Dividend vs Total Return question

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Topic Author
hoops777
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Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 3:48 pm

One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
K.I.S.S........so easy to say so difficult to do.

jebmke
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Re: Dividend vs Total Return question

Post by jebmke » Sun May 17, 2020 3:50 pm

I don't think there is any way to tell.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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yangtui
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Re: Dividend vs Total Return question

Post by yangtui » Sun May 17, 2020 3:56 pm

Your fact pattern is incomplete. You are not providing us with nearly enough information to provide you with a reasonable response.

mega317
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Re: Dividend vs Total Return question

Post by mega317 » Sun May 17, 2020 4:24 pm

With the information given a US dividend fund from vanguard comes out ahead. The dividends are 100% qualified while the total stock market dividends are 94% qualified. So all things being equal you will pay $100,000 x ~2% dividend x 6% not qualified x 12% tax = 14 dollars in taxes with the total stock fund vs. done with the dividend fund. This is assuming the total return of the two funds is identical. There is not enough information given to incorporate TLH into the calculus (does everything drop 10% right away and stay stable for 5 years?) but that will probably trump the dividend tax differences, not to mention the usual fluctuation in distributions.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

tibbitts
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Re: Dividend vs Total Return question

Post by tibbitts » Sun May 17, 2020 4:39 pm

hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
Since you used the term "quality", most "quality" dividend funds are actually dividend growth funds, and don't yield 3.6%.

Topic Author
hoops777
Posts: 3066
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 4:43 pm

Ok.
My main question is does the fact that you sold shares every month for 5 years and I did not matter at all?
Last edited by hoops777 on Sun May 17, 2020 4:48 pm, edited 2 times in total.
K.I.S.S........so easy to say so difficult to do.

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 4:44 pm

tibbitts wrote:
Sun May 17, 2020 4:39 pm
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
Since you used the term "quality", most "quality" dividend funds are actually dividend growth funds, and don't yield 3.6%.
SCHD,VEIPX have both been there recently,or very close. SCHD definitely even higher.
Last edited by hoops777 on Sun May 17, 2020 4:45 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.

livesoft
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Re: Dividend vs Total Return question

Post by livesoft » Sun May 17, 2020 4:45 pm

Whoever tax-loss harvested the mostest comes out ahead for sure. Since no shares of the dividend fund were sold, that one comes out behind.

If you change the conditions so that TLH is not possible by saying this is in a Roth IRA, then mega317's post no longer is sensical.
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JoMoney
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Re: Dividend vs Total Return question

Post by JoMoney » Sun May 17, 2020 4:50 pm

VEIPX is a very reasonably conservatively managed dividend portfolio offered by Vanguard, the "Vanguard Equity-Income Fund"
Going back to 1989, since that's the data PortfolioVisualizer has for the fund, an investor could have put money in either the VEIPX dividend fund, or the VFINX S&P 500 fund....
If they both withdrew monthly what amounted to a 4% initial + inflation rate, the VFINX S&P 500 investor would have a larger ending balance.
Link

There was only a 0.80% CAGR difference between the funds over the period. Some of the difference could be explained by the slightly higher expenses in the VEIPX fund. Some if it can be explained by the style differences (dividend stocks tend towards the "value" style which under-performed over that period).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 4:56 pm

Many years ago I was exposed to a lot of dividend investing rhetoric and one of the big points was you never have to sell shares when the market is down.
I think this has been debunked here in terms of having any effect on your total investment, I just want to here the reasoning for my peace of mind.
K.I.S.S........so easy to say so difficult to do.

JediMisty
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Location: Central NJ

Re: Dividend vs Total Return question

Post by JediMisty » Sun May 17, 2020 4:58 pm

hoops777 wrote:
Sun May 17, 2020 4:43 pm
Ok.
My main question is does the fact that you sold shares every month for 5 years and I did not matter at all?
I'm wondering what the person who is selling shares every month is doing with the dividends received? Reinvesting?

Topic Author
hoops777
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Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 5:06 pm

JediMisty wrote:
Sun May 17, 2020 4:58 pm
hoops777 wrote:
Sun May 17, 2020 4:43 pm
Ok.
My main question is does the fact that you sold shares every month for 5 years and I did not matter at all?
I'm wondering what the person who is selling shares every month is doing with the dividends received? Reinvesting?
Spending.Income.
K.I.S.S........so easy to say so difficult to do.

JediMisty
Posts: 535
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Location: Central NJ

Re: Dividend vs Total Return question

Post by JediMisty » Sun May 17, 2020 5:12 pm

hoops777 wrote:
Sun May 17, 2020 5:06 pm
JediMisty wrote:
Sun May 17, 2020 4:58 pm
hoops777 wrote:
Sun May 17, 2020 4:43 pm
Ok.
My main question is does the fact that you sold shares every month for 5 years and I did not matter at all?
I'm wondering what the person who is selling shares every month is doing with the dividends received? Reinvesting?
Spending.Income.
Ok. So then that person is ALSO taking dividends and selling shares? One person is getting $600 per month, the other $300 per month income. Do I misunderstand?

mega317
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Re: Dividend vs Total Return question

Post by mega317 » Sun May 17, 2020 5:20 pm

JediMisty wrote:
Sun May 17, 2020 5:12 pm
hoops777 wrote:
Sun May 17, 2020 5:06 pm
JediMisty wrote:
Sun May 17, 2020 4:58 pm
hoops777 wrote:
Sun May 17, 2020 4:43 pm
Ok.
My main question is does the fact that you sold shares every month for 5 years and I did not matter at all?
I'm wondering what the person who is selling shares every month is doing with the dividends received? Reinvesting?
Spending.Income.
Ok. So then that person is ALSO taking dividends and selling shares? One person is getting $600 per month, the other $300 per month income. Do I misunderstand?
My read of the post was that both investors take the same per month. The conditions were set so that the dividend investor sells no shares, the total stock investors adds dividends plus shares sold to get that same amount.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

mega317
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Re: Dividend vs Total Return question

Post by mega317 » Sun May 17, 2020 5:24 pm

hoops777 wrote:
Sun May 17, 2020 4:56 pm
I just want to here the reasoning for my peace of mind.
This is rather hard to demonstrate in a way that will satisfy anyone who doesn't already agree. But over a long period of time, if two funds have different dividends but equal total return, then the one who isn't selling shares has more shares that are less valuable. While the investor selling shares to make up the dividend difference has fewer shares that are more valuable.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 5:51 pm

mega317 wrote:
Sun May 17, 2020 5:24 pm
hoops777 wrote:
Sun May 17, 2020 4:56 pm
I just want to here the reasoning for my peace of mind.
This is rather hard to demonstrate in a way that will satisfy anyone who doesn't already agree. But over a long period of time, if two funds have different dividends but equal total return, then the one who isn't selling shares has more shares that are less valuable. While the investor selling shares to make up the dividend difference has fewer shares that are more valuable.
Actually that pretty much makes sense to me.
On one level you think I am not selling any shares so I should have more money than you. I subscribed to a newsletter years ago that preached this and have always had a difficult time getting it out of my shrinking brain.
Thanks.
Last edited by hoops777 on Sun May 17, 2020 5:53 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.

Topic Author
hoops777
Posts: 3066
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 5:52 pm

JediMisty wrote:
Sun May 17, 2020 5:12 pm
hoops777 wrote:
Sun May 17, 2020 5:06 pm
JediMisty wrote:
Sun May 17, 2020 4:58 pm
hoops777 wrote:
Sun May 17, 2020 4:43 pm
Ok.
My main question is does the fact that you sold shares every month for 5 years and I did not matter at all?
I'm wondering what the person who is selling shares every month is doing with the dividends received? Reinvesting?
Spending.Income.
Ok. So then that person is ALSO taking dividends and selling shares? One person is getting $600 per month, the other $300 per month income. Do I misunderstand?
No,you misunderstood because of my confusing post.
K.I.S.S........so easy to say so difficult to do.

tibbitts
Posts: 10583
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Re: Dividend vs Total Return question

Post by tibbitts » Sun May 17, 2020 7:13 pm

hoops777 wrote:
Sun May 17, 2020 4:44 pm
tibbitts wrote:
Sun May 17, 2020 4:39 pm
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
Since you used the term "quality", most "quality" dividend funds are actually dividend growth funds, and don't yield 3.6%.
SCHD,VEIPX have both been there recently,or very close. SCHD definitely even higher.
I don't know about the others but VEIPX is not considered to have a "quality" weighting. Vanguard Dividend Appreciation Index would, I believe, but yields less than 2%.

JustinR
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Re: Dividend vs Total Return question

Post by JustinR » Sun May 17, 2020 7:15 pm

Total Return wins.

Dividends are taxed more than selling shares yourself:


  • With dividends, you're taxed on the entire amount.
    When selling shares, you recover the principle so you're only taxed on the gain.


    In your specific example, 100% of the dividend is subject to tax, but 0% of the sold shares are because you lost money (in fact you would be able to deduct some taxes since these are losses).

  • With dividends, some of it may not be qualified, which means some may be taxed at regular income rates instead of LTCG.
    When selling shares, all of it is taxed at LTCG rates.


    In your example, with dividends you'd pay 12% tax on some of it, but 0% on all the shares you sold yourself.


Remember: Dividends do not make you wealthier at all. They always make you comparatively poorer than if you were to sell the shares yourself (assuming not short term shares). Say no to dividends.

delamer
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Re: Dividend vs Total Return question

Post by delamer » Sun May 17, 2020 7:20 pm

hoops777 wrote:
Sun May 17, 2020 5:51 pm
mega317 wrote:
Sun May 17, 2020 5:24 pm
hoops777 wrote:
Sun May 17, 2020 4:56 pm
I just want to here the reasoning for my peace of mind.
This is rather hard to demonstrate in a way that will satisfy anyone who doesn't already agree. But over a long period of time, if two funds have different dividends but equal total return, then the one who isn't selling shares has more shares that are less valuable. While the investor selling shares to make up the dividend difference has fewer shares that are more valuable.
Actually that pretty much makes sense to me.
On one level you think I am not selling any shares so I should have more money than you. I subscribed to a newsletter years ago that preached this and have always had a difficult time getting it out of my shrinking brain.
Thanks.
The whole scenario is improbable and, more importantly, not knowable in advance (equal total returns, that is).

So it is irrelevant in terms of choosing how to invest.

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 7:27 pm

tibbitts wrote:
Sun May 17, 2020 7:13 pm
hoops777 wrote:
Sun May 17, 2020 4:44 pm
tibbitts wrote:
Sun May 17, 2020 4:39 pm
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
Since you used the term "quality", most "quality" dividend funds are actually dividend growth funds, and don't yield 3.6%.
SCHD,VEIPX have both been there recently,or very close. SCHD definitely even higher.
I don't know about the others but VEIPX is not considered to have a "quality" weighting. Vanguard Dividend Appreciation Index would, I believe, but yields less than 2%.
I would respectfully disagree with you.VEIPX may not have a quality weighting according to the same standard as the other but it is an excellent fund,which is all I meant.
K.I.S.S........so easy to say so difficult to do.

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 7:36 pm

delamer wrote:
Sun May 17, 2020 7:20 pm
hoops777 wrote:
Sun May 17, 2020 5:51 pm
mega317 wrote:
Sun May 17, 2020 5:24 pm
hoops777 wrote:
Sun May 17, 2020 4:56 pm
I just want to here the reasoning for my peace of mind.
This is rather hard to demonstrate in a way that will satisfy anyone who doesn't already agree. But over a long period of time, if two funds have different dividends but equal total return, then the one who isn't selling shares has more shares that are less valuable. While the investor selling shares to make up the dividend difference has fewer shares that are more valuable.
Actually that pretty much makes sense to me.
On one level you think I am not selling any shares so I should have more money than you. I subscribed to a newsletter years ago that preached this and have always had a difficult time getting it out of my shrinking brain.
Thanks.
The whole scenario is improbable and, more importantly, not knowable in advance (equal total returns, that is).

So it is irrelevant in terms of choosing how to invest.
I really should have been more clear.
Another try....
Take one stock,ATT. Currently yielding about 7 pct
I cash in all the dividends and never sell a share for 5 years.
You sell shares in the same amount as the dividends for 5 years.
The market declines every year for 5 years.
Year 6 the market goes crazy and recaptures all of the losses.
Do I have more shares than you at the end of year 6 ?
I believe mega answered the question but posing it a different way :happy
K.I.S.S........so easy to say so difficult to do.

BH+
Posts: 83
Joined: Sat Aug 31, 2019 5:15 pm

Re: Dividend vs Total Return question

Post by BH+ » Sun May 17, 2020 7:40 pm

hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
Both will have the same amount before any taxes, assuming that dividends paid by a total market fund are included in the 300 per month.

Taxes would complicate things a bit, but may not make a major difference.

BGeste
Posts: 120
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Re: Dividend vs Total Return question

Post by BGeste » Sun May 17, 2020 8:11 pm

Lots of tiresome anti dividend responses on this site.

John Bogle, the patron saint of this site, writes in his book "Stay the Course" how he turned around the Wellington Fund in the late 1970s by making the focus of the fund high paying dividend stocks and corporate bonds to increase income significantly without sacrificing total return. HIs proposal to the Board specifies this and the execution exceeded expectations over the subsequent 10 and 30 year periods. THe Wellington fund needed a turnaround because fund managers focused on growth and total return screwed it up in the late sixties and through the seventies. Read the book.

Bottom line: buying funds and securities with solid dividends does not mean you have to sacrifice total return.

bgf
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Re: Dividend vs Total Return question

Post by bgf » Sun May 17, 2020 8:23 pm

Berkshire doesn't pay dividends. Would investors in berkshire have more money if it had paid dividends?

We don't know. Depends on what the cash that would have been used to pay dividends was used for.

Don't think about it on the investor level, think on the corporate level. If the company has something really good to do with the money, don't give it back to me!!! Do your job!

If they don't have anything to do with it, then give it to me for God's sake! Don't just sit on it!

Your question has no answer.

The only thing you can't say is the nonsense about how dividends provide "double compounding."
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 8:33 pm

I changed the question to owning one stock,ATT ,a few posts back to eliminate the confusion of owning different things.I really am interested in the answer if someone has one. Thanks
K.I.S.S........so easy to say so difficult to do.

bgf
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Re: Dividend vs Total Return question

Post by bgf » Sun May 17, 2020 8:38 pm

hoops777 wrote:
Sun May 17, 2020 8:33 pm
I changed the question to owning one stock,ATT ,a few posts back to eliminate the confusion of owning different things.I really am interested in the answer if someone has one. Thanks
Your ATT hypothetical is nonsense. One investor gets 7% in dividends. The other gets the same 7% in dividends and sells 7% in shares. Of course the former will have more ATT shares....
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

JustinR
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Re: Dividend vs Total Return question

Post by JustinR » Sun May 17, 2020 8:39 pm

hoops777 wrote:
Sun May 17, 2020 8:33 pm
I changed the question to owning one stock,ATT ,a few posts back to eliminate the confusion of owning different things.I really am interested in the answer if someone has one. Thanks
We already answered your question.

All things equal, total return/selling your own shares wins (dividends lose you more money because they are taxed more).

antiqueman
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Re: Dividend vs Total Return question

Post by antiqueman » Sun May 17, 2020 8:50 pm

All things equal, total return/selling your own shares wins (dividends lose you more money because they are taxed more).
[/quote]

Would the answer be different if the dividend stocks were in a Roth account. No taxes on the dividends.

JustinR
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Re: Dividend vs Total Return question

Post by JustinR » Sun May 17, 2020 8:54 pm

antiqueman wrote:
Sun May 17, 2020 8:50 pm
JustinR wrote:
Sun May 17, 2020 8:39 pm
All things equal, total return/selling your own shares wins (dividends lose you more money because they are taxed more).
Would the answer be different if the dividend stocks were in a Roth account. No taxes on the dividends.
Yes.

When taxes are not a factor (retirement accounts), the two situations are equal.

the way
Posts: 252
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Re: Dividend vs Total Return question

Post by the way » Sun May 17, 2020 8:59 pm

hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
To make it simpler, say it drops immediately to 90k, then stays at a constant 90k while taking the 300/mth payments, and finally pops back to 100k after 5 years.

For the div fund, assuming the divs are qualified, you pay no taxes in the 12% bracket. When you sell, you have $0 CG so again no taxes. Total after tax return is 300x12x5.

For the other fund, assume 0 divs so you sell $300 in shares each month. The basis is ~333, so you have $33x12 capital losses each year in the 12% bracket, so save $48. After 5 years, your basis is ~80k, so when you sell you have a 20k LTCG. If this is entirely in the 12% bracket, then no taxes on it. Total after tax return is 300x12x5 + 48x5.

tibbitts
Posts: 10583
Joined: Tue Feb 27, 2007 6:50 pm

Re: Dividend vs Total Return question

Post by tibbitts » Sun May 17, 2020 9:30 pm

hoops777 wrote:
Sun May 17, 2020 7:27 pm
tibbitts wrote:
Sun May 17, 2020 7:13 pm
hoops777 wrote:
Sun May 17, 2020 4:44 pm
tibbitts wrote:
Sun May 17, 2020 4:39 pm
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
Since you used the term "quality", most "quality" dividend funds are actually dividend growth funds, and don't yield 3.6%.
SCHD,VEIPX have both been there recently,or very close. SCHD definitely even higher.
I don't know about the others but VEIPX is not considered to have a "quality" weighting. Vanguard Dividend Appreciation Index would, I believe, but yields less than 2%.
I would respectfully disagree with you.VEIPX may not have a quality weighting according to the same standard as the other but it is an excellent fund,which is all I meant.
When you use the term "quality" that's a somewhat specific selection screen that will eliminate many higher-yielding equities although not every fund that attempts to screen for quality will do so in exactly the same way. But it has nothing to do with a fund being "excellent."

Topic Author
hoops777
Posts: 3066
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 9:34 pm

bgf wrote:
Sun May 17, 2020 8:38 pm
hoops777 wrote:
Sun May 17, 2020 8:33 pm
I changed the question to owning one stock,ATT ,a few posts back to eliminate the confusion of owning different things.I really am interested in the answer if someone has one. Thanks
Your ATT hypothetical is nonsense. One investor gets 7% in dividends. The other gets the same 7% in dividends and sells 7% in shares. Of course the former will have more ATT shares....
But if you sell the shares to equal the dividend payment you are reinvesting the dividends,correct? So it is a wash. I have a severe mental block on this.
K.I.S.S........so easy to say so difficult to do.

Topic Author
hoops777
Posts: 3066
Joined: Sun Apr 10, 2011 12:23 pm

Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 9:36 pm

tibbitts wrote:
Sun May 17, 2020 9:30 pm
hoops777 wrote:
Sun May 17, 2020 7:27 pm
tibbitts wrote:
Sun May 17, 2020 7:13 pm
hoops777 wrote:
Sun May 17, 2020 4:44 pm
tibbitts wrote:
Sun May 17, 2020 4:39 pm

Since you used the term "quality", most "quality" dividend funds are actually dividend growth funds, and don't yield 3.6%.
SCHD,VEIPX have both been there recently,or very close. SCHD definitely even higher.
I don't know about the others but VEIPX is not considered to have a "quality" weighting. Vanguard Dividend Appreciation Index would, I believe, but yields less than 2%.
I would respectfully disagree with you.VEIPX may not have a quality weighting according to the same standard as the other but it is an excellent fund,which is all I meant.
When you use the term "quality" that's a somewhat specific selection screen that will eliminate many higher-yielding equities although not every fund that attempts to screen for quality will do so in exactly the same way. But it has nothing to do with a fund being "excellent."
Ok,guilty for generalizing when all I was getting at is that it is an excellent fund.
K.I.S.S........so easy to say so difficult to do.

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Nate79
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Re: Dividend vs Total Return question

Post by Nate79 » Sun May 17, 2020 9:37 pm

Has it been a week already since the last dividend vs total return thread? It's always the same discussion.

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hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 9:38 pm

JustinR wrote:
Sun May 17, 2020 8:54 pm
antiqueman wrote:
Sun May 17, 2020 8:50 pm
JustinR wrote:
Sun May 17, 2020 8:39 pm
All things equal, total return/selling your own shares wins (dividends lose you more money because they are taxed more).
Would the answer be different if the dividend stocks were in a Roth account. No taxes on the dividends.
Yes.

When taxes are not a factor (retirement accounts), the two situations are equal.
Thanks. I did say 12 pct bracket.
K.I.S.S........so easy to say so difficult to do.

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hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Sun May 17, 2020 9:45 pm

Nate79 wrote:
Sun May 17, 2020 9:37 pm
Has it been a week already since the last dividend vs total return thread? It's always the same discussion

Deleted
Last edited by hoops777 on Mon May 18, 2020 1:41 am, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.

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CyclingDuo
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Re: Dividend vs Total Return question

Post by CyclingDuo » Sun May 17, 2020 10:08 pm

JustinR wrote:
Sun May 17, 2020 8:39 pm
hoops777 wrote:
Sun May 17, 2020 8:33 pm
I changed the question to owning one stock,ATT ,a few posts back to eliminate the confusion of owning different things.I really am interested in the answer if someone has one. Thanks
We already answered your question.

All things equal, total return/selling your own shares wins (dividends lose you more money because they are taxed more).
Not when your taxable income is under the threshold for paying 0% on qualified dividends in a taxable account.
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Re: Dividend vs Total Return question

Post by Schlabba » Mon May 18, 2020 1:51 am

Dividends come out ahead. Volatility matters.

If the dividends aren’t cut during the downturn, you can simply ignore it. So the dividend investor spent only his dividends.

If there is a serious downturn of, lets pretend 50%, the capital appreciation investor is now burning through his money at double the rate.
Secretly a dividend investor. Feel free to ask why.

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Re: Dividend vs Total Return question

Post by Enzo IX » Mon May 18, 2020 2:52 am

Schlabba wrote:
Mon May 18, 2020 1:51 am
Dividends come out ahead. Volatility matters.

If the dividends aren’t cut during the downturn, you can simply ignore it. So the dividend investor spent only his dividends.

If there is a serious downturn of, lets pretend 50%, the capital appreciation investor is now burning through his money at double the rate.
[/quote

That's the way I think, for the dividend investor the stock price went down by only the book value of the dividend distribution.

In a bear market, the market puts a lower value for a company's BtM valuation temporarily (goodwill in the private sector). Total return investor sells shares to pay bills at the lower temporary valuation, permanently reducing shares at a 50% discount. Crisis is over, BtM goes back up to previous valuations, total return investor portfolio impacted by the sale of shares.

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Re: Dividend vs Total Return question

Post by firebirdparts » Mon May 18, 2020 7:31 am

hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Good thinking.

The real answer, as always, is "it depends". You should start this experiment in the past, and then see how it turned out yourself in the past. Every investment is different; you have to pick two. You can adequately compare two real investments in the past.
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Re: Dividend vs Total Return question

Post by Jack FFR1846 » Mon May 18, 2020 8:28 am

An important characteristic is tax timing. With a dividend stock, when dividend time comes, you get the dividend paid and you have no choice on that. You owe tax. Whether you're in a low tax bracket or high tax bracket, the dividends are taxable.

With a non dividend paying stock, you can choose to take the gain and pay tax when your strategy places it in the best position to do so. So perhaps you're in your first year of retirement and not taking social security, living on your investments only. Well, this is a good time to sell these stocks because as mentioned earlier, you are not taxed on that withdrawal, you're taxed on the gain. And with proper strategic planning, you pay zero tax.
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Re: Dividend vs Total Return question

Post by mega317 » Mon May 18, 2020 8:32 am

hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Considering we are now on tax timing and 50% stock crashes, neither having anything to do with your question , I'd say this was a fail. Nice try though!
https://www.bogleheads.org/forum/viewtopic.php?t=6212

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Re: Dividend vs Total Return question

Post by Schlabba » Mon May 18, 2020 8:37 am

mega317 wrote:
Mon May 18, 2020 8:32 am
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Considering we are now on tax timing and 50% stock crashes, neither having anything to do with your question , I'd say this was a fail. Nice try though!
I actually directly answer his question saying that the dividend investor comes out ahead. The actual percentage of the drop had nothing to do with my point.
Secretly a dividend investor. Feel free to ask why.

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Re: Dividend vs Total Return question

Post by Northern Flicker » Mon May 18, 2020 8:45 am

hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
That depends on whether the “dividend fund” outperforms the market or not. Sometimes it will, sometimes it won’t. If the market knew that it would outperform reliably, the market would arbitrage it by bidding up the price of the stocks in the dividend fund accordingly.

But the two situations are not equivalent with respect to taxes. When you withdraw shares from a mutual fund there will be a cost basis that depends on the basis method you elect but generally is not zero. This means that when you withdraw $300 in a given month, some of that will be return of capital. You will realize a capital gain or loss with the remaining portion.

With the dividend fund, 100% of the distribution is income. It may be taxed favorably by the federal govt, but in many states it will be taxed as regular income. Withdrawing from the total market fund, the return of capital is not income and thus is not taxed. It also does not contribute to MAGI for the purposes of determining ACA tax credits. And when the investment is under water, the withdrawal from the total market fund will harvest a loss— up to $3K/yr of which can offset other income.

Realizing income by dividends is just less tax efficient than realizing it by mutual fund withdrawals.
Risk is not a guarantor of return.

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Re: Dividend vs Total Return question

Post by tibbitts » Mon May 18, 2020 8:56 am

Northern Flicker wrote:
Mon May 18, 2020 8:45 am
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Please clearly explain this one thing that bothers me to no end.

You have 100,000 to invest.
I have 100,000 to invest.
You invest it in the total mkt and take out 300 dollars per month selling shares.
I invest it in a quality Dividend fund yielding 3.6 pct and take the 300 per month in dividends
We are both in the 12 pct tax bracket and this is in taxable.
Over the next 5 years the market is down 10 pct.
After year 6 the market recovers back to exactly what it was when we invested the 100K.
Who has more money if anyone?
Thanks
That depends on whether the “dividend fund” outperforms the market or not. Sometimes it will, sometimes it won’t. If the market knew that it would outperform reliably, the market would arbitrage it by bidding up the price of the stocks in the dividend fund accordingly.

But the two situations are not equivalent with respect to taxes. When you withdraw shares from a mutual fund there will be a cost basis that depends on the basis method you elect but generally is not zero. This means that when you withdraw $300 in a given month, some of that will be return of capital. You will realize a capital gain or loss with the remaining portion.

With the dividend fund, 100% of the distribution is income. It may be taxed favorably by the federal govt, but in many states it will be taxed as regular income. Withdrawing from the total market fund, the return of capital is not income and thus is not taxed. It also does not contribute to MAGI for the purposes of determining ACA tax credits. And when the investment is under water, the withdrawal from the total market fund will harvest a loss— up to $3K/yr of which can offset other income.

Realizing income by dividends is just less tax efficient than realizing it by mutual fund withdrawals.
I thought we'd already established earlier in the thread that there is a 0% tax rate on any distributions, so dividend income is not less efficient in that sense.

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Re: Dividend vs Total Return question

Post by Northern Flicker » Mon May 18, 2020 9:00 am

But it will not be a zero tax rate in most states or if you get an ACA tax credit.

But even if you don’t use individual insurance and
live in a state without income tax, you still miss the tax loss harvesting of the mutual fund withdrawals made when the market was down in the example if harvesting dividends. This will offset some of the 12% bracket income.
Risk is not a guarantor of return.

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hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Mon May 18, 2020 9:35 am

Northern Flicker wrote:
Mon May 18, 2020 9:00 am
But it will not be a zero tax rate in most states or if you get an ACA tax credit.

But even if you don’t use individual insurance and
live in a state without income tax, you still miss the tax loss harvesting of the mutual fund withdrawals made when the market was down in the example if harvesting dividends. This will offset some of the 12% bracket income.
I live in California and forgot about state taxes.
K.I.S.S........so easy to say so difficult to do.

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hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Mon May 18, 2020 9:37 am

mega317 wrote:
Mon May 18, 2020 8:32 am
hoops777 wrote:
Sun May 17, 2020 3:48 pm
One question and I do not want to start the usual back and forth about this.
Considering we are now on tax timing and 50% stock crashes, neither having anything to do with your question , I'd say this was a fail. Nice try though!
:D I guess I should have asked the question more clearly.
K.I.S.S........so easy to say so difficult to do.

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Re: Dividend vs Total Return question

Post by goingup » Mon May 18, 2020 9:44 am

hoops-
Why not just buy the SCHD fund which you have been eyeing for months?

In April you wrote:
"I HEREBY DECREE BY THE POWER INVESTED IN ME BY MY OWN DELUSIONS TO MAKE THIS THE LAST DIVIDEND THREAD EVER RECORDED ON THIS SITE. THANK YOU. I have seen both viewpoints over and over and over and over and there will NEVER be a meeting in the middle."

Obviously, you have had some additional thoughts on the matter. :oops:

If owning this fund (or another dividend-focused fund) suits you, then buy it. Make it 10-20% of your portfolio. See if it's what you want. There's no optimal--there's only what's best for you. Further, if you're looking for a regular "paycheck" from your investments, consider a SPIA. :beer

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