Dividends - take cash or re-invest

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ps56k
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Dividends - take cash or re-invest

Post by ps56k »

I've often thought about the coin toss between taking the cash vs reinvesting. So, what are the pros/cons of handling the divs from both mutual funds and stocks.

I'm currently reinvesting for all mutual funds,
but taking cash for div paying stocks.

I haven't really noticed, are they treated the same with a 1099-DIV ?
Roy
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Re: Dividends - take cash or re-invest

Post by Roy »

ps56k wrote:I've often thought about the coin toss between taking the cash vs reinvesting. So, what are the pros/cons of handling the divs from both mutual funds and stocks.
No one right answer here as it depends on circumstances (do you need the income flow?) and security location (is it tax deferred or taxable?) and time horizon. Some try to approach this from a valuations perspective, reinvesting if the security is beaten down and taking cash if it is overvalued. But how one determines any of that involves other questions.
JustinR
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Post by JustinR »

http://www.bogleheads.org/wiki/Whether_ ... le_Account

None of the pros (of taking it in cash) listed there apply to me, so I reinvest.
dbr
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Re: Dividends - take cash or re-invest

Post by dbr »

ps56k wrote:
I haven't really noticed, are they treated the same with a 1099-DIV ?
Yes, reinvesting and whether stocks or bonds has no effect on the taxability of cash dividends received, nor on the reporting.

However, it is true that mutual fund distributions can also include capital gains distributions. Your full 1099 will straighten all that out, but it is a difference between stocks and funds. Also, some "funds" such as a money market "fund" may pay out as interest rather than as a dividend.
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Toons
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Post by Toons »

Regarding Taxes,dividends are dividends(1099-Div) whether taking in cash or reinvesting.
As to reinvesting,I have for decades as I remember Einsteins famous quote

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”


:D :D :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Daffy
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Post by Daffy »

Toons wrote:Regarding Taxes,dividends are dividends(1099-Div) whether taking in cash or reinvesting.
As to reinvesting,I have for decades as I remember Einsteins famous quote

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”


:D :D :D
On one hand, one can argue that Einstein was referring to compound interest on instruments like bank accounts or CDs where there's no potential loss of principal, just slow and steady growth over time. On the other hand, I doubt Einstein would argue that reinvesting dividends back into equities would in any way eliminate the risk of loss associated with falling stock prices. One can reinvest or "compound" dividends back into equities all they want, but valuations can still plummet and there's never any 8th wonder of the world guarantee that the investor will come out ahead.
MP173
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Post by MP173 »

Since I have no need for the cash at this stage, my dividends are re-invested. This applies to both mutual funds and the equities.

This is good if the end result is growth in the NAV or the stock price. So far, it has been a positive for me. My plan is to accumulate shares and then during retirement use the dividends for income.

Ed
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HomerJ
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Post by HomerJ »

I take all dividends as cash.... this allows me to rebalance without having to sell principal (and probably trigger another tax bill)

Also, in taxable accounts, I want the dividends in a cash account, so I can pay the taxes owed for those dividends from the dividends.

I don't get all angry over my tax bill when I can pay the $1000 I owe on dividends from the $6000 I received in dividends.
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FabLab
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Post by FabLab »

rrosenkoetter wrote:I take all dividends as cash.... this allows me to rebalance without having to sell principal (and probably trigger another tax bill)
Do you find that the dividends (which get taxed either way in a taxable account) just aren't enough to rebalance to one's desired AA? At some point it seems that it can take quite a bit to really move the AA or have much of an appreciable effect without the inclusion of selling some "principal," as you speak.
The fundamental things apply as time goes by -- Herman Hupfeld
bigDanShan
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Post by bigDanShan »

Depends on your needs but over the longterm reinvested dividends can have a massive effect on the size of your investment. At 7% price appreciation and 3% divided yield - after 25 yrs of dividend reinvested, accumulated capitol more than doubles the no reinvestment case.
"Be kind, for everyone you meet is fighting a hard battle." – Plato
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HomerJ
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Post by HomerJ »

RonV wrote:
rrosenkoetter wrote:I take all dividends as cash.... this allows me to rebalance without having to sell principal (and probably trigger another tax bill)
Do you find that the dividends (which get taxed either way in a taxable account) just aren't enough to rebalance to one's desired AA? At some point it seems that it can take quite a bit to really move the AA or have much of an appreciable effect without the inclusion of selling some "principal," as you speak.
Oh, sure, especially if the market swings hard up or down... But I usually rebalance by changing contributions and re-investing dividends in the lower asset...

So if stocks go down, and my 50/50 stock/bond portfolio changes to 45/55, I'll change my contributions to be 100% stock, and re-invest all dividends manually into stock funds.. and try to rebalance first that way...
learning_head
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Post by learning_head »

I used to reinvest but it became a pain
(a) at tax time (when you sell and need to figure out your basis or when some recent dividends are treated as short-term sale for your overall long-term position)
(b) for tracking how much I invested vs how much I have now
(c) when I moved from one brokerage to another, they sold off a bunch of fractional shares - a pain of its own, which triggered taxes again, etc.
(d) some of the pains in the above-mentioned wiki-page (wash sales and specific identification of shares)

So now,

- in tax-deferred / non-taxable accounts, I reinvest
- in taxable accounts, I take cash, and effectively reinvest all accumulated dividends from time to time with my regular investments (i.e. when I want to buy something, I use dividends accumulated in cash as part of my investment)
plnelson
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Post by plnelson »

I was unclear what the OP meant by "reinvesting" dividends. Did he mean in the sense of a DRIP or just reinvesting it sometime in the future when the amount in the cas account justfies it?

With individual stocks in taxable accounts held for a long time, one problem with reinvesting dividends is that computing the cost basis when you finally sell the whole thing can get complicated when you've made 40 purchases over 10 years since they were all bought at different prices.

In my value investing portfolio I tend to hold lots of stock of companies which pay good dividends, so they all get sent to my cash account where they don't usually wait long before they buy something new.

In my Boglehead portfolio I automatically reinvest and assume that Vanguard computes it correctly.

In my trading account if I happen to get divvies they go into the sweep account.
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Leif
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Post by Leif »

I'm in the asset accumulation phase, so that is a bit different from what I would do in the asset withdrawal phase.

In most cases I take the dividends and CG as cash. I then reinvest those in the asset class that is down when I re-balance.

I do have a few funds that have a transaction fee to buy. In those cases I reinvest.
umfundi
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Post by umfundi »

I'm a little late to this discussion, but I completely agree with rrosenkoetter.

If they're tax-deferred, reinvest. Be sure to rebalance occasionally.

I sweep all my dividends (from taxable mutual funds) to a cash (money market) account, still regarded as "investment". Most of the dividends occur in December. About February, I estimate what I need to pay the taxes, fund my IRAs, and rebalance my taxable accounts. Usually, I can do this without selling.

Theoretically, there's a little bit of opportunity loss for holding cash for a couple of months. But, the reduction in paperwork and record keeping is immense!

Keith
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ps56k
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Re: Dividends - take cash or re-invest

Post by ps56k »

was just thinking of adding an ETF like VIG for my sons Schwab account - and if I did do it, should I go with the cash payout to the sweep account, or checkmark the re-invest box ?

I hadn't thought of the cost basis issues maybe 10, 20 years down the road...
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daytona084
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Re:

Post by daytona084 »

learning_head wrote:I used to reinvest but it became a pain
(a) at tax time (when you sell and need to figure out your basis or when some recent dividends are treated as short-term sale for your overall long-term position)
(b) for tracking how much I invested vs how much I have now
(c) when I moved from one brokerage to another, they sold off a bunch of fractional shares - a pain of its own, which triggered taxes again, etc.
(d) some of the pains in the above-mentioned wiki-page (wash sales and specific identification of shares)

So now,

- in tax-deferred / non-taxable accounts, I reinvest
- in taxable accounts, I take cash, and effectively reinvest all accumulated dividends from time to time with my regular investments (i.e. when I want to buy something, I use dividends accumulated in cash as part of my investment)
Could have not said it better myself.

I was reinvesting in my taxable until a fellow Boglehead pointed out the above!
scrabbler1
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Re: Dividends - take cash or re-invest

Post by scrabbler1 »

Before I became an early retiree about 3 years ago, I reinvested all my mutual fund dividends and cap gains. Often they were reinvested into the same fund as the one generating the dividends, but sometime I used the dividends from one fund to buy new shares in another fund, like an automatic account builder, before switching it back to its host fund.

Now, as an early retiree, I take as cash a lot of the monthly dividends from my bond funds, reinvesting any surplus I do not need to cover my expenses in the next 6 months or so (I plan my budget for an entire calendar year, keeping a watch on the larger, non-monthly expenses such as auto and health insurance as well as estimated income taxes). I still have one fund's dividends reinvested in the same fund while another one's dividends gets reinvested into a different fund. I even have one fund give me dividends as cash while I reinvest its infrequent cap gains distributions. Nice to have choices, huh?
jon-nyc
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Re: Dividends - take cash or re-invest

Post by jon-nyc »

I don't have a hard and fast rule, rather I make the call prior to each dividend payment. If the fund is below its target allocation, I reinvest. If not, I do cash.
bucksfan2
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Re: Dividends - take cash or re-invest

Post by bucksfan2 »

I reinvest all my dividends. There are times it can get complicated (wash sale, cost basis) but in the end you own a stock/fund because you like it. When it pays a dividend I like the compounding interest aspect more than cash payments.

I guess it boils down to whether or not you need the cash flow. If your a retiree living off of your dividends then you shouldn't use DRIP. If the cost basis gets too complicated, thats what accountants are for :D
clevername
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Re: Dividends - take cash or re-invest

Post by clevername »

I just take it in cash and have it sent to vmmxx (money market). It makes taxes easier and rebalancing is easier if I just want a quick cash infusion somewhere. If we have a 2008/2009 style meltdown I would need more than a "bit of cash" to get my equities up to par, but for now it does the trick. If I see a compelling reason to reinvest then I'll switch.
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Cut-Throat
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Re:

Post by Cut-Throat »

Toons wrote:Regarding Taxes,dividends are dividends(1099-Div) whether taking in cash or reinvesting.
As to reinvesting,I have for decades as I remember Einsteins famous quote

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
:D :D :D
I don't think Money Market Accounts were paying .6% Interest when he made this comment. Although, I Keep wondering whether I am going to get any compounding at all! .....And that may be the Biggest Wonder!
Last edited by Cut-Throat on Thu Jan 19, 2012 5:17 pm, edited 1 time in total.
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Midpack
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Re: Dividends - take cash or re-invest

Post by Midpack »

Compounding is wonderful, so I reinvested all dividends during my working career. I recently retired, and eventually I will start letting dividends go to cash for ongoing spending. Unless you have a need for cash, or the discipline to invest the cash generated in a timely manner - I'd reinvest dividends. YMMV
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