Dividend Investing?

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socialforums2019
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Dividend Investing?

Post by socialforums2019 » Fri Nov 29, 2019 8:24 pm

For some reason, I've been flooded with a bunch of advertising around people focused on dividend investing. How they are making $X of passive income a month with this "strategy".

So what is the benefit of this vs just putting the money into something that tracks the S&P 500? One of the articles mentioned that dividend investing actually outperforms the index funds. Do you have this in your mix? Is it good to do for just passive income?

sport
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Re: Dividend Investing?

Post by sport » Fri Nov 29, 2019 8:27 pm

Most Bogleheads try to invest for Total Return. Since total return includes dividends, there does not seem to be anything special about dividend investing. Total return is what is important.

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David Jay
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Re: Dividend Investing?

Post by David Jay » Fri Nov 29, 2019 8:29 pm

This topic has been beat to death over the last year or two here on BH.

Here is a search, tons of threads, read to your heart’s content: https://www.google.com/search?sitesearc ... +investing
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Ferdinand2014
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Re: Dividend Investing?

Post by Ferdinand2014 » Fri Nov 29, 2019 9:01 pm

socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm
For some reason, I've been flooded with a bunch of advertising around people focused on dividend investing. How they are making $X of passive income a month with this "strategy".

So what is the benefit of this vs just putting the money into something that tracks the S&P 500? One of the articles mentioned that dividend investing actually outperforms the index funds. Do you have this in your mix? Is it good to do for just passive income?
There is no benefit over owning an S&P 500 index fund. No. No.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

GrowthSeeker
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Re: Dividend Investing?

Post by GrowthSeeker » Fri Nov 29, 2019 10:33 pm

If it were such a great thing, it’s proponents would be putting all their own money into it instead of spending so much on a flood of advertising.
ergo: they make more on commissions when they sell you something than they would on “dividend investing”
Just because you're paranoid doesn't mean they're NOT out to get you.

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arcticpineapplecorp.
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Re: Dividend Investing?

Post by arcticpineapplecorp. » Fri Nov 29, 2019 11:23 pm

socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm
For some reason, I've been flooded with a bunch of advertising around people focused on dividend investing. How they are making $X of passive income a month with this "strategy".

So what is the benefit of this vs just putting the money into something that tracks the S&P 500? One of the articles mentioned that dividend investing actually outperforms the index funds. Do you have this in your mix? Is it good to do for just passive income?
so much to read. so much to learn:

https://www.etf.com/sections/index-inve ... idend-myth
https://www.advisorperspectives.com/art ... sacred-cow
viewtopic.php?f=10&t=242939#p3806231
viewtopic.php?t=231661
viewtopic.php?t=227902
viewtopic.php?f=10&t=286813
viewtopic.php?f=10&t=294211
viewtopic.php?f=10&t=242939

what do you think after reading this?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

inferno9898
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Re: Dividend Investing?

Post by inferno9898 » Sat Nov 30, 2019 1:09 pm

David and Arctic answered well with links to the countless discussions.

There are really two flavors of dividend investing. One is high-yield, where the goal is to get a very high current income stream from your equity investment. Another is dividend-growth, where the goal is more to use regularly growing dividends as a guage of quality and measure of the portfolio.

In both cases, proponents will be able to show back tests that have the strategies beating indices. However, factor analysis studies have shown that the dividend outperformance can be attributed to factors that are adjacent to the strategies, but not directly to the dividends themselves. Specifically, a high yield strategy will overlap a lot with the value factor, and a dividend growth strategy will overlap a lot with the quality factor. You could more efficiently get those factor tilts directly if you wanted to, rather than focusing on yield.

This doesn't even touch on the extra fact that dividends are inefficient both on a tax basis and a strategy basis, though.

I do think the dividend growth strategy has a usefulness for certain investors for behavioral reasons. Setting an income goal of $X per year in the future, and then tracking portfolio dividend growth toward that goal is 1) a lot more intuitive and 2) a lot less volatile than investing and tracking on a total return basis. But I think you kind of have to commit to that for a huge chunk of your portfolio. Don't quite see the point of a "let's just do this with 10%" allocation.

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Sat Nov 30, 2019 1:43 pm

It really doesn't matter what overlaps with what. If anything beats the 500 long term it's likely
to be a 50 stock dividend index (SPHD) or a tech fund.

Recently LC Growth has been successful so if business activity increases LC Growth is likely to
continue to be there first as the 500 continues to the 3500 level especially after a market crash.
Most other successful factors appear to be just plain tech heavy.

Plus the dividend index will reduce portfolio beta effectively taking turns with the general
stock index generating returns. Nothing to fear with certain dividend indexes.

A utility index can generate increasing dividends based on purchase price so I watch for a good
current yield to buy that.
age in bonds, buy-and-hold, 10 year business cycle

UpperNwGuy
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Re: Dividend Investing?

Post by UpperNwGuy » Sat Nov 30, 2019 2:12 pm

Dividends trigger taxes. I don't like taxes, so I avoid dividends.

anonsdca
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Re: Dividend Investing?

Post by anonsdca » Sat Nov 30, 2019 5:33 pm

inferno9898 wrote:
Sat Nov 30, 2019 1:09 pm
David and Arctic answered well with links to the countless discussions.

There are really two flavors of dividend investing. One is high-yield, where the goal is to get a very high current income stream from your equity investment. Another is dividend-growth, where the goal is more to use regularly growing dividends as a guage of quality and measure of the portfolio.

These can blend these together also. You don't necessarily need to do one or the other.

In both cases, proponents will be able to show back tests that have the strategies beating indices. However, factor analysis studies have shown that the dividend outperformance can be attributed to factors that are adjacent to the strategies, but not directly to the dividends themselves. Specifically, a high yield strategy will overlap a lot with the value factor, and a dividend growth strategy will overlap a lot with the quality factor. You could more efficiently get those factor tilts directly if you wanted to, rather than focusing on yield.

"..proponents will be able to show back tests that have the strategies beating indices..."

I find it is very rare to find an investor using either of these strategies separately, or blended, that actually care about beating any index or benchmark. It is not about that, it is not about that at all. It is about as you have described elsewhere in this post.

"Setting an income goal of $X per year in the future, and then tracking portfolio dividend growth toward that goal..." That is spot on and income is the goal. More specifically, reliable, increasing income, year after year is the goal. Comparing or beating an index of any kind would be useless for this type of investor because it is unlikely their portfolio will have the same make up as any index.


This doesn't even touch on the extra fact that dividends are inefficient both on a tax basis and a strategy basis, though.

I do think the dividend growth strategy has a usefulness for certain investors for behavioral reasons. Setting an income goal of $X per year in the future, and then tracking portfolio dividend growth toward that goal is 1) a lot more intuitive and 2) a lot less volatile than investing and tracking on a total return basis. But I think you kind of have to commit to that for a huge chunk of your portfolio. Don't quite see the point of a "let's just do this with 10%" allocation.

ThankuVanguard
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Re: Dividend Investing?

Post by ThankuVanguard » Sun Dec 01, 2019 8:56 am

I will post a contrarian response as most here frown on dividend-focused investing. The lure of dividend investing to me is that I can create a sustainable pot of wealth and can live off the dividends and interest income without ever having to sell a share. In this way I am somewhat immune to the ebbs and flows of the market. While there are countless threads that show that this strategy is not the best for maximizing tax efficiency or overall performance, none the less it is what motivates me. I will give you a simple example using AT&T (ticker symbol T). I've owned this stock since 2014. It's price has fluctuated 15%-20% over the course of the years. Up Down Up Down.... That said, every year my per share dividend payment has grown and I didn't sell one share. While this is not guaranteed, it has been sustained for a long time. There are mutual funds and ETFs that focus on stocks that have historically raised their dividends over decades.

For better or worse, I believe the dividend investor treats their stocks or dividend oriented mutual funds/ETFs as many investors treat bonds; a steady source of income. They focus on the quarterly dividends and if they are growing. The share price is secondary. I chose this strategy because I plan on never selling a share, ever. As long as my dividends are growing, I don't much care if my overall net worth is trending up or down for any short period of time. I accept that I could create greater wealth using a total return strategy favored by many here. That however would require me to sell shares and I do not wish to do that.

I hope this helps explain the psyche of at least one dividend-oriented investor. :happy

JustinR
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Re: Dividend Investing?

Post by JustinR » Sun Dec 01, 2019 10:25 am

socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm
For some reason, I've been flooded with a bunch of advertising around people focused on dividend investing. How they are making $X of passive income a month with this "strategy".

So what is the benefit of this vs just putting the money into something that tracks the S&P 500?
None.

It's actually worse due to taxes.

People who like dividend investing are basing their entire investing strategy on the feeling of having money magically appear in their bank accounts every few months. They don't actually understand how dividends work. They're misguided souls.

ThankuVanguard wrote:
Sun Dec 01, 2019 8:56 am
I will post a contrarian response as most here frown on dividend-focused investing. The lure of dividend investing to me is that I can create a sustainable pot of wealth and can live off the dividends and interest income without ever having to sell a share. In this way I am somewhat immune to the ebbs and flows of the market. While there are countless threads that show that this strategy is not the best for maximizing tax efficiency or overall performance, none the less it is what motivates me. I will give you a simple example using AT&T (ticker symbol T). I've owned this stock since 2014. It's price has fluctuated 15%-20% over the course of the years. Up Down Up Down.... That said, every year my per share dividend payment has grown and I didn't sell one share. While this is not guaranteed, it has been sustained for a long time. There are mutual funds and ETFs that focus on stocks that have historically raised their dividends over decades.

For better or worse, I believe the dividend investor treats their stocks or dividend oriented mutual funds/ETFs as many investors treat bonds; a steady source of income. They focus on the quarterly dividends and if they are growing. The share price is secondary. I chose this strategy because I plan on never selling a share, ever. As long as my dividends are growing, I don't much care if my overall net worth is trending up or down for any short period of time. I accept that I could create greater wealth using a total return strategy favored by many here. That however would require me to sell shares and I do not wish to do that.

I hope this helps explain the psyche of at least one dividend-oriented investor. :happy
This is a form of cognitive bias called mental accounting.

Selling shares and receiving a dividend are exactly the same thing.

It makes you feel good to have money deposited into your account every quarter, so you're happy to ignore the reality of what's actually happening.

Long story short, your "I love a steady source of income without selling shares" reasoning is 100% irrational and illogical.

dbr
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Re: Dividend Investing?

Post by dbr » Sun Dec 01, 2019 10:30 am

JustinR wrote:
Sun Dec 01, 2019 10:25 am

Long story short, your "I love a steady source of income without selling shares" reasoning is 100% irrational and illogical.
Yes, and a simple and complete form of accounting is to count the number or shares, the value of each share, and compute the return, which includes both the dividends paid and the change in price of the shares. Other schemes tend to ignore some of the pieces, which is like flying an airplane while attending to the speed while ignoring the altitude.

coriolanusus
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Re: Dividend Investing?

Post by coriolanusus » Sun Dec 01, 2019 12:17 pm

JustinR wrote:
Sun Dec 01, 2019 10:25 am
socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm
For some reason, I've been flooded with a bunch of advertising around people focused on dividend investing. How they are making $X of passive income a month with this "strategy".

So what is the benefit of this vs just putting the money into something that tracks the S&P 500?
None.

It's actually worse due to taxes.

People who like dividend investing are basing their entire investing strategy on the feeling of having money magically appear in their bank accounts every few months. They don't actually understand how dividends work. They're misguided souls.

ThankuVanguard wrote:
Sun Dec 01, 2019 8:56 am
I will post a contrarian response as most here frown on dividend-focused investing. The lure of dividend investing to me is that I can create a sustainable pot of wealth and can live off the dividends and interest income without ever having to sell a share. In this way I am somewhat immune to the ebbs and flows of the market. While there are countless threads that show that this strategy is not the best for maximizing tax efficiency or overall performance, none the less it is what motivates me. I will give you a simple example using AT&T (ticker symbol T). I've owned this stock since 2014. It's price has fluctuated 15%-20% over the course of the years. Up Down Up Down.... That said, every year my per share dividend payment has grown and I didn't sell one share. While this is not guaranteed, it has been sustained for a long time. There are mutual funds and ETFs that focus on stocks that have historically raised their dividends over decades.

For better or worse, I believe the dividend investor treats their stocks or dividend oriented mutual funds/ETFs as many investors treat bonds; a steady source of income. They focus on the quarterly dividends and if they are growing. The share price is secondary. I chose this strategy because I plan on never selling a share, ever. As long as my dividends are growing, I don't much care if my overall net worth is trending up or down for any short period of time. I accept that I could create greater wealth using a total return strategy favored by many here. That however would require me to sell shares and I do not wish to do that.

I hope this helps explain the psyche of at least one dividend-oriented investor. :happy
This is a form of cognitive bias called mental accounting.

Selling shares and receiving a dividend are exactly the same thing.

It makes you feel good to have money deposited into your account every quarter, so you're happy to ignore the reality of what's actually happening.

Long story short, your "I love a steady source of income without selling shares" reasoning is 100% irrational and illogical.
Would this be so for me ? I am retired here in the US from a foreign country so never worked in the US so all my income can only be in a taxable account. All my dividends from VHYAX are qualified and total more than enough for me to live on. I am happy to salt away any excess in a MM account. I find the US tax system almost as difficult for me to understand as the US health system. Please advise if I am doing something stupid but I keep on reading that dividends are tax inefficient and I don't get why.

dbr
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Re: Dividend Investing?

Post by dbr » Sun Dec 01, 2019 1:34 pm

coriolanusus wrote:
Sun Dec 01, 2019 12:17 pm


Would this be so for me ? I am retired here in the US from a foreign country so never worked in the US so all my income can only be in a taxable account. All my dividends from VHYAX are qualified and total more than enough for me to live on. I am happy to salt away any excess in a MM account. I find the US tax system almost as difficult for me to understand as the US health system. Please advise if I am doing something stupid but I keep on reading that dividends are tax inefficient and I don't get why.

The math behind that is the following:

1. If you take the dividends the withdrawal is 100% taxable at dividend tax rates (mostly qualified). If you take more in dividends than you need and save the excess either in cash or by reinvesting, you will have paid unnecessary taxes on the dividends you did not spend.

2. If you sell appreciated shares the withdrawal is partly capital gain, long and/or short, at capital gain tax rates and partly already taxed basis which incurs no further tax. LT gains have the same tax rate as qualified dividends. If you do specific ID cost basis you can sell the specific shares at the least tax cost to you.

3. If you reinvest the dividends and then sell share shares and use average cost basis, then you will have paid tax on the dividends and then some capital gain on some shares you just paid tax on. That is the worst scenario. If you sell immediately the lots purchased by the reinvested dividends under specific ID then the effect is the same as just taking the dividend to start with.

4. If you never take any dividends or sell shares the cost basis is stepped up when you die and no one ever pays taxes on the gains.

prioritarian
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Re: Dividend Investing?

Post by prioritarian » Sun Dec 01, 2019 2:03 pm

ThankuVanguard wrote:
Sun Dec 01, 2019 8:56 am
The lure of dividend investing to me is that I can create a sustainable pot of wealth and can live off the dividends and interest income without ever having to sell a share. In this way I am somewhat immune to the ebbs and flows of the market.

That's certainly the emotional "lure" but the facts are a little more complicated:

Image

kardan
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Re: Dividend Investing?

Post by kardan » Sun Dec 01, 2019 2:15 pm

JustinR wrote:
Sun Dec 01, 2019 10:25 am
socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm

So what is the benefit of this vs just putting the money into something that tracks the S&P 500?
None.

It's actually worse due to taxes.

People who like dividend investing are basing their entire investing strategy on the feeling of having money magically appear in their bank accounts every few months. They don't actually understand how dividends work. They're misguided souls.

It amazes me how biased many of the responses are. You do understand that the funds most BHs prefer pay dividends, don't you? Your criticisms apply to the BH approach as well.

anonsdca
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Re: Dividend Investing?

Post by anonsdca » Sun Dec 01, 2019 2:26 pm

kardan wrote:
Sun Dec 01, 2019 2:15 pm
JustinR wrote:
Sun Dec 01, 2019 10:25 am
socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm

So what is the benefit of this vs just putting the money into something that tracks the S&P 500?
None.

It's actually worse due to taxes.

People who like dividend investing are basing their entire investing strategy on the feeling of having money magically appear in their bank accounts every few months. They don't actually understand how dividends work. They're misguided souls.

It amazes me how biased many of the responses are. You do understand that the funds most BHs prefer pay dividends, don't you? Your criticisms apply to the BH approach as well.
This is their playground. You need to deal with it. There are other investing playgrounds out there that ridicule and are as condescending to the Boglehead strategy as they are here about a dividend strategy. You need to go to those places to balance it all out.

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Sun Dec 01, 2019 2:33 pm

Here's how I look at it. Assuming a long term investment with continued reinvestment
and withdrawals after retirement from the reinvested account balance I calc the following.

I expect ticker SPHD to beat the 500 by 1% total return at a 15% tax rate.


500 = 8% total return with a 2% dividend

SPHD = 9% total return with a 4% dividend


After paying tax on reinvested dividends and all distributions I calc :

500 = 7.21 % long term after tax IRR (compound return)

SPHD = 8.01 % long term after tax IRR (compound return)


Not every dividend index is expected to beat the 500, only a handful might.
There is a sizable difference if the dividend index beats the 500 by 1% long term
negating any tax inefficiency. Of course you have to expect the better dividend
index to beat the 500 and then the dividend index has to actually do it. :)

Something to think about...
age in bonds, buy-and-hold, 10 year business cycle

Girya
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Re: Dividend Investing?

Post by Girya » Sun Dec 01, 2019 2:36 pm

Ok just a quick question because I too have contemplated dividends. I understand well that high dividend producing stocks, bonds, REIT’s etc are very tax inefficient and should be kept out of taxable and 401k spaces.

But what about putting dividend producing products into tax protected spaces such as a Roth or an HSA? I can only contribute (via a Backdoor and with my spouse) $12000 to a Roth per year, and $6500 to an HSA. If I were to put dividend producing products in there not for but cash flow, but rather then reinvest the dividends within the Roth/HSA, whether into that product or another, it would be a means to make periodic contributions to those accounts and grow them tax protected.

Just a thought.....

AznSaver
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Re: Dividend Investing?

Post by AznSaver » Sun Dec 01, 2019 2:42 pm

kardan wrote:
Sun Dec 01, 2019 2:15 pm
It amazes me how biased many of the responses are. You do understand that the funds most BHs prefer pay dividends, don't you? Your criticisms apply to the BH approach as well.
I think you are taking what is being said out of context. It's not that investing in funds with dividends is bad. It's where the primary determinate of fund/stock choice and selection is based solely on the amount of the dividend either as yield or dollar amount, i.e. I am looking at stocks/funds that pay me the highest dividend for my investment dollar. This will always in some way compromise diversification, growth and cost to an investor.

The BH Approach is a focus on low cost, tax-efficient and diversified holdings of broad indices. The BH goal is to capture all the market at the lowest cost, while minimizing risks with diversification. If the investment option pays dividends this doesn't impact the BH decision whether or not to hold it.

stlutz
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Re: Dividend Investing?

Post by stlutz » Sun Dec 01, 2019 2:45 pm

Girya wrote:
Sun Dec 01, 2019 2:36 pm
Ok just a quick question because I too have contemplated dividends. I understand well that high dividend producing stocks, bonds, REIT’s etc are very tax inefficient and should be kept out of taxable and 401k spaces.
Dividend-producing stocks are just fine in a 401K. With a 401, all income taxes, however the money way generated, are deferred until you withdraw.

That said, some people do argue that one out to fill up their 401K with bonds first before contemplating any type of equities since all monies are taxed as regular income (with caveat that future tax policy may be different from today's).

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abuss368
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Re: Dividend Investing?

Post by abuss368 » Sun Dec 01, 2019 2:49 pm

I believe most Bogleheads will invest for total return rather than just dividends.

Keep investing simple.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Sun Dec 01, 2019 2:53 pm

The best place for dividend producers would be a Roth account, but that is
true of all equity investments. It would be a shame to waste Roth space on
bonds.
age in bonds, buy-and-hold, 10 year business cycle

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Phineas J. Whoopee
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Re: Dividend Investing?

Post by Phineas J. Whoopee » Sun Dec 01, 2019 3:00 pm

We are not against dividends. They're an important part of total return.

We're only against misunderstandings about dividends.

PJW

dbr
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Re: Dividend Investing?

Post by dbr » Sun Dec 01, 2019 3:05 pm

Girya wrote:
Sun Dec 01, 2019 2:36 pm
Ok just a quick question because I too have contemplated dividends. I understand well that high dividend producing stocks, bonds, REIT’s etc are very tax inefficient and should be kept out of taxable and 401k spaces.

But what about putting dividend producing products into tax protected spaces such as a Roth or an HSA? I can only contribute (via a Backdoor and with my spouse) $12000 to a Roth per year, and $6500 to an HSA. If I were to put dividend producing products in there not for but cash flow, but rather then reinvest the dividends within the Roth/HSA, whether into that product or another, it would be a means to make periodic contributions to those accounts and grow them tax protected.

Just a thought.....
At issue is what is the return and does selecting on dividend paying generate a better return for the same risk, or less risk for the same return. Remember that dividends are part of return. That would be a good project for you to investigate. Hopefully you understand that many or most stocks but certainly most funds pay dividends. I think only about 80 of the S&P 500 companies do not pay a dividend. There are many more in the broader market.

I would suggest you read through Larry Swedroe's comments about dividend investing: https://www.google.com/search?source=hp ... 1INP1xadMg

Girya
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Re: Dividend Investing?

Post by Girya » Sun Dec 01, 2019 3:06 pm

stlutz wrote:
Sun Dec 01, 2019 2:45 pm
Girya wrote:
Sun Dec 01, 2019 2:36 pm
Ok just a quick question because I too have contemplated dividends. I understand well that high dividend producing stocks, bonds, REIT’s etc are very tax inefficient and should be kept out of taxable and 401k spaces.
Dividend-producing stocks are just fine in a 401K. With a 401, all income taxes, however the money way generated, are deferred until you withdraw.

That said, some people do argue that one out to fill up their 401K with bonds first before contemplating any type of equities since all monies are taxed as regular income (with caveat that future tax policy may be different from today's).
Right so if not paying taxes on dividends is a goal, then they would have to be in truly tax protected spaces, the only two of which we have are Roth and HSA. 401k money still gets taxed, just at some future (hopefully more marginal) rate.

I was making the point rather about popping dividend funds in there to grow them tax protected.

I agree with other points that getting dividend producing stock for that reason alone, while ignoring diversification, risk and tax efficiency would not be the smartest play.

dbr
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Re: Dividend Investing?

Post by dbr » Sun Dec 01, 2019 3:18 pm

Girya wrote:
Sun Dec 01, 2019 3:06 pm
Right so if not paying taxes on dividends is a goal, then they would have to be in truly tax protected spaces, the only two of which we have are Roth and HSA. 401k money still gets taxed, just at some future (hopefully more marginal) rate.

[/quote]

You are under a bit of a misapprehension here. Selecting stocks on dividend paying does not significantly affect return. In a 401k all gains are taxed the same, so if the total is the same regardless of dividends or capital change of value, it simply makes no difference what fraction of the gain comes from dividends. It would matter if selecting on dividends significantly increased the return without increasing the risk. If a person thinks dividend paying stocks have all the same capital increase and with dividends on top then one is engaging in the fallacy of "free money." Also all gains in 401ks are taxed as ordinary income but only when a distribution is taken.

In taxable accounts capital gains are not taxed until realized and then only at capital gains rates, hopefully not short term. At death basis is stepped up and no one ever pays a tax on the unrealized gains.

The real difference with IRA/401k is that the original earning is not taxed until withdrawn while Roth and taxable accounts can only be filled with already taxed income.

retiringwhen
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Re: Dividend Investing?

Post by retiringwhen » Sun Dec 01, 2019 3:21 pm

Girya wrote:
Sun Dec 01, 2019 2:36 pm
But what about putting dividend producing products into tax protected spaces such as a Roth or an HSA?
I am a virtual 3-funder, but to optimize my tax-treatment; I broke VTSAX (Total Stock Mkt) into 3 funds at market cap weightings (40% VIGAX - Vanguard Growth index, 40% VVIAX- Vanguard Value Index, and 20% VSMAX - Vanguard Small Cap Index).

as of 11/30/19, the dividend SEC yield for VVIAX is 2.72%, VIGAX is 1.00%

As a result of the opportunity to tax-loss harvest last December, I sold VTSAX and put almost all of the VVIAX allocation in an IRA and the rest (VIGAX and VSMAX) in a taxable account (I have a large taxable account as a total portfolio percentage.)

It has worked very well. I plan on donating my annual charitable giving each year from VIGAX and VSMAX in our taxable account as appropriate to meet both rebalancing needs as well as charitable goals. This allows me to convert capital gains on faster growing funds into charitable tax-avoidance. This year that is a 25+% return DEC to DEC for VIGAX if the market holds up for a couple more weeks (future years will build upon that growth hopefully).

At the same time I reduced our dividend income in taxable by well over a 1/3 by pushing the dividends into the IRA (same total dividends across all accounts though).

I did all that without sacrificing a total market exposure. (I am still 3-funding happily, but with a bit more rebalancing complexity.)

Dividends are not a problem, or to be avoided, but where possible you can be more tax-efficient by appropriate placement.

ChrisBenn
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Re: Dividend Investing?

Post by ChrisBenn » Sun Dec 01, 2019 6:04 pm

patrick013 wrote:
Sun Dec 01, 2019 2:33 pm
(...)
I expect ticker SPHD to beat the 500 by 1% total return at a 15% tax rate.
(...)
Apologies if I'm missing some nuance to the debate, but what is the thesis behind the SPHD performance assertion?
Since inception its total return has done about 1.6% CAGR worse -
https://www.portfoliovisualizer.com/ba ... ion2_2=100

It's a small period so not saying it's categorically worse - but I don't think it is obvious it outperforms?

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Sun Dec 01, 2019 10:17 pm

ChrisBenn wrote:
Sun Dec 01, 2019 6:04 pm
patrick013 wrote:
Sun Dec 01, 2019 2:33 pm
(...)
I expect ticker SPHD to beat the 500 by 1% total return at a 15% tax rate.
(...)
Apologies if I'm missing some nuance to the debate, but what is the thesis behind the SPHD performance assertion?
Since inception its total return has done about 1.6% CAGR worse -
https://www.portfoliovisualizer.com/ba ... ion2_2=100

It's a small period so not saying it's categorically worse - but I don't think it is obvious it outperforms?
The S&P website has much longer data on this particular index and on the ticker SPYD index. The ETF's are a bit new I agree. SPYD is actually their dividend factor index based on the longer data. Other lengthy studies show 50 stock large cap dividend indexes quite successful. Ticker PEY has a very good index also for similar reasons. A NASDAQ index but the ER is a bit high. They should take turns with the 500 beating it for a few years then taking a back seat for a few years like all indexes do. Over long studies they have beat the 500 by a per cent or more.
age in bonds, buy-and-hold, 10 year business cycle

kardan
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Re: Dividend Investing?

Post by kardan » Mon Dec 02, 2019 12:00 am

kardan wrote:
Sun Dec 01, 2019 2:15 pm
JustinR wrote:
Sun Dec 01, 2019 10:25 am
socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm

So what is the benefit of this vs just putting the money into something that tracks the S&P 500?
None.

It's actually worse due to taxes.

People who like dividend investing are basing their entire investing strategy on the feeling of having money magically appear in their bank accounts every few months. They don't actually understand how dividends work. They're misguided souls.

It amazes me how biased many of the responses are. You do understand that the funds most BHs prefer pay dividends, don't you? Your criticisms apply to the BH approach as well.
AznSaver wrote:
Sun Dec 01, 2019 2:42 pm
I think you are taking what is being said out of context. It's not that investing in funds with dividends is bad. It's where the primary determinate of fund/stock choice and selection is based solely on the amount of the dividend either as yield or dollar amount, i.e. I am looking at stocks/funds that pay me the highest dividend for my investment dollar. This will always in some way compromise diversification, growth and cost to an investor.
I'm pretty sure I did not take JustinR's comment out of context. Everything he stated was either biased or plain wrong.

JustinR
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Re: Dividend Investing?

Post by JustinR » Mon Dec 02, 2019 2:00 am

kardan wrote:
Mon Dec 02, 2019 12:00 am
kardan wrote:
Sun Dec 01, 2019 2:15 pm
JustinR wrote:
Sun Dec 01, 2019 10:25 am
socialforums2019 wrote:
Fri Nov 29, 2019 8:24 pm

So what is the benefit of this vs just putting the money into something that tracks the S&P 500?
None.

It's actually worse due to taxes.

People who like dividend investing are basing their entire investing strategy on the feeling of having money magically appear in their bank accounts every few months. They don't actually understand how dividends work. They're misguided souls.

It amazes me how biased many of the responses are. You do understand that the funds most BHs prefer pay dividends, don't you? Your criticisms apply to the BH approach as well.
AznSaver wrote:
Sun Dec 01, 2019 2:42 pm
I think you are taking what is being said out of context. It's not that investing in funds with dividends is bad. It's where the primary determinate of fund/stock choice and selection is based solely on the amount of the dividend either as yield or dollar amount, i.e. I am looking at stocks/funds that pay me the highest dividend for my investment dollar. This will always in some way compromise diversification, growth and cost to an investor.
I'm pretty sure I did not take JustinR's comment out of context. Everything he stated was either biased or plain wrong.
What AznSaver said is correct and the most common thinking around here.

Dividends are a fact of life when investing with index funds.

What's misguided is going out of your way to invest specifically for dividends.

22twain
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Re: Dividend Investing?

Post by 22twain » Mon Dec 02, 2019 4:34 am

dbr wrote:
Sun Dec 01, 2019 1:34 pm
coriolanusus wrote:
Sun Dec 01, 2019 12:17 pm


Would this be so for me ? I am retired here in the US from a foreign country so never worked in the US so all my income can only be in a taxable account. All my dividends from VHYAX are qualified and total more than enough for me to live on. I am happy to salt away any excess in a MM account. I find the US tax system almost as difficult for me to understand as the US health system. Please advise if I am doing something stupid but I keep on reading that dividends are tax inefficient and I don't get why.

The math behind that is the following:

1. If you take the dividends the withdrawal is 100% taxable at dividend tax rates (mostly qualified). If you take more in dividends than you need and save the excess either in cash or by reinvesting, you will have paid unnecessary taxes on the dividends you did not spend.
So it's up to coriolanusus to decide whether those unnecessary taxes are (a) something stupid or (b) a reasonable price to pay for the convenience of receiving all his retirement income automatically instead of having to sell some shares occasionally. Depending on the amount of taxes involved, I think the decision could reasonably go either way. Different people are allergic to taxes in different degrees. Some people shrug them off and and some people are driven insane by them. :)
My investing princiPLEs do not include absolutely preserving princiPAL.

GrowthSeeker
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Re: Dividend Investing?

Post by GrowthSeeker » Mon Dec 02, 2019 10:08 am

I don't think those who favor "dividend investing" are all the same.
SOME are indeed delusional in thinking that the dividend is free money: these people don't understand how it works.

SOME just want the convenience of an income stream they don't have to worry about, as explained better than I've ever seen it explained by ThankuVanguard upthread. These folks are willing to take the risk of lower total return for the benefit of the mental comfort of that income stream.

SOME believe that "good companies" paying consistent dividends (or some say 'growing dividends') will do better long term than those who don't. I think there was a large study years ago that suggested some validity to this, but I can't recall where I saw this.

SOME believe that high dividends attract more investment dollars: but I've never seen any evidence that it works like that in real life. This reminds me of some guy telling me when I was in my 20s, "I always try to buy a stock right after is splits because then the shares only cost half as much".

As for me, I don't believe any of it. I'll stick to focusing on total return, not taking more risk than I need to, and buying the market instead of trying to beat the market (except for my 2 legacy tech stocks from pre-BH).
Just because you're paranoid doesn't mean they're NOT out to get you.

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Mon Dec 02, 2019 10:50 am

All the comments I see miss the main point. The 50 stock dividend indexes have the best history, large cap or multi cap indexes. So if you want to personalize your portfolio for a 10% dividend tilt the conversation should be about those. All of those stocks selected from well known domestic general stock indexes. Not temporary performers or non investment grade companies.
age in bonds, buy-and-hold, 10 year business cycle

retiringwhen
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Re: Dividend Investing?

Post by retiringwhen » Mon Dec 02, 2019 11:12 am

patrick013 wrote:
Mon Dec 02, 2019 10:50 am
All the comments I see miss the main point. The 50 stock dividend indexes have the best history, large cap or multi cap indexes. So if you want to personalize your portfolio for a 10% dividend tilt the conversation should be about those. All of those stocks selected from well known domestic general stock indexes. Not temporary performers or non investment grade companies.
So, I just want to re-state your assertion in my own words to ensure I understand you.

You (patrick013) believe that a Large Cap stock's history of comparatively high dividends is a predictive factor for future outperformance for individual stocks when compared to Total Stock Market Indices. By choosing the 50 that best match that criteria, you have a diversified investment that will beat the Total Stock Market (or Large Cap) indices normally used for passive investing.

Do I have it?

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Mon Dec 02, 2019 4:06 pm

retiringwhen wrote:
Mon Dec 02, 2019 11:12 am
patrick013 wrote:
Mon Dec 02, 2019 10:50 am
All the comments I see miss the main point. The 50 stock dividend indexes have the best history, large cap or multi cap indexes. So if you want to personalize your portfolio for a 10% dividend tilt the conversation should be about those. All of those stocks selected from well known domestic general stock indexes. Not temporary performers or non investment grade companies.
So, I just want to re-state your assertion in my own words to ensure I understand you.

You (patrick013) believe that a Large Cap stock's history of comparatively high dividends is a predictive factor for future outperformance for individual stocks when compared to Total Stock Market Indices. By choosing the 50 that best match that criteria, you have a diversified investment that will beat the Total Stock Market (or Large Cap) indices normally used for passive investing.

Do I have it?
I do believe that 2 + 2 = 4

So yes, 50 dividend stocks chosen from a LC index and held for several or more decades has beaten
the LC index after tax in several studies. The 50 stocks placed in an index and rebalanced
once or twice per year and otherwise handled like any other index with index replacement and
reinvestment is a very good tilt IMO as studied thru many business cycles.

Same thing for a multi cap index where 50 stocks are selected by dividend yield from that index.

These are weighted by dividend yield or equally weighted so the index would be doing traditional
diversification. They have to be in an index and sold as an ETF or mutual fund if that is the
question. I wouldn't say I would buy individual stocks like Chevron, or TRTN, or TOT, or EPD,
or whatever. Even AT&T may reduce dividends as more people cancal cable services. So the
index will provide needed diversification and needed index replacement. I'm not talking about
individual stocks at all but rather a high dividend yield 50 stock index sold to investors publicly.
age in bonds, buy-and-hold, 10 year business cycle

retiringwhen
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Re: Dividend Investing?

Post by retiringwhen » Mon Dec 02, 2019 5:20 pm

patrick013 wrote:
Mon Dec 02, 2019 4:06 pm
retiringwhen wrote:
Mon Dec 02, 2019 11:12 am
patrick013 wrote:
Mon Dec 02, 2019 10:50 am
All the comments I see miss the main point. The 50 stock dividend indexes have the best history, large cap or multi cap indexes. So if you want to personalize your portfolio for a 10% dividend tilt the conversation should be about those. All of those stocks selected from well known domestic general stock indexes. Not temporary performers or non investment grade companies.
So, I just want to re-state your assertion in my own words to ensure I understand you.

You (patrick013) believe that a Large Cap stock's history of comparatively high dividends is a predictive factor for future outperformance for individual stocks when compared to Total Stock Market Indices. By choosing the 50 that best match that criteria, you have a diversified investment that will beat the Total Stock Market (or Large Cap) indices normally used for passive investing.

Do I have it?
I do believe that 2 + 2 = 4

So yes, 50 dividend stocks chosen from a LC index and held for several or more decades has beaten
the LC index after tax in several studies. The 50 stocks placed in an index and rebalanced
once or twice per year and otherwise handled like any other index with index replacement and
reinvestment is a very good tilt IMO as studied thru many business cycles.

Same thing for a multi cap index where 50 stocks are selected by dividend yield from that index.

These are weighted by dividend yield or equally weighted so the index would be doing traditional
diversification. They have to be in an index and sold as an ETF or mutual fund if that is the
question. I wouldn't say I would buy individual stocks like Chevron, or TRTN, or TOT, or EPD,
or whatever. Even AT&T may reduce dividends as more people cancal cable services. So the
index will provide needed diversification and needed index replacement. I'm not talking about
individual stocks at all but rather a high dividend yield 50 stock index sold to investors publicly.
Past performance does not ensure future returns (this is a variation of many back-tested approaches that don't have fundamental risk explanations, I personally got burned by the old Dogs of the Dow 20 years ago, I am wiser and more skeptical as a result.)

Ironically, today Allan Roth posted an article that directly addresses the risk associated with concentration such as this:

https://www.advisorperspectives.com/art ... sification
See topic: viewtopic.php?f=10&t=296501&newpost=486 ... ead#unread

YMMV, you may hit the dividend future just perfect.

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patrick013
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Re: Dividend Investing?

Post by patrick013 » Mon Dec 02, 2019 7:28 pm

retiringwhen wrote:
Mon Dec 02, 2019 5:20 pm

Ironically, today Allan Roth posted an article that directly addresses the risk associated with concentration such as this:

https://www.advisorperspectives.com/art ... sification
See topic: viewtopic.php?f=10&t=296501&newpost=486 ... ead#unread

YMMV, you may hit the dividend future just perfect.
Well I don't read Allan Roth but his background is well known. These dividend indexes are using
traditional diversification not MPT which is conceptual mostly, although a dividend fund will reduce beta nicely in a portfolio.

Amazon.com: What Works on Wall Street The original 40 year dividend study is in chapter 9. There's cheaper copies on eBay.

The first 2 chapters explain the market portfolio and how it beats 80% of all other mutual funds. There's a chapter on the LC dividend index, a chapter on a multi-cap dividend index, and a chapter on a market leaders index. Other chapters are a variety of discussions. His later books are a little more complex so I stick with the 1st edition and the pragmatic ideas brought forward.
age in bonds, buy-and-hold, 10 year business cycle

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CyclingDuo
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Re: Dividend Investing?

Post by CyclingDuo » Mon Dec 02, 2019 10:20 pm

JustinR wrote:
Mon Dec 02, 2019 2:00 am
What's misguided is going out of your way to invest specifically for dividends.
Just think of all those misguided nut jobs that go out of their way to invest specifically in real estate for the rental income. :twisted:
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Portfolio7
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Re: Dividend Investing?

Post by Portfolio7 » Mon Dec 02, 2019 11:38 pm

CyclingDuo wrote:
Mon Dec 02, 2019 10:20 pm
JustinR wrote:
Mon Dec 02, 2019 2:00 am
What's misguided is going out of your way to invest specifically for dividends.
Just think of all those misguided nut jobs that go out of their way to invest specifically in real estate for the rental income. :twisted:
More like purchasing a bigger house to improve your tax break (before the latest tax code updates.)

But isn't it true that someone fixated on rental income (rather than net cash flow, i.e. ignoring expenses) would have a high probability of finding themselves in financial hot water?
"An investment in knowledge pays the best interest" - Benjamin Franklin

Bronco Billy
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Re: Dividend Investing?

Post by Bronco Billy » Tue Dec 03, 2019 12:45 am

It looks to me that people in the over the 22% tax bracket would be better off doing dividend investment. Its my understanding if you can get qualified Dividends they are only taxed at 15%. So why would you not want to pay lower taxes? My problem is I how do you know if they pay a qualified Dividend?

babystep
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Re: Dividend Investing?

Post by babystep » Tue Dec 03, 2019 1:39 am

retiringwhen wrote:
Sun Dec 01, 2019 3:21 pm
Girya wrote:
Sun Dec 01, 2019 2:36 pm
But what about putting dividend producing products into tax protected spaces such as a Roth or an HSA?
I am a virtual 3-funder, but to optimize my tax-treatment; I broke VTSAX (Total Stock Mkt) into 3 funds at market cap weightings (40% VIGAX - Vanguard Growth index, 40% VVIAX- Vanguard Value Index, and 20% VSMAX - Vanguard Small Cap Index).

as of 11/30/19, the dividend SEC yield for VVIAX is 2.72%, VIGAX is 1.00%

As a result of the opportunity to tax-loss harvest last December, I sold VTSAX and put almost all of the VVIAX allocation in an IRA and the rest (VIGAX and VSMAX) in a taxable account (I have a large taxable account as a total portfolio percentage.)

It has worked very well. I plan on donating my annual charitable giving each year from VIGAX and VSMAX in our taxable account as appropriate to meet both rebalancing needs as well as charitable goals. This allows me to convert capital gains on faster growing funds into charitable tax-avoidance. This year that is a 25+% return DEC to DEC for VIGAX if the market holds up for a couple more weeks (future years will build upon that growth hopefully).

At the same time I reduced our dividend income in taxable by well over a 1/3 by pushing the dividends into the IRA (same total dividends across all accounts though).

I did all that without sacrificing a total market exposure. (I am still 3-funding happily, but with a bit more rebalancing complexity.)

Dividends are not a problem, or to be avoided, but where possible you can be more tax-efficient by appropriate placement.
Great point retiringwhen. This sounds great to me because I don't like the tax drag of dividends in my taxable account. I wish that I could apply this using growth and value ETFs like VUG , VTV but not sure about the long-term aspect of managing this split.

How do you keep making sure that weights of Growth, Value and Small cap remain inline with Total Stock Mkt over the long term say 20-30 years ?
What is the impact of a growth stock being kicked out of Growth Index Fund and then being added to Value Index Fund ?

TropikThunder
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Re: Dividend Investing?

Post by TropikThunder » Tue Dec 03, 2019 2:52 am

Bronco Billy wrote:
Tue Dec 03, 2019 12:45 am
It looks to me that people in the over the 22% tax bracket would be better off doing dividend investment. Its my understanding if you can get qualified Dividends they are only taxed at 15%. So why would you not want to pay lower taxes? My problem is I how do you know if they pay a qualified Dividend?
The rate is not the important part. When you receive a dividend in taxable, you pay tax on the entire dividend. When you sell shares, you only pay tax on the gains.

retiringwhen
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Re: Dividend Investing?

Post by retiringwhen » Tue Dec 03, 2019 7:04 am

babystep wrote:
Tue Dec 03, 2019 1:39 am
How do you keep making sure that weights of Growth, Value and Small cap remain inline with Total Stock Mkt over the long term say 20-30 years ?
What is the impact of a growth stock being kicked out of Growth Index Fund and then being added to Value Index Fund ?
I have a spreadsheet (way too complex and personal to post) that tracks my AA overall. Just built a model that first defines the percentage of US Total Stock Market exposure I want then divide into that for each of the three components.

I don't reinvest dividends automatically, so once a quarter I decide where to put them based on drift. I also plan on using the charitable giving the same way, I'll shave the winners a bit whenever I need to make a donation to our Donor Advised Fund.

But, if you play with Portfolio Visualizer you'll see that never rebalancing is not really a problem, they stray over time but eventually converge again.

Jack's prediction in the early 90s has held so far: In the long run, the Value Index and the Growth Index funds will provide essentially the same return over time.

retiringwhen
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Re: Dividend Investing?

Post by retiringwhen » Tue Dec 03, 2019 7:05 am

TropikThunder wrote:
Tue Dec 03, 2019 2:52 am
The rate is not the important part. When you receive a dividend in taxable, you pay tax on the entire dividend. When you sell shares, you only pay tax on the gains.
A good saying is "A tax delayed is a tax saving."

bondsr4me
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Re: Dividend Investing?

Post by bondsr4me » Tue Dec 03, 2019 8:09 am

UpperNwGuy wrote:
Sat Nov 30, 2019 2:12 pm
Dividends trigger taxes. I don't like taxes, so I avoid dividends.
"Qualified" dividends get preferential tax treatment.
It also depends whether we talking about "retirement" accounts or taxable accounts.
Investors should tax with their tax advisor about "your" particular tax situation.

Bronco Billy
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Re: Dividend Investing?

Post by Bronco Billy » Tue Dec 03, 2019 8:58 am

bondsr4me wrote:
Tue Dec 03, 2019 8:09 am
UpperNwGuy wrote:
Sat Nov 30, 2019 2:12 pm
Dividends trigger taxes. I don't like taxes, so I avoid dividends.
"Qualified" dividends get preferential tax treatment. That was my understanding about the 15% rate.
It also depends whether we talking about "retirement" accounts or taxable accounts. Do we care if its in a IRA that we are not pulling out of?
Investors should talk with their tax advisor about "your" particular tax situation. So we don't need a FA but get a Tax advisor?

bondsr4me
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Re: Dividend Investing?

Post by bondsr4me » Tue Dec 03, 2019 9:13 am

Bronco Billy wrote:
Tue Dec 03, 2019 8:58 am
bondsr4me wrote:
Tue Dec 03, 2019 8:09 am
UpperNwGuy wrote:
Sat Nov 30, 2019 2:12 pm
Dividends trigger taxes. I don't like taxes, so I avoid dividends.
"Qualified" dividends get preferential tax treatment. That was my understanding about the 15% rate.
It also depends whether we talking about "retirement" accounts or taxable accounts. Do we care if its in a IRA that we are not pulling out of? No, because the dividends and capital gains paid out to an IRA are not taxed at that time; but the distributions from IRA's are taxed.
Investors should talk with their tax advisor about "your" particular tax situation. So we don't need a FA but get a Tax advisor?
Typically an investor should talk to both BEFORE doing anything. It's really good to consult with an investment pro that also knows taxes.

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