Dividend vs Total Return question

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hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Mon May 18, 2020 9:49 am

goingup wrote:
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
You are right.
I apologize to all.
I officially close this thread even if I can’t.
No more comments and thanks to all.
K.I.S.S........so easy to say so difficult to do.

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KEotSK66
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Post by KEotSK66 » Mon May 18, 2020 10:04 am

all my dividends/interest are in tax-advantaged accounts, roth and rollover iras, 100% wellesley in each

I have a 401k which holds a dividend income stock fund, this will eventually be rolled into vwiax

the only tax issue I expect to have with the above is draws/rmds from the rollover. vwiax has done good by me so investing in it has been a better choice than a bond fund and when i start draws/rmds i likely will be in a lower tax bracket

reinvestment of capital and income distributions has worked out well during accumulation so far, i expect replacing at least 75% of my draw/rmds with income distributions alone will work out well too, even with modest return assumptions i could get between 20 and 25 years of inflation-adjusted money from my rollover...that's at least 20 yrs untouched stewing for my roth...ie, all capital and income distributions reinvested

my taxable account right now consists of a checking account for monthly transacting, no tax problems there. i have been thinking about what to do with any "excess money" which might find its way to me. I've been looking at midcap growth funds/etfs, at least they used to have a small tax impact while accumulating, not so sure now. but this is icing on the cake, i could not count on it to be a source of reliable cash flow so holding it for an extended period before selling would be the likely storyline. if needed to rely on an investment in my taxable account for additional reliable cash flow at some point taxes would be a consideration but i wouldn't let them drive the bus
"i just got fluctuated out of $1,500", jerry

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grabiner
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Re: Dividend vs Total Return question

Post by grabiner » Mon May 18, 2020 10:19 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
If the two funds have the same total return, the dividend investor comes out slightly behind in six years, but slightly ahead beyond the sixth year. The reason is that neither investor pays tax on capital gains, and both pay only 0.72% tax on dividends (assuming 94% qualified). However, when the market is down 10%, the dividend investor has a larger capital loss to harvest. Both investors will be able to take $3000 off their taxes in the fifth and sixth year, saving $360, but the total-market investor will have a smaller capital loss and will use some of it to offset capital gains, so he runs out of taxable losses first.

If the investors are in the phase-in of Social Security taxation, the dividend investor winds up significantly behind, because the marginal tax on dividend income becomes 6.72% or 10.92%; every dollar of dividends causes 50 or 85 cents of Social Security to be taxed.
Wiki David Grabiner

delamer
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Re: Dividend vs Total Return question

Post by delamer » Mon May 18, 2020 10:42 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.
No dividend cuts when there is a 50% market downturn is not a outcome to plan your retirement around.

Look at what happened to (nominal) S&P 500 dividends during the Great Recession: https://www.multpl.com/s-p-500-dividend/table/by-year

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Mon May 18, 2020 10:46 am

grabiner wrote:
Mon May 18, 2020 10:19 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
If the two funds have the same total return, the dividend investor comes out slightly behind in six years, but slightly ahead beyond the sixth year. The reason is that neither investor pays tax on capital gains, and both pay only 0.72% tax on dividends (assuming 94% qualified). However, when the market is down 10%, the dividend investor has a larger capital loss to harvest. Both investors will be able to take $3000 off their taxes in the fifth and sixth year, saving $360, but the total-market investor will have a smaller capital loss and will use some of it to offset capital gains, so he runs out of taxable losses first.

If the investors are in the phase-in of Social Security taxation, the dividend investor winds up significantly behind, because the marginal tax on dividend income becomes 6.72% or 10.92%; every dollar of dividends causes 50 or 85 cents of Social Security to be taxed.
Thank you.
K.I.S.S........so easy to say so difficult to do.

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Schlabba
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Re: Dividend vs Total Return question

Post by Schlabba » Mon May 18, 2020 11:31 am

delamer wrote:
Mon May 18, 2020 10:42 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.
No dividend cuts when there is a 50% market downturn is not a outcome to plan your retirement around.

Look at what happened to (nominal) S&P 500 dividends during the Great Recession: https://www.multpl.com/s-p-500-dividend/table/by-year
We're not planning a retirement in this thread.
Secretly a dividend investor. Feel free to ask why.

JonnyB
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Re: Dividend vs Total Return question

Post by JonnyB » Mon May 18, 2020 11:34 am

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).
All things equal is quite an assumption that is frequently glossed over with the simple words "all things equal."

But things are never that simple. A dividend paying company and a non-dividend company are going to be managed differently and make different operational decisions. For example, a non-dividend company that retains earnings might use them to pursue mergers and acquisitions. They might spend it on big executive bonuses. They might spend it on stock buybacks which require market timing resulting in overpaying or underpaying when reinvesting. So all things are never equal.

More importantly, only 25% of shares are owned in taxable accounts and those taxable shares are concentrated in the hands of a small minority of wealthy investors. Company dividend policies are engineered to benefit a small minority of taxable shareholders which just happens to include the executives themselves who are making those decisions.

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KEotSK66
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Post by KEotSK66 » Mon May 18, 2020 12:11 pm

investing only for capital return isn't total return investing

and the dreaded sequence of return risk is really based in the capital return components of nav and capital gains, ie a depressed nav possibly coupled with low/no capital gains
"i just got fluctuated out of $1,500", jerry

DSInvestor
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Re: Dividend vs Total Return question

Post by DSInvestor » Mon May 18, 2020 12:24 pm

If OP is looking at Vanguard Equity income VEIPX, it does not distribute dividends monthly and distributions may be uneven. I think only bond funds and MMFs distribute monthly. VEIPX seems to distribute dividends quarterly with some capital gains distributions also which the total stock fund would not have. If held in a taxable account, those capital gains distributions could be a big disadvantage over Total Stock market depending on one's tax circumstances (e.g. keeping AGI below certain limits for ACA premium tax credit etc).
https://investor.vanguard.com/mutual-fu ... ions/veipx
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Re: *

Post by TropikThunder » Mon May 18, 2020 1:00 pm

KEotSK66 wrote:
Mon May 18, 2020 12:11 pm
investing only for capital return isn't total return investing

and the dreaded sequence of return risk is really based in the capital return components of nav and capital gains, ie a depressed nav possibly coupled with low/no capital gains
Why do you keep deleting the thread titles or changing them to another poster’s screen name when you post? If you are responding to a particular comment by a particular poster, you can click on the quote symbol “ in the top right of the comment.

Broken Man 1999
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Re: Dividend vs Total Return question

Post by Broken Man 1999 » Mon May 18, 2020 2:49 pm

This thread should be euthanized, lest someone make a serious financial decision based on the info!

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain

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CyclingDuo
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Re: Dividend vs Total Return question

Post by CyclingDuo » Mon May 18, 2020 4:22 pm

Jack FFR1846 wrote:
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.
Maybe you could expand on your statement "Whether you're in a low tax bracket or high tax bracket, the dividends are taxable."

Those who invest in the stock market know that capital gains (and dividends) are taxed at a lower rate than ordinary income (wage, interest, and earned income). This is pertinent to be aware of because many of us could qualify for the 0% capital gain/dividend tax.

Here is a 2020 taxable income for cap gains/qualified dividends table for a quick reference:

Image

Married filing jointly in 2020 allows up to $80,000 in taxable income and single filer allows up to $40,000 in taxable income for the qualified dividends to be in the 0% tax rate for Federal.

Although this is from 2015, we'll take the graphic from Retire by 40 to illustrate rather that create a new one to see how he accomplishes not paying taxes on his qualified dividend income...

Image
https://retireby40.org/pay-no-tax-dividend-income/

Fast forward to 2020, and adjustments can still include contributions to 403b/401k/457b and a mandatory pension. For deductions, most take the standard deduction which is $24,400 for married filing jointly in 2019 tax year and goes up to $24,800 for tax year 2020. In our case, we can max out three retirement plans (403b/457b/401k between the two of us with the catch up contributions for over age 50 as well) plus pay the mandatory pension contribution for one of us, take the standard deduction and have our taxable income well within the target zone of paying 0% on all of our qualified dividends in a taxable account.

These articles and blog posts all show examples and explain how not to pay taxes on your dividends. Obviously, state income tax is an issue, but not in all states.

Physician On Fire: https://www.physicianonfire.com/paynotax/

The Balance: https://www.thebalance.com/how-to-pay-n ... ins-357399

Retire By 40: https://retireby40.org/pay-no-tax-dividend-income/

The Motley Fool: https://www.fool.com/taxes/2018/05/22/h ... t-tax.aspx

Early Retirement Now: https://earlyretirementnow.com/2019/11/ ... ome-taxes/

Market Watch: https://www.marketwatch.com/story/heres ... 2019-11-22
"Everywhere is within walking distance if you have the time." ~ Steven Wright

delamer
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Re: Dividend vs Total Return question

Post by delamer » Mon May 18, 2020 5:22 pm

Schlabba wrote:
Mon May 18, 2020 11:31 am
delamer wrote:
Mon May 18, 2020 10:42 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.
No dividend cuts when there is a 50% market downturn is not a outcome to plan your retirement around.

Look at what happened to (nominal) S&P 500 dividends during the Great Recession: https://www.multpl.com/s-p-500-dividend/table/by-year
We're not planning a retirement in this thread.
We are discussing withdrawal strategies. I used the example of retirement, but my comment applies regardless. Planning on dividends continuing at the same dollar level during a major stock market downturn is a mistake.

RAchip
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Re: Dividend vs Total Return question

Post by RAchip » Mon May 18, 2020 6:23 pm

Referring to dividends “VS” total return seems like a non sequitur to me. If you own a broad market fund like total market or s&p 500 your return consists of dividends and capital gains. You dont get to separate them.

If you look at books that discuss “dividend investing” they mostly focus on the claim that companies that pay regular growing dividends have greater total return over the long term than non-dividend paying stocks. So the whole point of so-called “dividend investing” is just a strategy that supposedly gives you greater total return. Every investor is, by definition, a “total return” investor.

FoolMeOnce
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Re: Dividend vs Total Return question

Post by FoolMeOnce » Mon May 18, 2020 6:41 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
I'm going to treat this as a zero-dividend fund v. a 3.6% dividend fund for clarity. I think what gets confusing if when you take about the market being down 10%. If that happens, the share price of the zero-dividend fund is down 10%, but the share price is the 3.6% dividend fund is down a lot more than that, because it has reduced with every dividend payout on top of the 10% market declined.

Topic Author
hoops777
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Re: Dividend vs Total Return question

Post by hoops777 » Mon May 18, 2020 10:42 pm

OP here.
Sorry to start the usual #^*%%% about dividends,
Anyway,with my stock allocation , I have decided to go 25 pct SCHD and 25 pct VEIPX and not reinvest the dividends. The other 50 pct will go in the total stock market.
I will put the dividend funds in my Roth and IRA.Total market in my taxable.
I will post about it in 10 years to let you all know how it turned out up to that point. Don’t hold your breath :D
In the end ,I really do not think it is going to make much of a difference either way,but it will keep me more interested for the helluva it.
K.I.S.S........so easy to say so difficult to do.

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LilyFleur
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Re: Dividend vs Total Return question

Post by LilyFleur » Mon May 18, 2020 11:16 pm

hoops777 wrote:
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.
In a taxable account, both investors are paying taxes on the dividends. The investor who reinvests the dividends pays taxes on the dividends, and also pays any taxes on the shares sold. I think that wouldn't be a wash, then. :confused

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