:34 am
JustinR wrote:
Mon Jan 07, 2019 7:19 am

There's literally nothing good about dividends. Why do people keep defending them?

Dividends should be reframed as: An annoying guy randomly sells off portions of your investments a few times a year, giving you extra taxes and lowering your return.
I understand the dividend argument, I do. On the other hand, I'll never turn down a dividend. I don't actively seek them, but if a business thinks they cannot increase the shareholder value with the money then I want it paid to me.

What if we reframe dividends as business profits? Business's have a life cycle. They grow, they get to a point where they have a hard time growing, and then they start to decline. If we want to participate in the latter two thirds of the business a nice dividend is often the best way.
Right - a dividend is generally paid by a company that has grown to a point that it is in a mature market with a sustainable business. It is no longer a growth company. Utilities are probably the best example of companies in this category. They aren't growing much, but they do make money and have a sustainable business model. Tying this back to mutual funds that distribute dividends, this is because of the law that requires them to distribute dividends received from the underlying assets (or at least the bulk of them) to shareholders.

If you want to completely avoid dividends, stick only with growth companies or mutual funds that only invest in growth companies. But be aware that if/when those growth companies mature, they may start paying dividends, and they will likely be sold off from that mutual fund, generating a capital gains distribution.
Steve

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Re: Embarrassed to ask... dividends and Total Return

Post by KeithZz » Mon Jan 07, 2019 10:26 am

OP, actually you do not have any confusion. It is someone mistakenly informed you dividend increases total return, it is wrong. Dividend is part of total return. Nothing can increase your total return since total return is a concept includes everything you can possibly get.
The right way to say is what can reduce your total return for example not reinvest dividend, not tax efficient.
Take dividends and bought a car will reduce your total investment return. Reinvest dividends give you 1 step closer to get total return.
Total means total. :sharebeer

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Re: Embarrassed to ask... dividends and Total Return

Post by pkcrafter » Mon Jan 07, 2019 11:04 am

Chart of S&P 500 growth with and without dividends reinvested.

http://i55.tinypic.com/2ry1szo.jpg





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SSeeling
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Re: Embarrassed to ask... dividends and Total Return

Post by SSeeling » Mon Jan 07, 2019 10:40 pm

Thanks for all these thoughtful rsponses, but still confused.
Here's why- if I look at my Vanguard Portal for Vanguard Total Stock ( in IRA; dividends reinvested) under "Personal Performance" I see monthly accounting of "Market Gain/Loss of
-$5894.27, "Income Return" of $302.47 and Total Return of -$5591.80.
If dividends reinvested don't increase monetary value of fund (because of accompanying reduction of NAV) why is the "Income Return" in this Vanguard table represented with a positive number

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Re: Embarrassed to ask... dividends and Total Return

Post by drk » Tue Jan 08, 2019 12:25 am

SSeeling wrote:
Mon Jan 07, 2019 10:40 pm
Thanks for all these thoughtful rsponses, but still confused.
Here's why- if I look at my Vanguard Portal for Vanguard Total Stock ( in IRA; dividends reinvested) under "Personal Performance" I see monthly accounting of "Market Gain/Loss of
-$5894.27, "Income Return" of $302.47 and Total Return of -$5591.80.
If dividends reinvested don't increase monetary value of fund (because of accompanying reduction of NAV) why is the "Income Return" in this Vanguard table represented with a positive number
You were paid dividends worth $302.47.

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Re: Embarrassed to ask... dividends and Total Return

Post by 22twain » Tue Jan 08, 2019 1:35 am

SSeeling wrote:
Mon Jan 07, 2019 10:40 pm
"Market Gain/Loss of -$5894.27,
This is the change in value due to the change in the fund's NAV: basically (number of shares) * (change in NAV). If the number of shares changes during the month, the calculation is more complicated. This is a negative number because the NAV decreased.
"Income Return" of $302.47
As drk noted, these are the dividends that you received. It's always a positive number.
and Total Return of -$5591.80.
This is the sum of the preceding two items, taking the +/- signs into account. The dividends partly offset the market loss.
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JustinR
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Re: Embarrassed to ask... dividends and Total Return

Post by JustinR » Tue Jan 08, 2019 1:54 am

SSeeling wrote:
Mon Jan 07, 2019 10:40 pm
Thanks for all these thoughtful rsponses, but still confused.
Here's why- if I look at my Vanguard Portal for Vanguard Total Stock ( in IRA; dividends reinvested) under "Personal Performance" I see monthly accounting of "Market Gain/Loss of
-$5894.27, "Income Return" of $302.47 and Total Return of -$5591.80.
If dividends reinvested don't increase monetary value of fund (because of accompanying reduction of NAV) why is the "Income Return" in this Vanguard table represented with a positive number
Imagine if literally nothing else happened in the market other than your dividend was paid out. It would look like this:

Market Gain/Loss: $-302.47
Income Return (dividend): $302.47
Total Return: $0.00

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Re: Embarrassed to ask... dividends and Total Return

Post by staycalm » Tue Jan 08, 2019 8:49 am

Great discussion! Can we extend it to Bond funds. In a bond fund, does the dividend reduce the NAV or is it a coupon that has no effect on the NAV but adds to the fund value by puchasing more shares? A MM fund is clear, the dividend does not change the NAV but positively increases the number of shares and fund value. I'm not clear how Bond funds work or if they all work the same. :confused

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Re: Embarrassed to ask... dividends and Total Return

Post by grayfox » Tue Jan 08, 2019 9:12 am

SSeeling wrote:
Mon Jan 07, 2019 10:40 pm
Thanks for all these thoughtful rsponses, but still confused.
Here's why- if I look at my Vanguard Portal for Vanguard Total Stock ( in IRA; dividends reinvested) under "Personal Performance" I see monthly accounting of "Market Gain/Loss of
-$5894.27, "Income Return" of $302.47 and Total Return of -$5591.80.
If dividends reinvested don't increase monetary value of fund (because of accompanying reduction of NAV) why is the "Income Return" in this Vanguard table represented with a positive number
This the mathematical definition of Total Return over some period:

Image

This is the first formula you will learn in any finance class and you will use this formula all the time. You can rewrite it as:

TR = (P1 - P0)/P0 + D/P0
TR = return due to price change + return due to dividend
TR = Capital Return + Income Return

E.g. Vanguard 500 Index Fund Investor Shares (VFINX)

Code: Select all

          Vanguard 500 Index Fund Investor Shares
Year     Capital return  Income return    Total return
2018          -6.23%          1.71%          -4.52%
2017          19.48%          2.18%          21.67%
2016           9.60%          2.22%          11.82%
2015          -0.74%          1.99%          1.25%
2014          11.46%          2.04%          13.51%
2013          29.68%          2.50%          32.18%
2012          13.45%          2.38%          15.82%
2011          -0.02%          1.98%          1.97%
2010          12.81%          2.11%          14.91%
2009          23.56%          2.92%          26.49%
2008          -38.52%         1.50%          -37.02%
2007           3.49%          1.89%          5.39%
2006          13.64%          2.01%          15.64%
2005           2.94%          1.84%          4.77%
2004           8.74%          2.00%          10.74%
2003          26.52%          1.98%          28.50%
Last year there was a capital return (loss) of -6.23% plus income return of +1.71% for a Total Return = -4.52%

Income Return is always >0, but Capital Return can be positive (gain) or negative (loss).
Sic transit gloria mundi. [STGM]

FoolMeOnce
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Re: Embarrassed to ask... dividends and Total Return

Post by FoolMeOnce » Tue Jan 08, 2019 9:20 am

One thing that has perhaps been implied but not explicitly stated is: reinvesting the dividend maintains your same position in the fund as before the dividend; pocketing the dividend lowers your position while giving you extra cash, as if you has sold shares of that value.

You have 100 shares of a fund with a NAV of 100, for $10,000 total.

You get a 2% dividend. Nav drops to 98 (assuming a flat market). You have 100 shares of a fund with a NAV of $98, for $9,800 invested. Plus you now have $200 cash, for a total of $10,000.

If you reinvest the dividend, you buy roughly 2.04 shares at a price of $98. You now have 102.04 shares at $98, for a total of $10,000 invested in the fund. The future proceeds accordingly, and your returns on this fund include all the value the fund has generated for you, including dividends.

If you do not reinvest the dividend, you continue from a value of $9,800 in the fund. You also are free to do what you wish with the $200 dividend, which, if invested elsewhere, might generate it's own returns. But by pulling out money from your investment, your position in the future based on shares x NAV does not reflect your "total return" from your investment in this specific fund
Last edited by FoolMeOnce on Tue Jan 08, 2019 2:50 pm, edited 1 time in total.

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Ben Mathew
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Re: Embarrassed to ask... dividends and Total Return

Post by Ben Mathew » Tue Jan 08, 2019 10:12 am

SSeeling wrote:
Sun Jan 06, 2019 10:06 pm
when dividends are reinvested, that the NAV is reduced accordingly.
That is not correct. When dividends are paid, the NAV is reduced accordingly. NAV has nothing to do with reinvesting dividends. Whether you choose to reinvest or not does not affect NAV of the fund.

NAV is calculated per share. Money coming into the fund increase shares, and does not affect per share calculations. When you reinvest dividends, you are simply choosing to invest more money in the fund with your dividend payout. It's no different from the fund's point of view whether you are putting $1 into the fund because of a dividend payout or because you got a raise or because you decided to save more or you decided to changed you asset allocation. Whatever the reason, when you buy more shares, Vanguard will have to issue more shares to accomodate you. The price and NAV per share will not be affected.

dbr
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Re: Embarrassed to ask... dividends and Total Return

Post by dbr » Tue Jan 08, 2019 10:54 am

FoolMeOnce wrote:
Tue Jan 08, 2019 9:20 am
One thing that has perhaps been implied but not explicitly stated is: reinvesting the dividend maintains your same position in the fund as before the dividend; pocketing the dividend lowers your position while giving you extra cash, as if you has sold shares of that value.

You have 100 shares of a fund with a NAV of 100, for $10,000 total.

You get a 2% dividend. Nav drops to 98 (assuming a flat market). You have 100 shares of a fund with a NAV of $98, for $9,800 invested. Plus you now have $200 cash, for a total of $10,000.

If you reinvest the dividend, you buy roughly 2.04 shares at a price of $98. You now have 102.04 shares at $98, for a total of $10,000 invested in the fund. The future proceeds accordingly, and your returns on this fund include all the value the fund has generated for you, including dividends.

If you do not reinvest the dividend, you continue from a value of $9,800 in the fund. You also are free to do what you wish with the $200 dividend, which, if invested elsewhere, might generate it's own returns. But by pulling out money from your investment, your position in the future bases on shares x NAV does not reflect your "total return" from your investment in this specific fund
Indeed, which is why not reinvesting is in fact a withdrawal from the position equivalent in assets held (but not shares held) to having sold some shares if there had not been a dividend paid. It is true that the dividend could be used to buy some other investment, in which case the investor has to consider the portfolio as a whole to keep track of everything.l

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SSeeling
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Re: Embarrassed to ask... dividends and Total Return

Post by SSeeling » Tue Jan 08, 2019 11:32 am

Thanks to all. I think (finally) I get it.
My other comment is to recognize the extraordinary collective wisdom and expertise embodied in this Forum. What a treasure !!

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bluquark
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Re: Embarrassed to ask... dividends and Total Return

Post by bluquark » Tue Jan 08, 2019 6:02 pm

staycalm wrote:
Tue Jan 08, 2019 8:49 am
Great discussion! Can we extend it to Bond funds. In a bond fund, does the dividend reduce the NAV or is it a coupon that has no effect on the NAV but adds to the fund value by puchasing more shares? A MM fund is clear, the dividend does not change the NAV but positively increases the number of shares and fund value. I'm not clear how Bond funds work or if they all work the same. :confused
Here is a past thread about this: viewtopic.php?t=237080 . Short answer: yes, bond fund payouts reduce the NAV.
70/30 portfolio | Equity: global market weight | Bonds: 20% long-term munis - 10% LEMB

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ogd
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Re: Embarrassed to ask... dividends and Total Return

Post by ogd » Tue Jan 08, 2019 8:40 pm

Longdog wrote:
Mon Jan 07, 2019 6:58 am
JustinR wrote:
Mon Jan 07, 2019 5:59 am
Miriam2 wrote:
Mon Jan 07, 2019 4:12 am
JustinR wrote: They don't.
Dividends don't make you wealthier at all. They do just the opposite: reduce your return.
How do dividends "reduce your return?"
Taxes
Any time you sell shares or receive a dividend taxes are involved. Assuming at some point you want to use your assets for some tangible purpose, taxes will be involved. If you simply want to see assets grow but have no intention of ever using them then I suppose having a dividend payout is harmful. Otherwise it’s just paying some taxes now rather than later.
No, now rather than later is a big deal. It's even worse than JustinR's reply below yours. If you are deferring capital gains until you actually need the money, you continue to earn returns on the unpaid taxes, which then compound. Over long periods of time, like 20-30 years, this effect can make your effective capital gains tax rate half or less, even without taking into account the flexibility to sell in low income vs high income years that the other post alluded to.

Of course, the problem of now vs later also affects frequent capital gain taking and is not specific to dividends. But with capital gains alone, you have a choice to be diligent about taxes, by not switching funds and using funds that don't distribute capital gains. Dividends remove that choice, so one should at least not seek them out if not actively avoid them.

There are a lot of things that one can wave off or be agnostic about in the investing world: factors, whether dividends affect pre-tax return or risk, sectors that behave better than others in such and such conditions, etc. But tax efficiency really matters -- it's one of the few things we have control over, with guaranteed profits -- and a lot of it has to do with deferring gains as much as possible. Which is why we have so many posts and wiki pages devoted to it.
UpperNwGuy wrote:
Mon Jan 07, 2019 7:38 am
goblue100 wrote:
Mon Jan 07, 2019 7:34 am
I'll never turn down a dividend. I don't actively seek them, but if a business thinks they cannot increase the shareholder value with the money then I want it paid to me.

What if we reframe dividends as business profits? Business's have a life cycle. They grow, they get to a point where they have a hard time growing, and then they start to decline. If we want to participate in the latter two thirds of the business a nice dividend is often the best way.
What if the business decided to buy back some of its stock with those profits? How would you compare that to a dividend in your order of preference?
Under current tax laws, the best way for a company to get rid of unwanted cash is share buybacks, which are in effect equivalent to auto-reinvested dividends but without forcing those who prefer to reinvest, or more importantly tax efficient funds, to pay taxes. In other times (or when selling shares was expensive), dividends were better. We live in the current tax regime, for better or worse 8-)

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arcticpineapplecorp.
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Re: Embarrassed to ask... dividends and Total Return

Post by arcticpineapplecorp. » Tue Jan 08, 2019 9:08 pm

SSeeling wrote:
Sun Jan 06, 2019 10:06 pm
I apologize in advance for this question, but after research, still confused.
I understand that in the Vanguard Total Stock Fund, for example, when dividends are reinvested, that the NAV is reduced accordingly. In other words, the investor experiences no gain in the value of the fund as a result. If this 'no gain" assumption is correct, then how do reinvested dividends contribute to the overall Total Return of the fund? Hope my question clearly captures my confusion!
the dividends are part of the earnings. Usually price increases (or decreases) as earnings increase/decrease over time. If the price increases 8% a year over time and the dividend is 2% per year, the 2% is part of the earnings (what wasn't reinvested) and the rest is capital appreciation (change in price to reflect the increased earnings).

I can't remember it correctly but I think it's been calculated that dividends make up about a third of the total return (feel free to correct that if it's incorrect).

Here's a price chart over the last 10 years of the total stock market index fund. Dividends were paid every three months (you can see if you click on "event" and check the box titled "dividends"). The price changed over time even though dividends were paid all along and the price increased because earnings increased). The dividend was $0.14 per share on 3/24/2009 and $0.35 a share on 9/27/18. The price per share went up $41.41 over 10 years (188.74% according to the chart) from $21.55/share to $63.35/share:

Image

source:
https://quotes.morningstar.com/chart/fu ... 3Afalse%7D

But the total return however was 251.56% over the same time period:

Image

source:
https://quotes.morningstar.com/chart/fu ... 3Afalse%7D

This was also discussed here in the context of bonds (with pictures to make the point):
viewtopic.php?f=1&t=268060#p4292250
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

delamer
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Re: Embarrassed to ask... dividends and Total Return

Post by delamer » Tue Jan 08, 2019 9:24 pm

JustinR wrote:
Mon Jan 07, 2019 7:19 am
Silk McCue wrote:
Mon Jan 07, 2019 6:45 am
JustinR wrote:
Mon Jan 07, 2019 5:59 am
You're right, you can either lose money or make zero money, which isn't technically "reducing" I guess.
Too late to try to spin your glib answer.

Cheers
Err, you either gain $0 or lose money. Is this an advanced concept or something?


Longdog wrote:
Mon Jan 07, 2019 6:58 am
JustinR wrote:
Mon Jan 07, 2019 5:59 am
Miriam2 wrote:
Mon Jan 07, 2019 4:12 am
How do dividends "reduce your return?"
Taxes
Any time you sell shares or receive a dividend taxes are involved. Assuming at some point you want to use your assets for some tangible purpose, taxes will be involved. If you simply want to see assets grow but have no intention of ever using them then I suppose having a dividend payout is harmful. Otherwise it’s just paying some taxes now rather than later.
No. Dividends are even worse than selling shares yourself.

Read this:
TropikThunder wrote:
Sat Nov 03, 2018 7:00 pm
MNS CA wrote:
Sat Nov 03, 2018 7:33 am
barnaclebob wrote:
Fri Nov 02, 2018 9:04 am
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.
Actually, dividends are worse than selling shares because you end up paying more in taxes. No recovery of basis with dividends. Plus you can't control the timing of taxes the way you can when you sell.

I'd like to find an index fund that pays no dividends to hold in a taxable account. Any suggestions?
This point seems to be constantly missed when people argue over which tax rate applies to dividends (regular income vs LTCG, qualified vs non-qualified, etc). The fact the entire dividend is taxed as opposed to just the gain on a sale (proceeds minus basis) makes a big difference on tax liability, regardless of the rates.


There's literally nothing good about dividends. Why do people keep defending them?

Dividends should be reframed as: An annoying guy randomly sells off portions of your investments a few times a year, giving you extra taxes and lowering your return.
You are completely ignorng that dividends don’t work that way in tax advantaged accounts.

JustinR
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Re: Embarrassed to ask... dividends and Total Return

Post by JustinR » Tue Jan 08, 2019 9:53 pm

delamer wrote:
Tue Jan 08, 2019 9:24 pm
You are completely ignorng that dividends don’t work that way in tax advantaged accounts.
There's nothing to discuss about dividends in tax-advantaged accounts...as there are no taxes there. The net gain there is $0, which we already covered:
JustinR wrote:
Mon Jan 07, 2019 7:19 am
Err, you either gain $0 or lose money.

ogd wrote:
Tue Jan 08, 2019 8:40 pm
Longdog wrote:
Mon Jan 07, 2019 6:58 am
Any time you sell shares or receive a dividend taxes are involved. Assuming at some point you want to use your assets for some tangible purpose, taxes will be involved. If you simply want to see assets grow but have no intention of ever using them then I suppose having a dividend payout is harmful. Otherwise it’s just paying some taxes now rather than later.
No, now rather than later is a big deal. It's even worse than JustinR's reply below yours. If you are deferring capital gains until you actually need the money, you continue to earn returns on the unpaid taxes, which then compound. Over long periods of time, like 20-30 years, this effect can make your effective capital gains tax rate half or less, even without taking into account the flexibility to sell in low income vs high income years that the other post alluded to.

Of course, the problem of now vs later also affects frequent capital gain taking and is not specific to dividends. But with capital gains alone, you have a choice to be diligent about taxes, by not switching funds and using funds that don't distribute capital gains. Dividends remove that choice, so one should at least not seek them out if not actively avoid them.

There are a lot of things that one can wave off or be agnostic about in the investing world: factors, whether dividends affect pre-tax return or risk, sectors that behave better than others in such and such conditions, etc. But tax efficiency really matters -- it's one of the few things we have control over, with guaranteed profits -- and a lot of it has to do with deferring gains as much as possible. Which is why we have so many posts and wiki pages devoted to it.
Another great point in the list of negatives that come with dividends.

mikeyzito22
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Re: Embarrassed to ask... dividends and Total Return

Post by mikeyzito22 » Thu May 30, 2019 10:38 pm

dbr wrote:
Tue Jan 08, 2019 10:54 am
FoolMeOnce wrote:
Tue Jan 08, 2019 9:20 am
One thing that has perhaps been implied but not explicitly stated is: reinvesting the dividend maintains your same position in the fund as before the dividend; pocketing the dividend lowers your position while giving you extra cash, as if you has sold shares of that value.

You have 100 shares of a fund with a NAV of 100, for $10,000 total.

You get a 2% dividend. Nav drops to 98 (assuming a flat market). You have 100 shares of a fund with a NAV of $98, for $9,800 invested. Plus you now have $200 cash, for a total of $10,000.

If you reinvest the dividend, you buy roughly 2.04 shares at a price of $98. You now have 102.04 shares at $98, for a total of $10,000 invested in the fund. The future proceeds accordingly, and your returns on this fund include all the value the fund has generated for you, including dividends.

If you do not reinvest the dividend, you continue from a value of $9,800 in the fund. You also are free to do what you wish with the $200 dividend, which, if invested elsewhere, might generate it's own returns. But by pulling out money from your investment, your position in the future bases on shares x NAV does not reflect your "total return" from your investment in this specific fund
Indeed, which is why not reinvesting is in fact a withdrawal from the position equivalent in assets held (but not shares held) to having sold some shares if there had not been a dividend paid. It is true that the dividend could be used to buy some other investment, in which case the investor has to consider the portfolio as a whole to keep track of everything.l
Thank you dbr. Question then: So if I theoretically have put $5500 for 10 years into a Roth and I turn off the re-investment, I can take up to any amount out of the settlement fund generated by dividends up to what I have contributed because you aren't taxed on contributions? I'm not planning on doing this any time soon but if it were to generate substantial dividends in the future, I could just take from the settlement fund without owing taxes, correct?

Silk McCue
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Re: Embarrassed to ask... dividends and Total Return

Post by Silk McCue » Fri May 31, 2019 6:57 am

mikeyzito22 wrote:
Thu May 30, 2019 10:38 pm
Thank you dbr. Question then: So if I theoretically have put $5500 for 10 years into a Roth and I turn off the re-investment, I can take up to any amount out of the settlement fund generated by dividends up to what I have contributed because you aren't taxed on contributions? I'm not planning on doing this any time soon but if it were to generate substantial dividends in the future, I could just take from the settlement fund without owing taxes, correct?
If you are under age 59.5 at the end of the 10 years you can take the full original contribution amount of $5500 out without tax or penalty but not the earnings or growth. If you are over 59.5 at the end of 10 years you can take the entire balance out without paying taxes. It doesn't matter where the funds sit within the account.

Please reference this table to see how Roth holdings are treated based upon age holding period (how long since the first Roth account was opened) an whether the funds were contributed or converted.


Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
Cheers

rkhusky
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Re: Embarrassed to ask... dividends and Total Return

Post by rkhusky » Fri May 31, 2019 7:04 am

mikeyzito22 wrote:
Thu May 30, 2019 10:38 pm
Thank you dbr. Question then: So if I theoretically have put $5500 for 10 years into a Roth and I turn off the re-investment, I can take up to any amount out of the settlement fund generated by dividends up to what I have contributed because you aren't taxed on contributions? I'm not planning on doing this any time soon but if it were to generate substantial dividends in the future, I could just take from the settlement fund without owing taxes, correct?
Dividends are irrelevant to taxation of Roth withdrawals.

Roth's are tax free - you don't pay tax on qualified withdrawals. You can withdraw contributions from a Roth at any time, penalty and tax free. Contributions come from outside the Roth using already-taxed money. Earnings are the current balance minus total contributions (negative earnings are losses). Dividends within a Roth are irrelevant to the calculation of earnings. If you make a non-qualified withdrawal, you will likely owe tax and penalty on the earnings, unless you qualify for an exception.

mikeyzito22
Posts: 368
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Re: Embarrassed to ask... dividends and Total Return

Post by mikeyzito22 » Fri May 31, 2019 11:52 am

Silk McCue wrote:
Fri May 31, 2019 6:57 am
mikeyzito22 wrote:
Thu May 30, 2019 10:38 pm
It doesn't matter where the funds sit within the account.
Right, so if I turned off dividend reinvestment I could theoretically take dividends from settlement because for sure my dividends will be smaller than contributions over time. I get the withdrawal rules. Thank you for helping!

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