Dividends vs Total Return

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sixtyforty
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Dividends vs Total Return

Post by sixtyforty »

I've read on a number of threads in this forum that one should pay more attention to total returns and not dividends by themselves. To understand this better, I would like to give an example and then maybe get some feedback..

Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.

Why in this scenario would one consider total returns over dividends ?
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci
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dwickenh
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Re: Dividends vs Total Return

Post by dwickenh »

Taxation and risk come to mind. The 6% yield is controlling your taxable income instead of you.

The risk involved with a 6% yield may be unattractive to many investors.
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BlueCable
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Re: Dividends vs Total Return

Post by BlueCable »

Would you rather have 10 shares worth $10 each, or 5 shares worth $20 each?

Actually, say 9.5 @ $10 or 5 @ $20, due to taxes.
radiowave
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Re: Dividends vs Total Return

Post by radiowave »

OP, they are both the same! A dividend can be considered a forced sale of assets - it is not free money.

Here's a thread from last year about total returns: viewtopic.php?t=245558

They way I view it is I would rather have more unrealized gains than dividends because I have to pay capital gains on the dividends (just as I would if I sold shares of the fund). In accumulation, I don't need extra cash as it pushes up my adjusted gross income (AGI). In withdraw in retirment, a small amount of dividends is fine, but I don't have control over them so in some circumstances can push me into a higher tax bracket.
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livesoft
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Re: Dividends vs Total Return

Post by livesoft »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.
It looks like a race to the bottom in both cases to me.

I know you wrote "assuming", but please post the ticker symbols of an ETF yielding 6% nowadays, so that we can evaluate its risk, its past history, and whether the companies in it are paying out capital or going out of business. That is, the assumption that the ETF won't go to zero is problematic.

As for another fund yielding 3%, one knows that selling 3% adds up to 6%, but one also knows that 6% is higher than a sustained withdrawal rate that will last. But one might say such a withdrawal scheme will last 33 years or so before it goes to zero, right? That will be more than long enough for people of a certain age.

I suppose one can change the scenario from 6% & 3%+3% to 4% & 2%+2% and be more realistic. But then one has 50 years or so of withdrawals of the initial 2%.

So with the funds that I own which each have hundreds of holdings, I never ever worry that they will go to zero anyways.
Last edited by livesoft on Sat Mar 23, 2019 8:36 am, edited 1 time in total.
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Re: Dividends vs Total Return

Post by S_Track »

Good question, I believe with account A the NAV will be reduced each month because of the distribution. Thus you will get less in dividends each month because of the price per share reduction.
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sixtyforty
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Re: Dividends vs Total Return

Post by sixtyforty »

S_Track wrote: Sat Mar 23, 2019 8:36 am Good question, I believe with account A the NAV will be reduced each month because of the distribution. Thus you will get less in dividends each month because of the price per share reduction.
The NAV may be reduced, but the shares stay the same and the investment returns is based on $/share. Account B, will also see a reduction in NAV because you are reducing the number of shares.
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Re: Dividends vs Total Return

Post by S_Track »

sixtyforty wrote: Sat Mar 23, 2019 8:46 am
S_Track wrote: Sat Mar 23, 2019 8:36 am Good question, I believe with account A the NAV will be reduced each month because of the distribution. Thus you will get less in dividends each month because of the price per share reduction.
The NAV may be reduced, but the shares stay the same and the investment returns is based on $/share. Account B, will also see a reduction in NAV because you are reducing the number of shares.
I beleive the reduction of NAV in account B is due to the distribution just like A. Isn't NAV and $/share the same with a mutual fund?

Account B does have less of a reduction of the NAV because the distribution is less. But Account B still does not win (even though it has capital increase) since you have to sell shares to maintain a 6% distribution as you said. I think livesoft has it correct (as always :) ) , seems like the same race to the bottom with both accounts in this example. With Account A you maintain your shares but they are not worth anything, with account B you shares increase in value but you run out of them.
Last edited by S_Track on Sat Mar 23, 2019 9:34 am, edited 1 time in total.
sambb
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Re: Dividends vs Total Return

Post by sambb »

dividends are a drag in high tax brackets
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sixtyforty
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Re: Dividends vs Total Return

Post by sixtyforty »

The only two convincing arguments that make sense to me is (1) the "risk" associated with the 6% yield and (2) taxes.

If the accounts are tax advantaged then (2) goes away.
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lostdog
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Re: Dividends vs Total Return

Post by lostdog »

Shares will appreciate over time. Dividends are just 1 part of total return. Dividends plus appreciation. Shares depreciate when the dividend is paid out. It's like a forced sell on some shares.

Dividend investing is more psychological in nature. It gives the investor comfort in knowing they don't have to sell shares even though total return works out better. You also lose diversification with dividend investing.

With total return investing you more control of your tax situation.
andrew99999
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Re: Dividends vs Total Return

Post by andrew99999 »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.
sixtyforty wrote: Sat Mar 23, 2019 8:18 am Why in this scenario would one consider total returns over dividends ?
Yes, in your unrealistic scenario, there is not much difference between them.

You could similarly make up another unrealistic scenario where in A you get a short term government bond with guaranteed yield 9% and in B you get equities with an expected return of 9% and use this to prove that bonds are better than equities.

What exactly is the point of these unrealistic scenarios other than to find out ways to use biased half-truths to falsely prove a point and lead someone astray instead of giving them the truth so they can make an educated decision for themselves?
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sixtyforty
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Re: Dividends vs Total Return

Post by sixtyforty »

andrew99999 wrote: Sat Mar 23, 2019 10:01 am
sixtyforty wrote: Sat Mar 23, 2019 8:18 am Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.
sixtyforty wrote: Sat Mar 23, 2019 8:18 am Why in this scenario would one consider total returns over dividends ?
Yes, in your unrealistic scenario, there is not much difference between them.

You could similarly make up another unrealistic scenario where in A you get a short term government bond with guaranteed yield 9% and in B you get equities with an expected return of 9% and use this to prove that bonds are better than equities.

What exactly is the point of these unrealistic scenarios other than to find out ways to use biased half-truths to falsely prove a point and lead someone astray instead of giving them the truth so they can make an educated decision for themselves?
Read the whole thread. See my previous post.
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Re: Dividends vs Total Return

Post by jeffyscott »

sixtyforty wrote: Sat Mar 23, 2019 9:41 am The only two convincing arguments that make sense to me is (1) the "risk" associated with the 6% yield and (2) taxes.

If the accounts are tax advantaged then (2) goes away.
If you have two funds that each have a total return of exactly 6% each year, one is not going to last longer than the other because more of it's return is in the form of dividends.

I think you are missing that the fund with less dividends, but same total return, will be increasing in price. Or else the other fund will be decreasing in price. In any case, one way or another the price changes will differ if the two funds have same total return but different dividends.

If simple logic does not convince you, maybe make a spreadsheet.
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Re: Dividends vs Total Return

Post by gd »

I was recently given responsibility for managing a cluttered active brokerage account designed for income, much as you're suggesting. As an aside, a careful analysis showed that over 25 years, it performed about the same as a 50/50 index solution, worse than 60/40. My current time-sink is trying to work through it and decipher the various high-income funds in the portfolio. For example, a utilities fund turned out to basically be selling off its capital to produce "income". The brokerage statements consistently claimed 10-20% "current yield" rather than the actual 6-6.5%, and effectively concealed a 1-for-2 reverse split several years back. It was more or less getting that 6.5% total, but at current trends I guessed it would be worthless in about 10 years. In other words, a riskier, obfuscated version of your #2. Adding insult to injury, it delayed the 1099 for the account by 1-2 months every year as the fund company worked the books to report the sell-off as income. The final 1099 never matched the brokerage monthly statements. This was an extreme case, but many other investments in the account have similar trends, more artfully executed.

I write off the income vs. total return argument as basically a religious argument. Pick your faith, and live with it. Do whichever feels right to you, but do your homework. That homework will be much harder with income.
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Re: Dividends vs Total Return

Post by sixtyforty »

gd wrote: Sat Mar 23, 2019 10:46 am I was recently given responsibility for managing a cluttered active brokerage account designed for income, much as you're suggesting. As an aside, a careful analysis showed that over 25 years, it performed about the same as a 50/50 index solution, worse than 60/40. My current time-sink is trying to work through it and decipher the various high-income funds in the portfolio. For example, a utilities fund turned out to basically be selling off its capital to produce "income". The brokerage statements consistently claimed 10-20% "current yield" rather than the actual 6-6.5%, and effectively concealed a 1-for-2 reverse split several years back. It was more or less getting that 6.5% total, but at current trends I guessed it would be worthless in about 10 years. In other words, a riskier, obfuscated version of your #2. Adding insult to injury, it delayed the 1099 for the account by 1-2 months every year as the fund company worked the books to report the sell-off as income. The final 1099 never matched the brokerage monthly statements. This was an extreme case, but many other investments in the account have similar trends, more artfully executed.

I write off the income vs. total return argument as basically a religious argument. Pick your faith, and live with it. Do whichever feels right to you, but do your homework. That homework will be much harder with income.

Very interesting. This is the realization I have come to with this after thinking more through it. It really isn't about Total returns vs dividends, as others have suggested (in other threads). It's about the RISK associated between the two and the tax consequences.

Perhaps going forward, instead of the phrase "You should pay attention to Total Returns vs looking at just the dividends" could be restated as "You should look at the return and RISK between the two investments and tax consequences". Take care of that and dividends and/or cap appreciation is already figured out.
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Re: Dividends vs Total Return

Post by MotoTrojan »

sixtyforty wrote: Sat Mar 23, 2019 8:46 am
S_Track wrote: Sat Mar 23, 2019 8:36 am Good question, I believe with account A the NAV will be reduced each month because of the distribution. Thus you will get less in dividends each month because of the price per share reduction.
The NAV may be reduced, but the shares stay the same and the investment returns is based on $/share. Account B, will also see a reduction in NAV because you are reducing the number of shares.
So your dividend gets smaller each year, no? Until it (and the NAV) are both 0. Sadly you haven’t found the magical money tree. Dividends, taxes aside, are literally the same as selling shares, and you don’t even get to decide whether you want to.
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Re: Dividends vs Total Return

Post by Wakefield1 »

Does chasing yield increase risk?
Does chasing yield ever decrease total return?
But could avoiding dividends completely also increase risk? (As in less diversification)
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Re: Dividends vs Total Return

Post by MotoTrojan »

Wakefield1 wrote: Sat Mar 23, 2019 4:08 pm Does chasing yield increase risk?
Does chasing yield ever decrease total return?
But could avoiding dividends completely also increase risk? (As in less diversification)
Why not ignore them and buy the full market?
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Re: Dividends vs Total Return

Post by Phineas J. Whoopee »

A withdrawal from a portfolio is a withdrawal from a portfolio.

Stocks go down in price by the amount of the dividend they paid. Sometimes it can be hard to see because of other market movements.

Withdrawing dividends and withdrawing funds from sold shares are exactly equivalent, outside tax considerations.

The important number in your holdings is their overall market value, not the total number of shares.

PJW
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Re: Dividends vs Total Return

Post by Thesaints »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am I've read on a number of threads in this forum that one should pay more attention to total returns and not dividends by themselves. To understand this better, I would like to give an example and then maybe get some feedback..

Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.

Why in this scenario would one consider total returns over dividends ?
Because the part in bold is not true.
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Re: Dividends vs Total Return

Post by RAchip »

“I think you are missing that the fund with less dividends, but same total return, will be increasing in price. Or else the other fund will be decreasing in price. In any case, one way or another the price changes will differ if the two funds have same total return but different dividends“

I believe that this argumwnt is flawed. The fund with less dividends may or may not increase in price. It depends on multiple factors. For example, its market price may well be influenced by what is done with the retained earnings. Morover, in any case, market price is based on supply and demand not a mathametical calculation of what someone thinks a stock should trade for. A portfolio of company’s that pay and grow dividends in a responsible manner is a perfectly reasonble nvestment strategy.

As for “total return” , I personally do not consider unrealized capital gains as “return.” If I own $100 worth of stock and it goes up in market price to $110 in 2019 then in 2020 drops in price back to $100, saying you had a “return” of 10% in 2019 is nice but irrelevant. There is realized return and unrealized return. Unrealized return may never be realized.
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Re: Dividends vs Total Return

Post by Thesaints »

RAchip wrote: Sat Mar 23, 2019 5:13 pm Unrealized return may never be realized.
Nonetheless they are taxed (retail investors excepted).

Yours looks like a bad accounting method. For many years you may have zero return and then all of sudden you get maybe a 900% return in a single year ??
That's exactly the opposite of what useful accounting methods try to achieve.
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Re: Dividends vs Total Return

Post by JustinR »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am I've read on a number of threads in this forum that one should pay more attention to total returns and not dividends by themselves. To understand this better, I would like to give an example and then maybe get some feedback..

Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.

Why in this scenario would one consider total returns over dividends ?

Account B is better.

The number of shares does not matter. "100 shares of $1" is the same as "1 share of $100".
  • Account A is like having 100 shares of $1. Every time a dividend is issued, the price drops by that amount. You're not gaining any wealth from getting a dividend.
  • Account B is like having 1 share of $100.
Assuming no taxes, and you're reinvesting dividends in Account A, the two accounts are equivalent.


The difference:

You pay more taxes with account A because every dividend is a forced taxable event, and you pay more tax on the amount of cash you receive than if you had sold it yourself.

With Account B, you choose when to sell and how much. You're taxed less on the amount you sell than if you were to receive it as a dividend.


Another way to rephrase your question is:

Would you rather choose when to sell your stocks (Account B) or would you have a stranger sell parts of your stock at random times and tax you more on it (Account A)?
Last edited by JustinR on Mon Mar 25, 2019 12:21 pm, edited 1 time in total.
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Re: Dividends vs Total Return

Post by jeffyscott »

RAchip wrote: Sat Mar 23, 2019 5:13 pm “I think you are missing that the fund with less dividends, but same total return, will be increasing in price. Or else the other fund will be decreasing in price. In any case, one way or another the price changes will differ if the two funds have same total return but different dividends“

I believe that this argumwnt is flawed. The fund with less dividends may or may not increase in price. It depends on multiple factors. For example, its market price may well be influenced by what is done with the retained earnings. Morover, in any case, market price is based on supply and demand not a mathametical calculation of what someone thinks a stock should trade for. A portfolio of company’s that pay and grow dividends in a responsible manner is a perfectly reasonble investment strategy.
The OP's premise was both have a 6% total return. The 6% comes from price appreciation and dividends, so more of one means less of the other for this hypothetical scenario.

I'm actually a fan of dividends (own Vanguard dividend growth and high dividend funds) but the OP's reasoning is flawed.
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Re: Dividends vs Total Return

Post by patrick013 »

I think on a long term investment in taxable after tax calc's............

If you have one of those S&P dividend indexes with only 50-100 stocks yield or equal weighted indexes and the before tax total long term return is 1% higher than TSM for example, your long term return over TSM will be .67% higher, after tax.

Most charted returns for those indexes are 1% or higher than the 500 or TSM.

If returns are equal, general index vs. dividend index, the general index has the advantage in after tax long term return of .20% based on long term performance.

These are ball park figures assuming slightly below average returns on a long term static basis for analysis.
Higher or lower total returns would result in slightly different but similar results.
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Re: Dividends vs Total Return

Post by gd »

sixtyforty wrote: Sat Mar 23, 2019 10:58 am
gd wrote: Sat Mar 23, 2019 10:46 am I was recently given responsibility for managing a cluttered active brokerage account designed for income, much as you're suggesting. As an aside, a careful analysis showed that over 25 years, it performed about the same as a 50/50 index solution, worse than 60/40. My current time-sink is trying to work through it and decipher the various high-income funds in the portfolio. For example, a utilities fund turned out to basically be selling off its capital to produce "income". The brokerage statements consistently claimed 10-20% "current yield" rather than the actual 6-6.5%, and effectively concealed a 1-for-2 reverse split several years back. It was more or less getting that 6.5% total, but at current trends I guessed it would be worthless in about 10 years. In other words, a riskier, obfuscated version of your #2. Adding insult to injury, it delayed the 1099 for the account by 1-2 months every year as the fund company worked the books to report the sell-off as income. The final 1099 never matched the brokerage monthly statements. This was an extreme case, but many other investments in the account have similar trends, more artfully executed.

I write off the income vs. total return argument as basically a religious argument. Pick your faith, and live with it. Do whichever feels right to you, but do your homework. That homework will be much harder with income.

Very interesting. This is the realization I have come to with this after thinking more through it. It really isn't about Total returns vs dividends, as others have suggested (in other threads). It's about the RISK associated between the two and the tax consequences.

Perhaps going forward, instead of the phrase "You should pay attention to Total Returns vs looking at just the dividends" could be restated as "You should look at the return and RISK between the two investments and tax consequences". Take care of that and dividends and/or cap appreciation is already figured out.
Left out one bit for brevity-- the actively managed portfolio (15-25 investments of all kinds) was more stable than the backtested, hypothetical stock/bond index solution during the down times in that 25 years. Pretty close to 50/50, slightly more than 60/40 and clearly more stable (less down in bad, less up in good) than 70/30. The higher stock ratios came out better as of end 2018 (+10% for 70/30), but that's the end of a long bull market. It was down 7% in 2008. The differences could possibly be absorbed in particularly good or bad active portfolio management. And I don't need another hobby.
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Re: Dividends vs Total Return

Post by fortyofforty »

What the OP is missing is the cash generated by the underlying stocks in the two examples.

The companies generating cash can either pay it out in dividends, or hold on to it for other purposes.

If it's paid out in dividends, the money is out of the hands of the underlying companies. The valuation by investors of their shares should be reduced by the amount paid out in dividends.

If the cash is held by the companies, the valuation by investors of those shares should increase by the amount of that cash. The only time it "disappears" is if the companies waste it, it's stolen, or it's used for bad acquisitions and projects that fail.

Excluding taxes, in a perfect world, the cash would be valued the same, whether held or paid out. Taxes paid today won't have to be paid later, so even the tax situation is more complicated, but with dividends you cannot control when you will owe the taxes, and dividends are taxed at a higher rate than capital gains.
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Re: Dividends vs Total Return

Post by jeffyscott »

fortyofforty wrote: Sun Mar 24, 2019 7:58 am...and dividends are taxed at a higher rate than capital gains.
Not if they are qualified dividends.
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Re: Dividends vs Total Return

Post by Elena »

These days, since interest rates will remain steady, I am thinking whether dividend paying stocks beat rate-chasing, tax-wise. I know they are different animals in terms of principal allocation. However, interest is taxed at one's income tax bracket, while qualified dividends could be advantageous depending on one's bracket. Maybe circumstantially, one can just think about divs. as a replacement for interest paying deposits (again, depending on one's income bracket and interest rates).
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Re: Dividends vs Total Return

Post by fortyofforty »

jeffyscott wrote: Sun Mar 24, 2019 8:15 am
fortyofforty wrote: Sun Mar 24, 2019 7:58 am...and dividends are taxed at a higher rate than capital gains.
Not if they are qualified dividends.
Yes, I was not getting into all the minute details of the debate. So, some dividends are "qualified" but that's not all dividends, or even most dividends. Here is a link to the Investopedia page describing more of the details that I chose not to get into.
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Re: Dividends vs Total Return

Post by jeffyscott »

100% of Vanguard high dividend yield, dividend appreciation, dividend growth, and equity income fund's dividends were qualified in 2018. I'd assume that was and will be the case in other years.

Seems like it's pretty easy to a avoid earning unqualified dividends in a taxable account, by simply putting dividend focused US stock funds in the taxable account.
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Re: Dividends vs Total Return

Post by onourway »

jeffyscott wrote: Sun Mar 24, 2019 10:31 am 100% of Vanguard high dividend yield, dividend appreciation, dividend growth, and equity income fund's dividends were qualified in 2018. I'd assume that was and will be the case in other years.

Seems like it's pretty easy to a avoid earning unqualified dividends in a taxable account, by simply putting dividend focused US stock funds in the taxable account.
Even if the tax rate is the same, the total tax cost is higher on cash taken as dividends vs. sale of shares. A dividend is a sale of shares treated as if the cost basis is zero.
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Re: Dividends vs Total Return

Post by fortyofforty »

Of course, things like Vanguard's Total Stock Market is not 100% qualified dividends, nor are any of the international choices so often mentioned here. That's to say nothing of many balanced choices, which are much worse in that regard. Seems like it might not be so easy to completely avoid non-qualified dividends in a taxable account. Fund company literature used to say companies managed funds without regard to tax considerations, but I'm not sure if that's still the case.
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Re: Dividends vs Total Return

Post by abuss368 »

In my opinion the debate is often too polarized. That is one or the other. I have friends and family that accumulated "enough" and have a portfolio that is balanced with total market index funds. The needs are such that the average yield of 3.00% from dividends (i.e. Total Stock funds, US & International REITs, and bond funds) is more than enough to support cash flow needs.
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Re: Dividends vs Total Return

Post by jminv »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am I've read on a number of threads in this forum that one should pay more attention to total returns and not dividends by themselves. To understand this better, I would like to give an example and then maybe get some feedback..

Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.

Why in this scenario would one consider total returns over dividends ?
I understand that in either case, the dividends will not be reinvested and the stock sale will happen since you need 6% regardless.

What you're saying doesn't follow because:
Asset A and B have total returns of 6%.
Asset B's price will be increasing by 3% per year by definition (according to your statement above). It will also yield 3%. If I own asset B, I will sell an amount of shares to realize my 3% required addition return. You'll fully take out the 6% in price appreciation and dividends and spend it, not re-invest. The price of the shares has increased 3% during the year. So, zero return after distributions. So the market value in your account after distributions at the end of the year will be the same as at the beginning of the year. That you have less shares doesn't matter.

Asset A's price will be increasing by 0% per year according to you. It will yield 6%. You will take the 6% and use it, not re-invest it. Again, zero returns after distributions. Again, the market value in your account will be the same at the end of the year as at the beginning of the year.

Your own statement says that the price of Asset B will never go to 0 and that the market value of both will remain the same but you didn't realize it.

In reality, any dividend etf yielding 6% would be full of junk and you can't ever say that the total return of one asset will be the same as another in the future. The companies in each basket would not have the same characteristics. Also, a 6% withdrawal rate will lead is excessive and can cause portfolio depletion if sustained for a long period, but this was not how you setup your statement.

There will also be tax differences and, if I didn't really need the full 6%, there would be a forced tax event if it's held in taxable. As far as costs of selling shares go, it's now zero through many brokers so I don't feel that I neglected that in the analysis. Selling versus dividends could be suboptimal if the two securities in question were sufficiently illiquid - large bid ask spread - but then, I wouldn't invest in an illiquid security in the first place.

The preference for dividends is mostly behavioral. People want to see a periodic payment that doesn't rely on price appreciation. They can be terrible if the person receiving the dividends doesn't need the income but also doesn't re-invest the dividends. Every month they get a check and keep it in the bank or, worse, they spend it on things they otherwise wouldn't. If it's in taxable, having to pay taxes on the dividends and then re-investing them also means you will have far less money at the end than a total return equivalent, but lower dividend paying, security.
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Re: Dividends vs Total Return

Post by TropikThunder »

onourway wrote: Sun Mar 24, 2019 10:37 am
jeffyscott wrote: Sun Mar 24, 2019 10:31 am 100% of Vanguard high dividend yield, dividend appreciation, dividend growth, and equity income fund's dividends were qualified in 2018. I'd assume that was and will be the case in other years.

Seems like it's pretty easy to a avoid earning unqualified dividends in a taxable account, by simply putting dividend focused US stock funds in the taxable account.
Even if the tax rate is the same, the total tax cost is higher on cash taken as dividends vs. sale of shares. A dividend is a sale of shares treated as if the cost basis is zero.
That’s a good way to put it, and the piece that is almost always missing from the “dividends: good or bad” debates. The entire dividend is taxed, at whatever rate applies to one’s situation. Only the gain is taxed when one sells shares. $1,000 in dividends will incur much higher taxes than $1,000 in shares sold.
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Re: Dividends vs Total Return

Post by jeffyscott »

onourway wrote: Sun Mar 24, 2019 10:37 am
jeffyscott wrote: Sun Mar 24, 2019 10:31 am 100% of Vanguard high dividend yield, dividend appreciation, dividend growth, and equity income fund's dividends were qualified in 2018. I'd assume that was and will be the case in other years.

Seems like it's pretty easy to a avoid earning unqualified dividends in a taxable account, by simply putting dividend focused US stock funds in the taxable account.
Even if the tax rate is the same, the total tax cost is higher on cash taken as dividends vs. sale of shares. A dividend is a sale of shares treated as if the cost basis is zero.
In my case, I remain in the 0% tax bracket for cap gains and qualified dividends and am doing Roth conversions to the top of that bracket. My total tax bill for each year will be whatever it is going to be based on taxable income of ~$77,000.

I would choose to have US stocks in taxable account, in any case, for tax efficiency (and simplicity vs. having foreign in taxable and dealing with the tax credit for that). So for myself I see no tax problem caused by choosing to have high dividend yield (VHYAX) in a taxable account. Any dividends are taxed at 0%. Tax deferred and Roth accounts are used for fixed income and foreign stock as well as additional US stock.

I prefer dividends for behavioral reasons, but it is the behavior of corporate management that is the concern. I don't trust them to not waste money, such as by doing stock buybacks in order to pump up the price and cash in their options.
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Re: Dividends vs Total Return

Post by Phineas J. Whoopee »

jeffyscott wrote: Sun Mar 24, 2019 1:20 pm ...
I prefer dividends for behavioral reasons, but it is the behavior of corporate management that is the concern. I don't trust them to not waste money, such as by doing stock buybacks in order to pump up the price and cash in their options.
In what way is distribution of cash via stock buybacks worse than doing it via dividends?

PJW
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Re: Dividends vs Total Return

Post by jsprag »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.
Only sort of true. As the share price increases, the number of shares sold to make up the difference decreases.

Theoretically, remaining shares asymptotically approach zero but never quite get there. In reality (because funds don't allow you to sell fractional positions to an arbitrarily small number of decimal places) once you reach the smallest allowable sales increment then you'll have to sell your entire remaining position.

Do a spreadsheet example as jeffyscott suggested, and you'll see that year-end portfolio values are exactly the same for each account. Since they are mathematically equivalent you would choose based on tax and other behavioral factors discussed.
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Re: Dividends vs Total Return

Post by Thesaints »

Hint: What's the highest priced fund share on the market ?
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Re: Dividends vs Total Return

Post by Iridium »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.
This is the error. If you are selling 3% of shares per year, that means each year you are keeping 97% of shares. So, after several years, you have:
.97 * .97 * ... * .97 * .97 shares. So long as the number of years is finite, then you will have a non-zero number of shares. Meanwhile, each of those shares keeps increasing in value, exactly counteracting the reduction in shares.

If you are worried about an infinite number of years, then we should change the question to what is the value after an infinite period of time:

Value = shares * price

Assume first year, you had 1 share with price of $1

shares = 0.97 * ... * 0.97
price = 1.03 * ... * 1.03

Value = 0.97 * ... * 0.97 * 1.03 * ... * 1.03
Value = (0.97 * 1.03) * ... * (0.97 * 1.03)
Value = 1 * ... * 1
Value = $1

So, even taking the limit as time goes to infinity, you would still have the same amount of money. Note, that I cheated a bit in stating that 1.03 * 0.97 is equal to 1. It isn't of course, but under your plan, if you had growth of 3%, you should really only sell 2.912...% rather than 3% in order to collect 3% of your original investment (as each share is worth 3% more, the value of the sale is worth 3% of the original investment even though you sell slightly fewer than 3% of shares). If you were to plug in the exact number of shares you are supposed to sell rather than 3%, then 1.03 * [1 - percent you sell] would equal exactly 1.

So, forever and ever, your investment will be remain worth the same amount (with your given assumptions). Now, you might argue that mutual fund shares and ETFs can't be split into infinitely small units. However, if the NAV/share price was to get high enough, then a split would almost certainly occur. So, in practice, the quantization doesn't really change anything.
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Re: Dividends vs Total Return

Post by jeffyscott »

Phineas J. Whoopee wrote: Sun Mar 24, 2019 4:16 pm
jeffyscott wrote: Sun Mar 24, 2019 1:20 pm ...
I prefer dividends for behavioral reasons, but it is the behavior of corporate management that is the concern. I don't trust them to not waste money, such as by doing stock buybacks in order to pump up the price and cash in their options.
In what way is distribution of cash via stock buybacks worse than doing it via dividends?

PJW
In an idealized world none. But as I indicated, I don't trust our real world corporate managers. Neither did Bogle, as indicated here: https://personal.vanguard.com/bogle_sit ... 30611.html
(where he also says: "Bring Back Dividends!")
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Re: Dividends vs Total Return

Post by onthecusp »

The attraction of the dividend return is a "perception" of a dividend portfolio's income as being guaranteed.
sixtyforty wrote: Sat Mar 23, 2019 8:18 am Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
A number of replies mentioned that the Risk in such an investment should be included in the analysis. The Risk I see in this scenario is that such an ETF is unlikely to continually produce the same returns month in and out.

In a recession many dividend stocks slash their dividend. Then if they survive, grow it back over time. That is a lost opportunity. Another risk is that focusing on dividend only stocks reduces overall diversification and focuses the portfolio on "cash cow" businesses and ignores the market in many growth or value stocks.
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Re: Dividends vs Total Return

Post by indexlover »

fortyofforty wrote: Sun Mar 24, 2019 9:40 am
jeffyscott wrote: Sun Mar 24, 2019 8:15 am
fortyofforty wrote: Sun Mar 24, 2019 7:58 am...and dividends are taxed at a higher rate than capital gains.
Not if they are qualified dividends.
Yes, I was not getting into all the minute details of the debate. So, some dividends are "qualified" but that's not all dividends, or even most dividends. Here is a link to the Investopedia page describing more of the details that I chose not to get into.
Also, don't forget the NIIT ( Net Investment Income tax) on the qualified dividends - The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

The 3 income thresholds to note:
- $250,000 for married couples filing jointly
- $125,000 for married spouses filing separately
- $200,000 for single and head of household (with a qualifying person)
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Re: Dividends vs Total Return

Post by CyclingDuo »

onthecusp wrote: Mon Mar 25, 2019 9:00 amIn a recession many dividend stocks slash their dividend. Then if they survive, grow it back over time. That is a lost opportunity. Another risk is that focusing on dividend only stocks reduces overall diversification and focuses the portfolio on "cash cow" businesses and ignores the market in many growth or value stocks.
We can take a look at what happened to the S&P 500 dividends during the previous recessions...

Image

71% of the 139 Dividend Champions increased or maintained their dividends in the 2008, 2009, 2010 recession. The obvious glaring cutters/slashers were the financials due to the financial crisis.
"Save like a pessimist, invest like an optimist." - Morgan Housel
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Re: Dividends vs Total Return

Post by onthecusp »

CyclingDuo wrote: Mon Mar 25, 2019 9:23 am
onthecusp wrote: Mon Mar 25, 2019 9:00 amIn a recession many dividend stocks slash their dividend. Then if they survive, grow it back over time. That is a lost opportunity. Another risk is that focusing on dividend only stocks reduces overall diversification and focuses the portfolio on "cash cow" businesses and ignores the market in many growth or value stocks.
We can take a look at what happened to the S&P 500 dividends during the previous recessions...

Image

71% of the 139 Dividend Champions increased or maintained their dividends in the 2008, 2009, 2010 recession. The obvious glaring cutters/slashers were the financials due to the financial crisis.

That is interesting, much less of a correlation with recession/bear markets than I expected. That is a problem with using personal (limited) experience vs. aggregate data. Once you buy a broad market dividend it seems likely that the cash flow should be pretty consistent.

Distinguishing that from yield, which is obviously affected by changing prices, the following link shows yields moving significantly over time, likely a function of prices changing faster than the dollar value of the dividends.
https://www.multpl.com/s-p-500-dividend ... le/by-year
From this, buying a broad market yield (say as part of the S&P 500) is likely to net an investor less than 2% from dividends.

I suppose that a dividend focused ETF will yield much more, by removing the stocks which do not offer a dividend.
The Vanguard High Dividend Yield ETF VYM currently yields about 3.3%. That is a far cry from the OPs 6% assumption, but might satisfy someone using a 3% withdrawal rate. The recent performance 1 year 5 year 10 year all seem to underperform broader ETFs by about 3% but that could be a recency effect.

I like dividends, as part of an overall asset allocation / income strategy.
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Re: Dividends vs Total Return

Post by DaufuskieNate »

Most of the performance of The Vanguard High Dividend Yield ETF VYM is explained by its exposure to 3 factors: Large Cap, Value and Quality. It has far fewer stocks than TSM and a top ten holdings concentration of over 25%. I wonder how many investors who are looking for yield realize that they are simply following a less diversified factor tilt strategy.
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Re: Dividends vs Total Return

Post by jeffyscott »

onthecusp wrote: Mon Mar 25, 2019 10:28 am I suppose that a dividend focused ETF will yield much more, by removing the stocks which do not offer a dividend.
The Vanguard High Dividend Yield ETF VYM currently yields about 3.3%. That is a far cry from the OPs 6% assumption, but might satisfy someone using a 3% withdrawal rate. The recent performance 1 year 5 year 10 year all seem to underperform broader ETFs by about 3% but that could be a recency effect.

I like dividends, as part of an overall asset allocation / income strategy.
You could look at Equity Income (VEIPX) for a longer term comparison? Over it's lifetime it is slightly behind the S&P 500 index, but slightly ahead of Vanguard 500 index fund (VFINX) (Total stock, VTSMX, has not existed long enough).

It's certainly not definitive either, but FWIW, from Nov. 1992 (date of inception for VIVAX), VEIPX has beaten that as well as the S&P 500, VTSMX, and the value "gold standard" (DFLVX).
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Re: Dividends vs Total Return

Post by Ketawa »

sixtyforty wrote: Sat Mar 23, 2019 8:18 am Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.

Why in this scenario would one consider total returns over dividends ?
The bolded part is untrue.

Start at $100/share. Investor needs $6/year.

Account A:
Stays at $100/share forever, investor has 1 share forever, final value $100 forever.

Account B

Code: Select all

   year     price/share         shares    portfolio value remaining        yield/share    appreciation/share  portfolio yield    portfolio appreciation     shares sold
       1         $100.00             1                      $100.00               $3.00               $3.00             $3.00                 $3.00            0.029
       2         $103.00         0.971                      $100.00               $3.09               $3.09             $3.00                 $3.00            0.028
       3         $106.09         0.943                      $100.00               $3.18               $3.18             $3.00                 $3.00            0.027
       4         $109.27         0.915                       $99.99               $3.28               $3.28             $3.00                 $3.00            0.027
       5         $112.55         0.888                       $99.98               $3.38               $3.38             $3.00                 $3.00            0.026
       6         $115.93         0.862                       $99.98               $3.48               $3.48             $3.00                 $3.00            0.025
       7         $119.41         0.837                       $99.96               $3.58               $3.58             $3.00                 $3.00            0.024
       8         $122.99         0.813                       $99.95               $3.69               $3.69             $3.00                 $3.00            0.024
       9         $126.68         0.789                       $99.93               $3.80               $3.80             $3.00                 $3.00            0.023
      10         $130.48         0.766                       $99.91               $3.91               $3.91             $3.00                 $3.00            0.022
      11         $134.39         0.743                       $99.89               $4.03               $4.03             $3.00                 $3.00            0.022
      12         $138.42         0.721                       $99.87               $4.15               $4.15             $3.00                 $3.00            0.021
      13         $142.58         0.700                       $99.85               $4.28               $4.28             $3.00                 $3.00            0.021
      14         $146.85         0.680                       $99.82               $4.41               $4.41             $2.99                 $2.99            0.020
      15         $151.26         0.660                       $99.79               $4.54               $4.54             $2.99                 $2.99            0.019
      16         $155.80         0.640                       $99.76               $4.67               $4.67             $2.99                 $2.99            0.019
      17         $160.47         0.621                       $99.73               $4.81               $4.81             $2.99                 $2.99            0.018
      18         $165.28         0.603                       $99.70               $4.96               $4.96             $2.99                 $2.99            0.018
      19         $170.24         0.585                       $99.66               $5.11               $5.11             $2.99                 $2.99            0.017
      20         $175.35         0.568                       $99.63               $5.26               $5.26             $2.99                 $2.99            0.017
      21         $180.61         0.551                       $99.59               $5.42               $5.42             $2.99                 $2.99            0.016
      22         $186.03         0.535                       $99.55               $5.58               $5.58             $2.99                 $2.99            0.016
      23         $191.61         0.519                       $99.51               $5.75               $5.75             $2.99                 $2.99            0.015
      24         $197.36         0.504                       $99.46               $5.92               $5.92             $2.98                 $2.98            0.015
      25         $203.28         0.489                       $99.42               $6.10               $6.10             $2.98                 $2.98            0.014
      26         $209.38         0.475                       $99.38               $6.28               $6.28             $2.98                 $2.98            0.014
      27         $215.66         0.461                       $99.33               $6.47               $6.47             $2.98                 $2.98            0.014
      28         $222.13         0.447                       $99.28               $6.66               $6.66             $2.98                 $2.98            0.013
      29         $228.79         0.434                       $99.23               $6.86               $6.86             $2.98                 $2.98            0.013
      30         $235.66         0.421                       $99.18               $7.07               $7.07             $2.98                 $2.98            0.012
Account B same portfolio value throughout except for Excel rounding errors.

Either situation will result in the same total return. Number of shares, value per share, and price appreciation vs dividends don't matter for total return.
Last edited by Ketawa on Mon Mar 25, 2019 11:31 am, edited 2 times in total.
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