Dividends vs. Capital Gains for Spending Needs?

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Taylor Larimore
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Dividends vs. Capital Gains for Spending Needs?

Post by Taylor Larimore » Thu Oct 05, 2017 12:46 pm

Bogleheads:

Would you rather own stock funds that automatically pay you enough in dividends to cover your spending needs or own funds that pay little to no dividends, forcing you to sell shares?

Physician on Fire prefers stock funds (in taxable accounts) that pay little or no dividends. He tells us why here (I agree):

Selling Shares Beats Collecting Dividends

Best wishes.
Taylor
Last edited by Taylor Larimore on Thu Oct 05, 2017 12:47 pm, edited 1 time in total.
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by jebmke » Thu Oct 05, 2017 12:46 pm

If all other things are equal, I agree. In other words, I would not skew my portfolio to the point of not being diversified just to avoid dividends.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TJSI » Thu Oct 05, 2017 1:02 pm

Taxes are very important and every investor should be aware of their effect on return.

Assumptions are also important in any analysis. So the reader of this paper should make note of the statement "assuming the total return of the two options is equal" and judge for themselves.

TJSI

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by dbr » Thu Oct 05, 2017 2:55 pm

TJSI wrote:
Thu Oct 05, 2017 1:02 pm
Taxes are very important and every investor should be aware of their effect on return.

Assumptions are also important in any analysis. So the reader of this paper should make note of the statement "assuming the total return of the two options is equal" and judge for themselves.

TJSI
Indeed, and sometimes the issue is being sure to note "assuming equal total return" and in some other conversations one should be aware that someone is assuming the total return is not equal when it is.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Thu Oct 05, 2017 3:15 pm

I really don't want to get into this argument again.

However, I would like to point out some items to
(Physician On Fire) for future reference.

1). Not everyone lives in California.
2). Not everyone is in the 25% tax bracket.
3). Not every State imposes high taxes on dividends.
4). Everyone is not a Doctor in a high tax bracket.
5). I consider myself a pretty "savvy" investor.
6). This was a really biased/slanted article.
7). I would not invest in Berkshire Hathaway because
they do not pay a dividend & I love Warren Buffett.

Ok...You can carry on now...Thanks for letting me rant.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Thu Oct 05, 2017 3:28 pm

snarlyjack wrote:
Thu Oct 05, 2017 3:15 pm
I really don't want to get into this argument again.

However, I would like to point out some items to
(Physician On Fire) for future reference.

1). Not everyone lives in California.
2). Not everyone is in the 25% tax bracket.
3). Not every State imposes high taxes on dividends.
4). Everyone is not a Doctor in a high tax bracket.
5). I consider myself a pretty "savvy" investor.
6). This was a really biased/slanted article.
7). I would not invest in Berkshire Hathaway because
they do not pay a dividend & I love Warren Buffett.

Ok...You can carry on now...Thanks for letting me rant.
I'd suggest that statement #7 demonstrates that statement #5 is incorrect.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by JoMoney » Thu Oct 05, 2017 3:29 pm

As a mutual fund owner, especially via broad market low cost index funds, I see little need to look at dividends as anything but a tax consideration.
If I was stock picking, I think there is information/signal in dividends that deserves consideration when selecting stocks, but not in my spending needs.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Thu Oct 05, 2017 3:30 pm

snarlyjack wrote:
Thu Oct 05, 2017 3:15 pm
I really don't want to get into this argument again.

However, I would like to point out some items to
(Physician On Fire) for future reference.

1). Not everyone lives in California.
2). Not everyone is in the 25% tax bracket.
3). Not every State imposes high taxes on dividends.
4). Everyone is not a Doctor in a high tax bracket.
5). I consider myself a pretty "savvy" investor.
6). This was a really biased/slanted article.
7). I would not invest in Berkshire Hathaway because
they do not pay a dividend & I love Warren Buffett.

Ok...You can carry on now...Thanks for letting me rant.
Even if everything you say is true, it remains the case that there is no benefit to receiving dividends over tax gain harvesting shares. And the downsides have been repeatedly explained, even recently, on this forum.

Also stating "this was a really biased/slanted article" without proof is unlikely to convince anyone unless you show the bias or slant. Note that disagreeing with an article criticizing your investing style does not make it biased.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Thu Oct 05, 2017 3:36 pm

Avalpert,

I absolutely refuse to be drawn into this argument again.

However, I also don't invest in "zero coupon bonds" just to be fair.

I love Warren Buffett & his fund is super but it's not what I' am looking for
in a investment. Nice guy tho..

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Thu Oct 05, 2017 3:38 pm

By the way, snarlyjack, your tax rate in Montana is 6.9% if your taxable income for montana tax purposes is at least $15.601k. That can be quite a lot of tax drag on a dividend fund.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by FrugalProfessor » Thu Oct 05, 2017 3:49 pm

I loathe dividends and am perplexed by people's obsession with them. If a mutual fund or stock's dividend yield isn't high enough for your liking, sell some stock and create your home grown dividend.

For an investor with a multi decade investing horizon, I hate the drag caused by dividends, as shown by the following example.

$1 investment with 5% real return, 2% dividend yield, 20% tax rate on dividends (15% federal + 5% state), 20Y investing horizon.

No dividends.
FV = $1*(1+5%)^20 = $2.65

Dividends create a tax drag of 2%*20%=0.4%, causing the real return to drop from 5% to 4.6%.
FV = $1*(1+4.6%)^20 = $2.46

Dividends in this case have destroyed 7.3% of the potential value of the no-dividend stock (=1-$2.46/$2.65).
I blog. My effective (not to be confused with statutory) MTR is 45% (fed + state, excluding payroll). I save $30k/year in taxes by maxing out deferrals. Taxes are the lowest hanging source of alpha.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Thu Oct 05, 2017 4:08 pm

Since were posting articles & giving opinions.
I would like to post mine.

I love freedom, I love passive income, I love my time...

The question is, how can I achieve my goals without selling
off my portfolio? Remember I' am a young guy 23 years old.
I need my portfolio to last until age 100. That's 77 more years.
I have no intention of selling off my portfolio. If anything it
needs to be a lot larger. That's what I' am working on.

Enjoy this article & see if you can relate.

http://www.dividendmantra.com/2011/05/why-dividends/

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Thu Oct 05, 2017 4:20 pm

snarlyjack wrote:
Thu Oct 05, 2017 4:08 pm
Since were posting articles & giving opinions.
I would like to post mine.

I love freedom, I love passive income, I love my time...

The question is, how can I achieve my goals without selling
off my portfolio? Remember I' am a young guy 23 years old.
I need my portfolio to last until age 100. That's 77 more years.
I have no intention of selling off my portfolio. If anything it
needs to be a lot larger. That's what I' am working on.

Enjoy this article & see if you can relate.

http://www.dividendmantra.com/2011/05/why-dividends/
Note: what I posted were facts, not opinions. It is helpful to distinguish between the two.

Not selling off your portfolio for the most part^* sounds like a great reason to own total market funds with a lower dividend yield. Great idea.

*: (that is, the dividend yield is greater than the amount you require withdrawn from the fund for at least a period of years)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Dead Man Walking » Thu Oct 05, 2017 4:40 pm

I invest in equity mutual funds and reinvest dividends and capital gains. If I need money or rebalance, I sell shares. I don't calculate how much of my withdrawal or transfer is dividends or capital gains. Frankly, I don't understand this debate. Perhaps mutual fund dividends can be withdrawn when they are paid and I am not aware that this option is available.

DMW

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Thu Oct 05, 2017 4:48 pm

Triceratop,

I agree with you, you are very good!
You must be getting a MBA or working on your CPA
degree?

The reason I picked the High Dividend Yield Index fund was
the companies/stocks in the fund. Big Blue Cap. stocks
imho, are the cat's meow.

I've noticed that a lot of investors here tax-loss harvest.
Going from 1 fund to another. My 1st impression is I would
dca into the fund. A lot of investors here like small cap value stocks,
I can relate to big cap stocks. I would rather own Boeing than
Ace Hardware. It's a matter of the companies in the fund.

Also, remember that I own the LifeStrategy Fund which has
the TSM & TIM & Bonds. In my mind, I' am picking up
everything that moves. Some people tilt to small caps, I tilt to
large caps. I feel more comfortable with my tilt.

I don't disagree with what you & Avalpert are saying. I just
think my particular situation is a bit different.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Sidney » Thu Oct 05, 2017 4:54 pm

snarlyjack wrote:
Thu Oct 05, 2017 3:36 pm
I absolutely refuse to be drawn into this argument again.
That didn't last long.
I always wanted to be a procrastinator.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by PhysicianOnFIRE » Thu Oct 05, 2017 4:57 pm

snarlyjack wrote:
Thu Oct 05, 2017 3:15 pm
I really don't want to get into this argument again.

However, I would like to point out some items to
(Physician On Fire) for future reference.

1). Not everyone lives in California.
2). Not everyone is in the 25% tax bracket.
3). Not every State imposes high taxes on dividends.
4). Everyone is not a Doctor in a high tax bracket.
5). I consider myself a pretty "savvy" investor.
6). This was a really biased/slanted article.
7). I would not invest in Berkshire Hathaway because
they do not pay a dividend & I love Warren Buffett.

Ok...You can carry on now...Thanks for letting me rant.
You're welcome, @snarlyjack. Rant away.

While I realize not everyone is a physician in the top tax brackets, that's my target audience and many of my readers share at least some of those characteristics. I also see many people ignore the fact that state income tax is usually levied on dividends. I read a blog post today that incorrectly stated most states don't tax dividends.

I've also written about the benefits of structuring a portfolio to put yourself in the 15% federal income tax bracket as an early retiree to benefit from tax-free dividends and capital gains. It's not tough to do with a reasonable spending level and a decent sum invested in Roth and / or taxable accounts to go along with your tax deferred money.

I like dividends from a behavioral / psychological standpoint. You are granted money rather than requesting it, and I can see why that's appealing. But functionally, I'm generally better off choosing the quantity and timing of the amount of the withdrawal by selling shares, instead. If that's not true for you, you should certainly do what's best for you and your portfolio.

:beer
-PoF

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Thu Oct 05, 2017 5:07 pm

snarlyjack wrote:
Thu Oct 05, 2017 3:36 pm
Avalpert,

I absolutely refuse to be drawn into this argument again.

However, I also don't invest in "zero coupon bonds" just to be fair.

I love Warren Buffett & his fund is super but it's not what I' am looking for
in a investment. Nice guy tho..
No argument to be drawn in to - no one who avoids investing in Berkshire Hathaway because they have consistently returned cash to shareholders via buybacks and avoided dividends should be considered a savvy investor.

By the way, Warren Buffet doesn't have any funds - he is the CEO of a massive conglomerate that has been both a highly successful company and investment for decades. And for what it is worth, since you own (owned?) VTSAX you most certainly have invested in it.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Thu Oct 05, 2017 5:12 pm

snarlyjack wrote:
Thu Oct 05, 2017 4:48 pm
I just think my particular situation is a bit different.
The ways in which your situation are different make the tax drag associated with dividends all the more harmful.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Wakefield1 » Thu Oct 05, 2017 5:26 pm

Is Berkshire Hathaway as an investment subject to single stock risk?

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Thu Oct 05, 2017 5:45 pm

Wakefield1 wrote:
Thu Oct 05, 2017 5:26 pm
Is Berkshire Hathaway as an investment subject to single stock risk?
Yes it is. Because of it's diversified business lines it may be less susceptible to sector-specific risks than mono-line businesses but it definitely has single-stock risk.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Thu Oct 05, 2017 6:06 pm

Triceratop,

I agree with you, you are very good!
You must be getting a MBA or working on your CPA
degree?
No, I am a Ph.D. candidate in an unrelated field. Personal finance is a hobby of mine, though I can't speak for avalpert.

However, that does not mean avalpert and I are incorrect about the suitability of dividend funds for your situation. You live in a state with a somewhat substantial state income tax (about what I pay in California!) so investing in dividends is a quantitatively inferior investing strategy. It may help you avoid behavioral errors but quantitatively that protection still costs you in after tax returns.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by marcopolo » Thu Oct 05, 2017 11:05 pm

snarlyjack wrote:
Thu Oct 05, 2017 4:08 pm


I love freedom...
In that case, wouldn't you want to be in charge of making the decisions on when and how much income to take from your investments?
With dividends, you are giving up that freedom to choose, and being forced to accept your income whether you want (need) it or not.
And it is really tax-inefficient, as others have pointed out.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by PhysicianOnFIRE » Thu Oct 05, 2017 11:56 pm

Wakefield1 wrote:
Thu Oct 05, 2017 5:26 pm
Is Berkshire Hathaway as an investment subject to single stock risk?
Yes, but not to the same extent as most other individual stocks.

Berkshire fully owns dozens of companies and has a substantial position in many more. It's one stock, but it acts more like an index fund than most. It's the only individual stock I own. I use products owned by them every day. GEICO, Duracell, Dairy Queen (not every day, but I wish it were!).

I think it's fine to own BRK as a portion of your portfolio, but I wouldn't go all in on them or any one company. It's less than 1% of my portfolio, but I wouldn't be upset if it were 10%, particularly if you own the stock in a taxable account.

:beer
-PoF

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Fri Oct 06, 2017 7:48 am

Good morning everybody,
(New day, new thoughts...I slept on this last night)

The problem is: Selling off the portfolio.
There are lot of people that don't want to sell off their portfolio
for various reasons.
1). Psychological reasons.
2). Longevity reasons.
3). Inheritance reasons.
4). Diversify out reasons.
5). 4% Trinity study reasons.
6). Gifting reasons.
7). Generational funding reasons.
8). Different types of stocks reasons.
These are some of my reasons off the top of my head, their are more reasons.

In life their are always trade offs. Unfortunately, their isn't the perfect
solution to everything. You can get close but it isn't 100% perfect.
Everything is not "black & white" we live in the "gray".

Their is a tax drag on dividends. Their is a forced quarterly dividend even
if you don't want it. But their is good points also. Your not liquidating the
portfolio. The total return is about the same. Your compounding out the
number of shares. You can invest the dividends into another fund, etc.

In our imperfect investment world we do the best we can & make the
best choices for ourselves. Their are tradeoffs to every decision. In
economics it is called the "economic man philosophy". In the end,
you need to be open to possibilities. Which possibilities are best for you,
only you can decide.

Thank you everyone...I apologize for the rant. Let's open this discussion up.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Wakefield1 » Fri Oct 06, 2017 9:36 am

I don't like to sell-I know I should sell but I don't like to-and a couple of dividend paying stocks have treated me very well-not just increases in the dividend over time but share value increases and splits over time-but the dividends if not spent get used for other things such as buying diversified mutual fund shares (that might only pay a small dividend rate) or adding to the house downpayment fund (Credit Union money market fund/CDs etc).
Actually I should move those things to my Vanguard account from where if the impulse to sell hit me I could do it easily

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by KlangFool » Fri Oct 06, 2017 9:50 am

FrugalProfessor wrote:
Thu Oct 05, 2017 3:49 pm
I loathe dividends and am perplexed by people's obsession with them. If a mutual fund or stock's dividend yield isn't high enough for your liking, sell some stock and create your home grown dividend.

For an investor with a multi decade investing horizon, I hate the drag caused by dividends, as shown by the following example.

$1 investment with 5% real return, 2% dividend yield, 20% tax rate on dividends (15% federal + 5% state), 20Y investing horizon.

No dividends.
FV = $1*(1+5%)^20 = $2.65

Dividends create a tax drag of 2%*20%=0.4%, causing the real return to drop from 5% to 4.6%.
FV = $1*(1+4.6%)^20 = $2.46

Dividends in this case have destroyed 7.3% of the potential value of the no-dividend stock (=1-$2.46/$2.65).
FrugalProfessor,

https://en.wikipedia.org/wiki/Qualified_dividend

Sorry to nitpick. There are the normal dividend and qualified dividend. They are taxed differently. Depending on the exact ETF and mutual fund, the amount/ratio of normal versus qualified dividend come into play as to how much tax that you do pay.

The list for qualified dividend ratio for Vanguard funds and ETF.

https://advisors.vanguard.com/VGApp/iip ... endfigures

KlangFool

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by PhysicianOnFIRE » Fri Oct 06, 2017 10:02 am

KlangFool wrote:
Fri Oct 06, 2017 9:50 am
FrugalProfessor wrote:
Thu Oct 05, 2017 3:49 pm
I loathe dividends and am perplexed by people's obsession with them. If a mutual fund or stock's dividend yield isn't high enough for your liking, sell some stock and create your home grown dividend.

For an investor with a multi decade investing horizon, I hate the drag caused by dividends, as shown by the following example.

$1 investment with 5% real return, 2% dividend yield, 20% tax rate on dividends (15% federal + 5% state), 20Y investing horizon.

No dividends.
FV = $1*(1+5%)^20 = $2.65

Dividends create a tax drag of 2%*20%=0.4%, causing the real return to drop from 5% to 4.6%.
FV = $1*(1+4.6%)^20 = $2.46

Dividends in this case have destroyed 7.3% of the potential value of the no-dividend stock (=1-$2.46/$2.65).
FrugalProfessor,

https://en.wikipedia.org/wiki/Qualified_dividend

Sorry to nitpick. There are the normal dividend and qualified dividend. They are taxed differently. Depending on the exact ETF and mutual fund, the amount/ratio of normal versus qualified dividend come into play as to how much tax that you do pay.

KlangFool
True. The FrugalProfessor's example assumes the best case scenario of 100% qualified dividends. If a percentage or your dividend take is ordinary, non-qualified, then the tax hit is worse.

It would be interesting to know what percentage of a dividend darling portfolio's dividends are qualified. Quite a few index funds' dividends are 90% to 100% qualified, but I have no experience with individual stocks or dividend focused ETFs. Should be easy enough to look up, I suppose.

:beer
-PoF

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by avalpert » Fri Oct 06, 2017 10:16 am

snarlyjack wrote:
Fri Oct 06, 2017 7:48 am
Good morning everybody,
(New day, new thoughts...I slept on this last night)

The problem is: Selling off the portfolio.
Withdrawing your dividends is selling off your portfolio - you aren't alleviating your problem. The only reason in your list that applies is #1 - and part of becoming a savvy investor is recognizing how your psychological biases impede you making the right decisions and figuring way to subvert those biases - not give in to them.

A savvy investor wouldn't keep digging in to their mistake, doubling down and making more excuses for it - they would accept it and figure out how to overcome it.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Stryker » Fri Oct 06, 2017 10:37 am

I've been retired for well over ten years and I'll just continue doing with individual stocks what I've always been doing for many years now. Re-invest my dividends which have been growing faster than inflation. Perhaps others were already rich or had great paying jobs in their working life so could build up a large cache of assets. I never had that luxury. Now I'm making up for lost time, and building up our own little empire. No debts, plenty of cash, assets growing, yearly income growing, I'll take it any day.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by dbr » Fri Oct 06, 2017 10:39 am

Stryker wrote:
Fri Oct 06, 2017 10:37 am
I've been retired for well over ten years and I'll just continue doing with individual stocks what I've always been doing for many years now. Re-invest my dividends which have been growing faster than inflation. Perhaps others were already rich or had great paying jobs in their working life so could build up a large cache of assets. I never had that luxury. Now I'm making up for lost time, and building up our own little empire. No debts, plenty of cash, assets growing, yearly income growing, I'll take it any day.
Of course you reinvest your dividends. They are part of the return. You are also reinvesting your capital gains which are also part of your return.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Fri Oct 06, 2017 11:03 am

snarlyjack wrote:
Fri Oct 06, 2017 7:48 am
Good morning everybody,
(New day, new thoughts...I slept on this last night)

The problem is: Selling off the portfolio.
There are lot of people that don't want to sell off their portfolio
for various reasons.
1). Psychological reasons.
2). Longevity reasons.
3). Inheritance reasons.
4). Diversify out reasons.
5). 4% Trinity study reasons.
6). Gifting reasons.
7). Generational funding reasons.
8). Different types of stocks reasons.
These are some of my reasons off the top of my head, their are more reasons.

In life their are always trade offs. Unfortunately, their isn't the perfect
solution to everything. You can get close but it isn't 100% perfect.
Everything is not "black & white" we live in the "gray".

Their is a tax drag on dividends. Their is a forced quarterly dividend even
if you don't want it. But their is good points also. Your not liquidating the
portfolio. The total return is about the same. Your compounding out the
number of shares. You can invest the dividends into another fund, etc.

In our imperfect investment world we do the best we can & make the
best choices for ourselves. Their are tradeoffs to every decision. In
economics it is called the "economic man philosophy". In the end,
you need to be open to possibilities. Which possibilities are best for you,
only you can decide.

Thank you everyone...I apologize for the rant. Let's open this discussion up.
Selling off your portfolio is indeed problematic tax-wise. I never want to sell my portfolio unless I need to (like, for retirement). Since receiving dividends is equivalent to selling shares, you've made a great case to avoid dividend paying stocks (except for diversification reasons, so hold total market). The only trade-off here is that you're exchanging lower after-tax return for your psychological biases and investing misconceptions.

In particular, #3-4, 6-7 are reasons I myself have made for avoiding dividend tilts.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Toons » Fri Oct 06, 2017 11:05 am

I don't sell shares of stocks or funds I have owned for years(decades)
Those in taxable account I now take dividends and capital gains in cash.
Right or Wrong?
I don't think about it ,
Personal Preference. :happy
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by aj76er » Fri Oct 06, 2017 11:36 am

Dividend paying stocks and growth stocks fundamentally represent two different types of businesses. In the interest of diversification, I prefer to own both.

The tax drag on dividends is unfortunate.

During long bull markets in which we see 10-20% YoY growth, we tend to scoff at dividends.

When a 20-30% correction comes, having some dividends roll in will feel good; and if retired, will help pay the bills.

To make an analogy, why just own apple trees (dividend stocks) or just timber trees (growth stocks) when you can own both? Each will do better under different weather (economic) conditions.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Grt2bOutdoors » Fri Oct 06, 2017 12:16 pm

Taylor is fond of saying "Many Roads to Dublin", I whole heartedly agree. Folks, structure your portfolio the way that is easiest for you to stomach.
Why stomach? Simple, most folks simply can not handle watching their shares tank in value and then sell those now cheapened shares to fund living expenses, they view it as "dipping into capital". Not everyone agrees and that is fine, but if seeing a stream of dividends or interest hit your account each month would let you SWAN better than by all means do so.

One thing learned long ago, not everyone and that includes physicians have the right answer 100% of the time. What works for one may or does not work for others. No doctor writes blanket prescriptions, this should not be any different. Finance is personal.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Robin » Fri Oct 06, 2017 12:21 pm

Grt2bOutdoors wrote:
Fri Oct 06, 2017 12:16 pm
Simple, most folks simply can not handle watching their shares tank in value and then sell those now cheapened shares to fund living expenses,
Aren't you supposed to be "dipping into" bonds when the equity market tanks? Except for all/high equity portfolios, I've never understood the concept of "selling cheapened shares to fund expenses."

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Stryker » Fri Oct 06, 2017 12:44 pm

dbr wrote:
Fri Oct 06, 2017 10:39 am
Stryker wrote:
Fri Oct 06, 2017 10:37 am
I've been retired for well over ten years and I'll just continue doing with individual stocks what I've always been doing for many years now. Re-invest my dividends which have been growing faster than inflation. Perhaps others were already rich or had great paying jobs in their working life so could build up a large cache of assets. I never had that luxury. Now I'm making up for lost time, and building up our own little empire. No debts, plenty of cash, assets growing, yearly income growing, I'll take it any day.
Of course you reinvest your dividends. They are part of the return. You are also reinvesting your capital gains which are also part of your return.
Well, I think I can also call it re-allocation of capital. Going back to the early 80's I was the type that had to try a little of this and a little of that with the limited resources I had, before I could find what worked for me, but I always found myself going back to investing in individual dividend growth stocks. It wasn't easy, but I was determined to learn, persevered and stuck with it. Investing in broad based indexes was rather late in the investment scene, around 2010.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Phineas J. Whoopee » Fri Oct 06, 2017 4:05 pm

snarlyjack wrote:
Thu Oct 05, 2017 3:15 pm
I really don't want to get into this argument again.
...
Given the fact you've already conceded your position is based purely on your feelings, I don't know what argument you're referring to.

Nobody I remember having read here, in threads you've contributed to, has suggested you should do anything other than that which makes you feel best.

Feelings are real feelings. They're important. They make a difference. Yours make a difference. Do what you have to do in your own situation, and once again my condolences for having lost your parents at such a young age.

Feelings aren't math.

PJW
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by SGM » Fri Oct 06, 2017 4:33 pm

I spend from my dividend pocket and my capital gains pocket. I didn't feel the tax drag of dividends until I sold most of my BRK to become more diversified. Spending only dividends is a way some people discipline their spending. The dividend puzzle has been discussed for a long time. It is good for a laugh. As long as one is aware of the increased tax drag and still choose to only spend dividends then additional lecturing is of no use. I think these conversations are helpful for those who are unaware of why in terms of taxation capital gains are more desirable than dividends in most situations.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by kingsnake » Fri Oct 06, 2017 5:08 pm

The 3 fund portfolio still kicks out a lot of dividends....I'd like to have enough principle to live off dividends some day. We'll see.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by dbr » Fri Oct 06, 2017 5:10 pm

kingsnake wrote:
Fri Oct 06, 2017 5:08 pm
The 3 fund portfolio still kicks out a lot of dividends....I'd like to have enough principle to live off dividends some day. We'll see.
Why? That might require you to work longer and save more than you really need to. It might also cause you to spend down your retirement too fast. Dividend payouts are not the measure of the best use of assets in retirement.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Fri Oct 06, 2017 5:28 pm

Taylor Larimore wrote:
Thu Oct 05, 2017 12:46 pm
Bogleheads:
Would you rather own stock funds that automatically pay you enough in dividends to cover your spending needs or own funds that pay little to no dividends, forcing you to sell shares?
Best wishes.
Taylor
I believe a dividend tilt can be reasonable for some due to convenience and simplicity alone. One must understand the tax drag that a dividend tilt entails, and be willing to incur that cost in order to avoid the hassles, fees, and potential behavioral errors associated with needing to sell shares. Further, one needs to avoid the common mistakes of many dividend investors ("reaching" for high-yield and taking too much risk in the process, not understanding that dividends and capital gains are two "paths" to total return, and not being sufficiently diversified).

The column chart in the article cited shows gains on 10% appreciation, 25% appreciation, etc. It doesn't account for the fact that after 30-40 years of savings, appreciation is likely to be 90%+, so that selling the stock involves about the same tax hit as receiving the income.

The article suggests the "SpecID" method of basis tracking. This takes a lot of time. If someone has been regularly contributing to a stock for decades, there are likely hundreds or even thousands of share lots. Tracking down the basis of each share lot after decades of reinvesting requires sifting through piles of old paperwork, doing hours of calculations, organizing spreadsheets, etc - and the tax savings aren't that large (remember, there'd likely be 95%+ appreciation). Sales require active, frequent effort on the part of the stockholder and may involve transaction fees. Sales generate 1099-B paperwork each time.

A regular dividend check is simple and easy to deal with. It is a simple way to implement a variable withdrawal scheme and keep spending in check. It also generally comes with a value tilt.

Note that I feel that a dividend strategy is probably not ideal for most investors - I'm only saying that depending on particular circumstances such a tilt can be reasonable. In particular, it is hard to live on dividends and income alone, so most people would instead be better served with a total return approach, in my opinion.
Grt2bOutdoors wrote:
Fri Oct 06, 2017 12:16 pm
Taylor is fond of saying "Many Roads to Dublin", I whole heartedly agree. Folks, structure your portfolio the way that is easiest for you to stomach.
Why stomach? Simple, most folks simply can not handle watching their shares tank in value and then sell those now cheapened shares to fund living expenses, they view it as "dipping into capital". Not everyone agrees and that is fine, but if seeing a stream of dividends or interest hit your account each month would let you SWAN better than by all means do so.

One thing learned long ago, not everyone and that includes physicians have the right answer 100% of the time. What works for one may or does not work for others. No doctor writes blanket prescriptions, this should not be any different. Finance is personal.
It likely won't matter too much over the long run whether one has 100% of equities in TSM or adds a small allocation to a dividend fund - at least, there's relatively little foreseeable difference, in my opinion.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Artsdoctor » Fri Oct 06, 2017 5:36 pm

SGM wrote:
Fri Oct 06, 2017 4:33 pm
I spend from my dividend pocket and my capital gains pocket. I didn't feel the tax drag of dividends until I sold most of my BRK to become more diversified. Spending only dividends is a way some people discipline their spending. The dividend puzzle has been discussed for a long time. It is good for a laugh. As long as one is aware of the increased tax drag and still choose to only spend dividends then additional lecturing is of no use. I think these conversations are helpful for those who are unaware of why in terms of taxation capital gains are more desirable than dividends in most situations.

You and I might be able to chuckle, but there is a lot of misunderstanding out there. It is true that arguing about equity funds that pay relatively few dividends versus those that pay higher dividends can be debated amongst very savvy investors without end. However, there are a lot of retirees who have invested in high-dividend paying stocks INSTEAD OF investing in fixed income because interest rates have been so low. We've been fortunate that this equity bull market is now 8 years old so those retirees have not been burned. However, I'm pretty sure that high dividend-paying equities will fall in tandem with low dividend-paying equities during the next bear market. I think that only then are some people going to see that high dividend-paying mutual funds are not substitutes for bond funds.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by spdoublebass » Fri Oct 06, 2017 5:47 pm

snarlyjack wrote:
Fri Oct 06, 2017 7:48 am
Good morning everybody,
(New day, new thoughts...I slept on this last night)

The problem is: Selling off the portfolio.
There are lot of people that don't want to sell off their portfolio
for various reasons.
Well, I do not invest in dividend ETF's, I just use TSM, BUT...I want to thank you for your recent discussions because they have answered questions I have had and was a little too timid to ask.

The only reason why I haven't actually added dividend ETF's is just because, as others have pointed out, they may not have the growth. When I chart TSM against say VYM (High dividend yield), TSM comes out ahead. To me (and I am no investing guru) I want my stash to grow as much as possible.

I must say, being new to all of this, they sound like a great thing, but the more I look into it, I'd rather just hold TSM.
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Phineas J. Whoopee » Fri Oct 06, 2017 5:51 pm

kingsnake wrote:
Fri Oct 06, 2017 5:08 pm
The 3 fund portfolio still kicks out a lot of dividends....I'd like to have enough principle to live off dividends some day. We'll see.
Hi kingsnake.

My having posted, a short time ago, a suggestion that we can explain the difference between principal and capital whenever necessary, I'd like to give it a try. I'm not picking on you personally. You just happen to have posted in the right place at the right time. :happy

Capital is the stuff that you own for your or your family's benefit. It includes financial assets, such as but not limited to stock index funds for example, and also (this is contentious here at bogleheads.org but its status as capital in financial terms is well established), a dwelling you own.

Capital is still capital even if over time it works out to your disadvantage.

In many, but not all, cases, capital can be quantified in monetary units, using money in its unit of account sense. Often a number is only an approximate estimate. Trulia house prices are like that. In other cases, like publicly traded liquid assets it's easy to assign a value, because by accounting convention we count such things as being worth the most recent price they've been transacted at. Everybody who marks to market marks to that.

Trulia, to continue with the same example, doesn't say your house is $250,000. It only estimates that if you sold it today you could get $250,000. Nobody supposes you could break off a bit of cornice and trade it to the fruit cart vendor on the corner for an apple.

Principal is one type of capital, but there are many others. Principal is money somebody owes to somebody else. You might owe it, or somebody might owe it to you. Unlike other types of capital, you have some reasonable expectation (but defaults and bankruptcies sometimes occur) that whoever it is will pay you the number of dollars they said they would, on the dates they said they would. Principal is money in its store of value sense, and the payouts are in its medium of exchange sense.

To recap: stock (for example) certainly is an asset, but nobody owes you anything, which is the usual case with capital. Principal is a subtype of capital, and somebody does owe you money (or perhaps you owe them). You have a right to principal and contracted interest if it can be paid at all, but no right to any particular number of dollars from other types of capital.

Are you with me so far?

It is not meaningful to talk about principal with respect to stock investments. They may or may not pay dividends, the amounts may or may not persist, and you are exposed to all the risks of ownership, including losing everything.

Fixed income, bonds and bond funds and their ilk, do have principal, but it might not be paid back because whoever owes it might not have enough money. One can adjust how much default risk one takes, and adjust other risks like interest-rate risk and inflation risk, but principal is money somebody has a contractual obligation to pay you.

Stocks don't have to pay you anything.

Sometimes investors think of capital as if it's a savings account, but that's a misunderstanding. True, if you have a savings account it's part of your capital, and it has principal, but many other types of capital are not principal.

With practice it probably will get quicker and easier to explain the difference between the broader term capital, and the narrower one principal, but this is my initial game attempt.

Thanks for providing me with the opportunity, and I wish you all the best, kingsnake.

PJW

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by goingup » Fri Oct 06, 2017 6:21 pm

Phineas J. Whoopee wrote:
Fri Oct 06, 2017 5:51 pm
kingsnake wrote:
Fri Oct 06, 2017 5:08 pm
The 3 fund portfolio still kicks out a lot of dividends....I'd like to have enough principle to live off dividends some day. We'll see.
Hi kingsnake.

My having posted, a short time ago, a suggestion that we can explain the difference between principal and capital whenever necessary, I'd like to give it a try. I'm not picking on you personally. You just happen to have posted in the right place at the right time. :happy

Capital is the stuff that you own for your or your family's benefit. It includes financial assets, such as but not limited to stock index funds for example, and also (this is contentious here at bogleheads.org but its status as capital in financial terms is well established), a dwelling you own.

Capital is still capital even if over time it works out to your disadvantage.

In many, but not all, cases, capital can be quantified in monetary units, using money in its unit of account sense. Often a number is only an approximate estimate. Trulia house prices are like that. In other cases, like publicly traded liquid assets it's easy to assign a value, because by accounting convention we count such things as being worth the most recent price they've been transacted at. Everybody who marks to market marks to that.

Trulia, to continue with the same example, doesn't say your house is $250,000. It only estimates that if you sold it today you could get $250,000. Nobody supposes you could break off a bit of cornice and trade it to the fruit cart vendor on the corner for an apple.

Principal is one type of capital, but there are many others. Principal is money somebody owes to somebody else. You might owe it, or somebody might owe it to you. Unlike other types of capital, you have some reasonable expectation (but defaults and bankruptcies sometimes occur) that whoever it is will pay you the number of dollars they said they would, on the dates they said they would. Principal is money in its store of value sense, and the payouts are in its medium of exchange sense.

To recap: stock (for example) certainly is an asset, but nobody owes you anything, which is the usual case with capital. Principal is a subtype of capital, and somebody does owe you money (or perhaps you owe them). You have a right to principal and contracted interest if it can be paid at all, but no right to any particular number of dollars from other types of capital.

Are you with me so far?

It is not meaningful to talk about principal with respect to stock investments. They may or may not pay dividends, the amounts may or may not persist, and you are exposed to all the risks of ownership, including losing everything.

Fixed income, bonds and bond funds and their ilk, do have principal, but it might not be paid back because whoever owes it might not have enough money. One can adjust how much default risk one takes, and adjust other risks like interest-rate risk and inflation risk, but principal is money somebody has a contractual obligation to pay you.

Stocks don't have to pay you anything.

Sometimes investors think of capital as if it's a savings account, but that's a misunderstanding. True, if you have a savings account it's part of your capital, and it has principal, but many other types of capital are not principal.

With practice it probably will get quicker and easier to explain the difference between the broader term capital, and the narrower one principal, but this is my initial game attempt.

Thanks for providing me with the opportunity, and I wish you all the best, kingsnake.

PJW
Funny, I knew exactly what kingsnake meant but I have no idea what you're trying to convey. :oops: If he/she had said, "My 3-fund portfolio kicks out a lot of dividends which I'd like to use to fund my retirement someday," would that have been acceptable?

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Phineas J. Whoopee » Fri Oct 06, 2017 6:40 pm

goingup wrote:
Fri Oct 06, 2017 6:21 pm
...
Funny, I knew exactly what kingsnake meant but I have no idea what you're trying to convey. :oops: If he/she had said, "My 3-fund portfolio kicks out a lot of dividends which I'd like to use to fund my retirement someday," would that have been acceptable?
Hi goingup.

Nothing kingsnake posted was unacceptable. I stated clearly, at the beginning and again at the end, that since I had posted a short time ago we can explain the difference between principal and capital whenever necessary, I was giving it a try.

If I may be excused for quoting myself:
Phineas J. Whoopee wrote:...
My having posted, a short time ago, a suggestion that we can explain the difference between principal and capital whenever necessary, I'd like to give it a try. I'm not picking on you personally. You just happen to have posted in the right place at the right time. :happy
...
Phineas J. Whoopee wrote:...
With practice it probably will get quicker and easier to explain the difference between the broader term capital, and the narrower one principal, but this is my initial game attempt.

Thanks for providing me with the opportunity, and I wish you all the best, kingsnake.
...
Was what I wrote, carefully signposted at both the beginning and at the end, unacceptable in your eyes?

PJW

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by nedsaid » Fri Oct 06, 2017 7:15 pm

avalpert wrote:
Thu Oct 05, 2017 3:28 pm
snarlyjack wrote:
Thu Oct 05, 2017 3:15 pm
I really don't want to get into this argument again.

However, I would like to point out some items to
(Physician On Fire) for future reference.

1). Not everyone lives in California.
2). Not everyone is in the 25% tax bracket.
3). Not every State imposes high taxes on dividends.
4). Everyone is not a Doctor in a high tax bracket.
5). I consider myself a pretty "savvy" investor.
6). This was a really biased/slanted article.
7). I would not invest in Berkshire Hathaway because
they do not pay a dividend & I love Warren Buffett.

Ok...You can carry on now...Thanks for letting me rant.
I'd suggest that statement #7 demonstrates that statement #5 is incorrect.
My gosh, can't we give Snarlyjack a break here? My gosh the guy is 23 years old and at least has
the sense to invest the inheritance from his mom in high quality stocks. I bought my first stock mutual fund at age 25 in a taxable account, and a very tax inefficient fund at that. His choice of High Yield Index and Dividend Appreciation Index is miles more tax efficient than my first mutual fund. I was probably 28 years old when I bought my first individual stock.

As a young investor, I was actually pretty ultraconservative. My IRA was in bank CDs until a friend went into the brokerage business. I bought my first stock, AST Research from him and from there it was off to the races. Even then, I bought three zero coupon treasuries paying about 8% and an FDIC Insured Certificate of Deposit. I gradually became more aggressive as I experienced one of the great bull markets of all time.

Snarlyjack started out with Vanguard and I started out with a no-load mutual fund and later with a stockbroker. I didn't start investing in index funds until the mid-1990's. My first index fund was purchased at about age 36. All I can say is that I did a lot of things that were not optimal from a Boglehead perspective. He will make mistakes and learn just as I did, and I suspect as other forum members did.

So the guy is miles beyond where I was at age 23. At his age, I was a poor college student with no money. I guess that is why I picked a mutual fund with no minimum investment, that seemed a good match for someone with no money.
A fool and his money are good for business.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Fri Oct 06, 2017 7:34 pm

Artsdoctor wrote:
Fri Oct 06, 2017 5:36 pm
SGM wrote:
Fri Oct 06, 2017 4:33 pm
I spend from my dividend pocket and my capital gains pocket. I didn't feel the tax drag of dividends until I sold most of my BRK to become more diversified. Spending only dividends is a way some people discipline their spending. The dividend puzzle has been discussed for a long time. It is good for a laugh. As long as one is aware of the increased tax drag and still choose to only spend dividends then additional lecturing is of no use. I think these conversations are helpful for those who are unaware of why in terms of taxation capital gains are more desirable than dividends in most situations.

You and I might be able to chuckle, but there is a lot of misunderstanding out there. It is true that arguing about equity funds that pay relatively few dividends versus those that pay higher dividends can be debated amongst very savvy investors without end. However, there are a lot of retirees who have invested in high-dividend paying stocks INSTEAD OF investing in fixed income because interest rates have been so low. We've been fortunate that this equity bull market is now 8 years old so those retirees have not been burned. However, I'm pretty sure that high dividend-paying equities will fall in tandem with low dividend-paying equities during the next bear market. I think that only then are some people going to see that high dividend-paying mutual funds are not substitutes for bond funds.
Good point regarding investors "reaching" for income. People should not take on excessive risk. Those who do not have the willingness/ability/need to take on the risk of stocks should not.

Debating a dividend stock fund VS a Total stock fund is something that people can go round and round with because the historical data isn't there to make an utterly obvious, clear case either way. One example - dividend funds often have a value tilt. Some like value tilts, while others say the value premium is "missing" or not helpful. Still others say that dividend funds are poor ways to obtain value tilts.

However, someone who needs the safety of treasuries or high-grade bonds should realize that this debate (of Total Stock vs a dividend stock fund) is happening because there is ambiguity. No one who can't withstand the full risk of stocks, including the potential for a 90%+ drop, should invest in dividend stocks solely for the yield.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Fri Oct 06, 2017 8:04 pm

Phineas J. Whoopee wrote:
Fri Oct 06, 2017 5:51 pm
Principal is one type of capital, but there are many others. Principal is money somebody owes to somebody else. You might owe it, or somebody might owe it to you. Unlike other types of capital, you have some reasonable expectation (but defaults and bankruptcies sometimes occur) that whoever it is will pay you the number of dollars they said they would, on the dates they said they would. Principal is money in its store of value sense, and the payouts are in its medium of exchange sense.

To recap: stock (for example) certainly is an asset, but nobody owes you anything, which is the usual case with capital. Principal is a subtype of capital, and somebody does owe you money (or perhaps you owe them). You have a right to principal and contracted interest if it can be paid at all, but no right to any particular number of dollars from other types of capital.

PJW
This was a very clear and well worded post. I like your concepts and distinctions.

However, isn't it the case that with stocks, you do own something. If the company is wound down, and all assets (factories/inventory/machinery) are sold, and all company debts are paid off, aren't shareholders, as the legal (fractional) owners of the company, the ones who get what is left over? Aren't shareholders "owed" something in this case - the "shareholder's equity"?

Also, with junk bonds that have very high risk of default, the principal-capital distinction is quite shaky. Say the market considers a bond to have a 30% risk of default. This is a very risky investment indeed.

A different distinction, a corpus/income distinction is sometimes made. For example, some types of permanent endowments https://www.finance.emory.edu/home/acco ... ments.html) are set up to spend the income from the corpus of the endowment. This sort of distinction may be made in a variety of trust/endowement settings and is what people who adopt a "spend the income" policy may be envisioning.

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