Dividends vs. Capital Gains for Spending Needs?

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TD2626
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by TD2626 » Sat Oct 07, 2017 10:41 pm

avalpert wrote:
Sat Oct 07, 2017 10:04 pm
TD2626 wrote:
Sat Oct 07, 2017 9:45 pm
avalpert wrote:
Sat Oct 07, 2017 9:33 pm
TD2626 wrote:
Sat Oct 07, 2017 9:16 pm
Some funds distribute capital gains and you have to pay taxes on those too. Selecting funds that trade infrequently or using Vanguard funds that funnel gains to in-kind etf redemptions can limit distributions. However, broad index funds (such as those at Fidelity) can distribute capital gains.

I agree that there is little short-term difference between a reinvested dividend and a share buyback. Over the long run, though, people invest in companies with an expectation of a return. I realize growth companies can grow and you get returns from rising share prices. But investors are assuming the company will eventually stop growing and start paying out, and isn't valuation predicated on that? If a company was committed to never paying a dividend untill bankruptcy, would it be worth it to own the stock? Or am I mistaken?
Look at Berkshire Hathaway - they are committed to never returning cash to shareholders via dividends - has it been worth it to own the stock and do you think it will continue to be?

Real valuation is not predicated on returning cash via actual 'dividend payments' - there are other ways to return value to shareholders.
How exactly would this work? If a company never pays a dividend, and goes bankrupt after decades of buybacks, aren't the only people who earned money those who sold to "greater fools"?
If a company goes bankrupt the only people who will have received something from their investment are people who withdrew their earnings from the investment along the way - whether that withdrawal was via dividend distributions or share sales is irrelevant. Someone who reinvested dividends is in the same position as someone who didn't sell their shares in a share repurchase (or other transaction).
I know it is worth something to own a fraction of an entity that has a lot of cash sitting around - but if that cash is only yours in theory, and will never be distributed in practice, what does that ownership amount to?
It amounts to a fractional ownership of the cash, even though that ownership doesn't include ultimate control. We can place a value on that ownership based on our expectations of what those who do control it will do (and earn) with that cash. That those expectations may not be realized doesn't invalidate the value today - if it did we wouldn't be investing in equities at all as even future dividend payments are predicated on our expectations of what those who control the asset will be able to do with it. This is of course why equity investments are risky.
I know Berkshire's total return history, and it's of course impressive - but aren't investors just valuing things based on the possibility that a distribution might be made in the future?
I hope not, they have been pretty clear about that so anyone basing their valuation on that possibility seems to be divorced from reality (I suppose it is possible that Buffet and Munger's successor will have a different perspective on that but I wouldn't place a bet on it).
Are there any good articles or research papers that you would recommend for learning more about the mechanics of how things work?
I wish I did, I don't know how you like to learn but the chapter in any Intro to Corporate Finance textbook that covers capital structure and dividend policy in particular should give it to you. If you want to dive into the research I think the best place to start is still with Modigliani and Miller's Dividend Policy, Growth, and the Valuation of Shares.
Thank you for your clear and helpful answers. I will look into the research, (Modigliani and Miller's Dividend Policy, Growth, and the Valuation of Shares) and see if that helps.

My current feeling is that investors need to be aware of the tax drag of dividend investing but may consider it if they feel the perceived benefits (a simple withdrawal strategy without the hassle of sales, behavioral benefits, a value tilt, etc) outweigh the tax drag based on their tax rates/situations. I think that most people would be best served with a "Total World" type allocation that is indifferent to dividends vs capital gains, but in some (uncommon) situations a tilt toward a low-cost, broadly diversified dividend fund may be reasonable. To make it clear, investors need to remain diversified whatever they do - and investing in only high dividend companies (or the opposite, only non-dividend-payers) isn't diversified enough - which is why a tilt one way or the other would be what I feel may be reasonable. Investors who need the safety of bonds shouldn't take the risks of equities in order to reach for higher payouts. Further, while investing in a large number of companies like AT&T that have large, steady high dividend payouts of a few % more than the average company may be somewhat reasonable, investing in something with an unusually high yield (8%, 15%, 20%, etc) is extremely risky and that payout is almost certainly unsustainable - the "4% Safe Withdrawal Rate" approximation still applies.

By the way - as a hypothetical... say a hypothetical investor put money in high-yield bond funds and high dividend yield stock funds such that their portfolio income was 5%. If a sustainable real withdrawal rate is 3%, wouldn't the portfolio be expected to loose 2% (real)? (Note that this is a hypothetical portfolio for the sake of debate only, in this market a portfolio paying out 5% is likely not diversified enough and too risky.)

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

Post by nedsaid » Sun Oct 08, 2017 10:51 am

Snarlyjack, a few things.

The greatest bulk of my investments are in tax deferred retirement accounts. So I don't worry so much about taxes. But seeing that you are in the opposite situation, the bulk of your investments are in taxable accounts, I gently suggest you consider the tax efficiency of your taxable investments. You are in a low tax bracket (I think) but you may find yourself in the 25% marginal tax bracket. Again, study your own tax return. Do you know the difference between a marginal tax rate and an effective tax rate?

My first mutual fund that I ever bought was American Century Select. In those days, it was Twentieth Century Investors and their funds used an earnings and price momentum strategy. Thus this fund has fairly high turnover. I learned my lesson on tax efficiency when it gave me unwanted capital gains distributions. Over 20 years ago, I stopped contributing to the fund and started taking the distributions by check. Pretty much, I use the annual check to help fund my IRA account and most years I got my tax deduction for those contributions. I also own 4 stocks in DRIP accounts and I pay taxes on those dividends every year. Fortunately the amounts are small and my taxes aren't affected by very much. But I have learned my lesson about tax efficiency.

Second, I have great sympathy for your views. Vanguard High Dividend doesn't go crazy buying up stocks just for the sake of the dividends themselves. These are high quality "Steady Eddie" type of companies. You made the point that my individual stock holdings look a lot like Vanguard High Dividend. I also like dividends myself, I guess I am old fashioned. The idea of a cash flow from dividends that grows faster than inflation is very appealing to me. Dividend Appreciation Index is another very good fund. I like the idea of buying and holding the Blue Chips and I do that myself.

Third, though I like dividends myself, I realize that for my investment plan to work, that I need capital gains as well. Look at the whole picture.

Fourth, you will get a lot of anti-dividend posts here. Larry Swedroe, who I like and admire, has been on an anti-dividend jihad here for years. He doesn't post here anymore but you can see the after effects from all the dividend wars when he was here. I share his opinion that when you adjust for factors that the returns of dividend paying stocks and non-dividend paying stocks are identical. High Dividend is related to Value and Dividend Appreciation is related to Profitability/Quality. If you get excess returns from dividend funds, it is because of the underlying factors and not the dividends themselves.

There are academics that like dividend strategies. One of them is Jeremy Siegel. His is a minority opinion, but an opinion that I respect. You might consult his writings. MSCI has a white paper that discusses factors and they consider dividends as a factor that drives performance, again this is a minority view.
Last edited by nedsaid on Mon Oct 09, 2017 10:25 pm, edited 1 time in total.
A fool and his money are good for business.

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

Post by RAchip » Sun Oct 08, 2017 12:59 pm

“Look at AT&T stock price on Thursday/Friday. It closed Thursday at 39.51 and opened Friday at 39.00 after going ex-divided with a .49 dividend. What else do you think drove the bulk of that price change?“

I dont care what the opening stock price is the morning after ex dividend. That is set by brokers. It adjusts to market over the following days and weeks. Lets get back to my question: What do tou think would happen if ATT stopped paying dividends? Answer: The stock would completely tank. It seems to me that paying dividends generally causes a company’s market price to be higher than it would be if they didnt pay dividends.

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

Post by avalpert » Sun Oct 08, 2017 1:34 pm

RAchip wrote:
Sun Oct 08, 2017 12:59 pm
“Look at AT&T stock price on Thursday/Friday. It closed Thursday at 39.51 and opened Friday at 39.00 after going ex-divided with a .49 dividend. What else do you think drove the bulk of that price change?“

I dont care what the opening stock price is the morning after ex dividend. That is set by brokers.
No, it isn't set by brokers. Look at the first executed price - that was set by market participants.
It adjusts to market over the following days and weeks.
If this were the case you would expect to see dividend stocks overall outperforming non-dividend paying stocks (and in fact you'd expect to see higher dividend paying stocks outperforming lower dividend paying stocks) - when adjusted for factor exposure that isn't the case. This is exactly the 'magical dividend' way of thinking that the data doesn't bear out.
Lets get back to my question: What do tou think would happen if ATT stopped paying dividends? Answer: The stock would completely tank.
It depends on what else they said around it - if they said they were discontinuing their dividend but switching to share buybacks which, dilution adjusted, would return exactly the same amount of cash as their dividends I don't think it would tank at all. This is solely about the signal value of the announcement and what the market perceives it means about future business prospects - nothing about the dividend payment itself.
It seems to me that paying dividends generally causes a company’s market price to be higher than it would be if they didnt pay dividends.
The research disagrees with you.

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

Post by KlangFool » Sun Oct 08, 2017 2:59 pm

nedsaid wrote:
Sun Oct 08, 2017 10:51 am
Snarlyjack, a few things.

The greatest bulk of my investments are in tax deferred retirement accounts. So I don't worry so much about taxes. But seeing that you are in the opposite situation, the bulk of your investments are in taxable accounts, I gently suggest you consider the tax efficiency of your taxable investments. You are in a low tax bracket (I think) but you may find yourself in the 25% marginal tax bracket. Again, study your own tax return. Do you know the difference between a marginal tax rate and an effective tax rate?

My first mutual fund that I ever bought was American Century Select. In those days, it was Twentieth Century Investors and their funds used an earnings and price momentum strategy. Thus this fund has fairly high turnover. I learned my lesson on tax efficiency when it gave me unwanted capital gains distributions. Over 20 years ago, I stopped contributing to the fund and started taking the distributions by check. Pretty much, I use the annual check to help fund my IRA account and most years I got my tax deduction for those contributions. I also own 4 stocks in DRIP accounts and I pay taxes on those dividends every year. Fortunately the amounts are small and my taxes aren't affected by very much. But I have learned my lesson about tax efficiency.

Second, I have great sympathy for your views. Vanguard High Dividend doesn't go crazy buying up stocks just for the sake of the dividends themselves. These are high quality "Steady Eddie" type of companies. You made the point that my individual stock holdings look a lot like Vanguard High Dividend. I also like dividends myself, I guess I own old fashioned. The idea of a cash flow from dividends that grows faster than inflation is very appealing to me. Dividend Appreciation Index is another very good fund. I like the idea of buying and holding the Blue Chips and I do that myself.

Third, though I like dividends myself, I realize that for my investment plan to work, that I need capital gains as well. Look at the whole picture.

Fourth, you will get a lot of anti-dividend posts here. Larry Swedroe, who I like and admire, has been on an anti-dividend jihad here for years. He doesn't post here anymore but you can see the after effects from all the dividend wars when he was here. I share his opinion that when you adjust for factors that the returns of dividend paying stocks and non-dividend paying stocks are identical. High Dividend is related to Value and Dividend Appreciation is related to Profitability/Quality. If you get excess returns from dividend funds, it is because of the underlying factors and not the dividends themselves.

There are academics that like dividend strategies. One of them is Jeremy Siegel. His is a minority opinion, but an opinion that I respect. You might consult his writings. MSCI has a white paper that discusses factors and they consider dividends as a factor that drives performance, again this is a minority view.
+1.

I like my Wellington fund. It pays a good dividend. It was in my taxable account. I resisted all reasonable argument to move this fund into my tax-advantaged account. Then, one day, I actually calculated and checked how much tax that I was paying for my Wellington fund. I was convinced. I moved my Wellington fund into my tax-advantaged account. This took a few years.

KlangFool

RetireBy55
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by RetireBy55 » Sun Oct 08, 2017 4:39 pm

I'm in the "we love dividends" camp, and have moved into investments that generate some kind of reasonable dividend specifically to replace income in retirement. In fact, I've shifted wife's investments more into dividend paying investments as she's at an age where she can pull from her tax-deferred investments whereas I have a few years to go yet.

We're at a point now (at 54/59) where dividends from CDs & Dividend paying funds will cover 3/4s of our annual expenses. That's a REALLY good feeling, as it's a lot different to figure "how do I cover $X in annual expenses" vs "how do I cover $X less 75% that I can reasonably count on"?

I do not have to touch the "principal" and if it drops - it's painful psychologically, but there's a good chance the income stream we need to live will continue unabated. (I realize dividends can and do get cut, and have had that happen on a couple of stocks I own like HCP - but for the most part, the 3/4s coverage is still intact).

Most of our dividend paying investments are funds (eg: Wellesley, Pimco Income, etc) but I have small quantities of things like O (decades of constantly growing dividends), CVX, F, HCN and similar individual stocks also. Hard to beat 5% for the most part guaranteed income, and since I most likely will "never" sell these stocks the fluctuation in share price is noise - although it can at times get painful, like CTL.

While it's definitely a higher risk strategy, a not so bad approach is to find a stock you like (say, O), wait for the share price to get into a range that the dividend is at a yield % that's attractive (I like 4.5 - 5+%), and buy. Hold forever, and ignore the share price. (I realize that's sacrilege to many here, but that strategy is going to help me meet my goal of retiring by 55, also unless something unforeseen goes totally haywire). I picked up pretty much every stock I own at a yield > 5% and you can't get 5% reasonably guaranteed anywhere..especially if a bear market hits us as many expect. The share price will drop, but the 5% income stream is something that's very hard to find a reasonable alternative to.

FWIW..

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

Post by nedsaid » Sun Oct 08, 2017 4:46 pm

RAchip wrote:
Sun Oct 08, 2017 12:59 pm
“Look at AT&T stock price on Thursday/Friday. It closed Thursday at 39.51 and opened Friday at 39.00 after going ex-divided with a .49 dividend. What else do you think drove the bulk of that price change?“

I dont care what the opening stock price is the morning after ex dividend. That is set by brokers. It adjusts to market over the following days and weeks. Lets get back to my question: What do tou think would happen if ATT stopped paying dividends? Answer: The stock would completely tank. It seems to me that paying dividends generally causes a company’s market price to be higher than it would be if they didnt pay dividends.
If AT&T stopped paying dividends, cash would build on the balance sheet and the P/E ratio of the stock would go up to account for the cash hoard. Stocks mostly trade as a multiple of earnings but attention is also paid to the balance sheet. The people who own the stock for the dividend would sell and maybe temporarily depress the price but others would step in and buy.

One good argument for dividends is that companies with too much cash are tempted to make acquisitions that turn out to be unprofitable for the firm. Acquisitions gone bad can actually destroy value. If a company has more cash than it can reinvest in its own business, then it is better to return the cash to shareholders. Too much cash also makes a company an attractive takeover target, the acquiring company will use the acquired company's own cash to help finance the purchase.
A fool and his money are good for business.

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patrick013
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by patrick013 » Sun Oct 08, 2017 5:18 pm

nedsaid wrote:
Sun Oct 08, 2017 4:46 pm
One good argument for dividends is that companies with too much cash are tempted to make acquisitions that turn out to be unprofitable for the firm. Acquisitions gone bad can actually destroy value. If a company has more cash than it can reinvest in its own business, then it is better to return the cash to shareholders. Too much cash also makes a company an attractive takeover target, the acquiring company will use the acquired company's own cash to help finance the purchase.
There is a tax penalty if too much cash is accumulated. Some large payouts
are often started to avoid that tax penalty. Royal Dutch was paying out 8%
recently so I suspect that amount was so high to avoid being penalized.
age in bonds, buy-and-hold, 10 year business cycle

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

Post by Admiral » Sun Oct 08, 2017 5:39 pm

RetireBy55 wrote:
Sun Oct 08, 2017 4:39 pm
I'm in the "we love dividends" camp, and have moved into investments that generate some kind of reasonable dividend specifically to replace income in retirement. In fact, I've shifted wife's investments more into dividend paying investments as she's at an age where she can pull from her tax-deferred investments whereas I have a few years to go yet.

We're at a point now (at 54/59) where dividends from CDs & Dividend paying funds will cover 3/4s of our annual expenses. That's a REALLY good feeling, as it's a lot different to figure "how do I cover $X in annual expenses" vs "how do I cover $X less 75% that I can reasonably count on"?

I do not have to touch the "principal" and if it drops - it's painful psychologically, but there's a good chance the income stream we need to live will continue unabated. (I realize dividends can and do get cut, and have had that happen on a couple of stocks I own like HCP - but for the most part, the 3/4s coverage is still intact).

Most of our dividend paying investments are funds (eg: Wellesley, Pimco Income, etc) but I have small quantities of things like O (decades of constantly growing dividends), CVX, F, HCN and similar individual stocks also. Hard to beat 5% for the most part guaranteed income, and since I most likely will "never" sell these stocks the fluctuation in share price is noise - although it can at times get painful, like CTL.

While it's definitely a higher risk strategy, a not so bad approach is to find a stock you like (say, O), wait for the share price to get into a range that the dividend is at a yield % that's attractive (I like 4.5 - 5+%), and buy. Hold forever, and ignore the share price. (I realize that's sacrilege to many here, but that strategy is going to help me meet my goal of retiring by 55, also unless something unforeseen goes totally haywire). I picked up pretty much every stock I own at a yield > 5% and you can't get 5% reasonably guaranteed anywhere..especially if a bear market hits us as many expect. The share price will drop, but the 5% income stream is something that's very hard to find a reasonable alternative to.

FWIW..
Dividends in the retirement phase are a totally different animal than dividends during the accumulation phase (especially when they are not spent, because they are taxed when they are not needed for expenses). Retirees have lower brackets to fill where dividends are untaxed. Those in the accumulation phase are presumably working and have income, making the tax hit higher, depending on their bracket.

This board is focused on low-expense investing, which includes minimizing taxes, so that is the natural bias of posters (myself included). It's also focused on control, and dividends are taxable income that one cannot control (amount or timing).

Wakefield1
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Wakefield1 » Sun Oct 08, 2017 5:46 pm

nedsaid wrote:
Sun Oct 08, 2017 4:46 pm
RAchip wrote:
Sun Oct 08, 2017 12:59 pm
“Look at AT&T stock price on Thursday/Friday. It closed Thursday at 39.51 and opened Friday at 39.00 after going ex-divided with a .49 dividend. What else do you think drove the bulk of that price change?“

I dont care what the opening stock price is the morning after ex dividend. That is set by brokers. It adjusts to market over the following days and weeks. Lets get back to my question: What do tou think would happen if ATT stopped paying dividends? Answer: The stock would completely tank. It seems to me that paying dividends generally causes a company’s market price to be higher than it would be if they didnt pay dividends.
If AT&T stopped paying dividends, cash would build on the balance sheet and the P/E ratio of the stock would go up to account for the cash hoard. Stocks mostly trade as a multiple of earnings but attention is also paid to the balance sheet. The people who own the stock for the dividend would sell and maybe temporarily depress the price but others would step in and buy.

One good argument for dividends is that companies with too much cash are tempted to make acquisitions that turn out to be unprofitable for the firm. Acquisitions gone bad can actually destroy value. If a company has more cash than it can reinvest in its own business, then it is better to return the cash to shareholders. Too much cash also makes a company an attractive takeover target, the acquiring company will use the acquired company's own cash to help finance the purchase.
I guess T. Boone Pickens used to be attracted to such companies with his takeover and shareholder proposal activities. Haven't heard as much such of his activities lately.

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

Post by Artsdoctor » Sun Oct 08, 2017 6:31 pm

Admiral wrote:
Sun Oct 08, 2017 5:39 pm
RetireBy55 wrote:
Sun Oct 08, 2017 4:39 pm
I'm in the "we love dividends" camp, and have moved into investments that generate some kind of reasonable dividend specifically to replace income in retirement. In fact, I've shifted wife's investments more into dividend paying investments as she's at an age where she can pull from her tax-deferred investments whereas I have a few years to go yet.

We're at a point now (at 54/59) where dividends from CDs & Dividend paying funds will cover 3/4s of our annual expenses. That's a REALLY good feeling, as it's a lot different to figure "how do I cover $X in annual expenses" vs "how do I cover $X less 75% that I can reasonably count on"?

I do not have to touch the "principal" and if it drops - it's painful psychologically, but there's a good chance the income stream we need to live will continue unabated. (I realize dividends can and do get cut, and have had that happen on a couple of stocks I own like HCP - but for the most part, the 3/4s coverage is still intact).

Most of our dividend paying investments are funds (eg: Wellesley, Pimco Income, etc) but I have small quantities of things like O (decades of constantly growing dividends), CVX, F, HCN and similar individual stocks also. Hard to beat 5% for the most part guaranteed income, and since I most likely will "never" sell these stocks the fluctuation in share price is noise - although it can at times get painful, like CTL.

While it's definitely a higher risk strategy, a not so bad approach is to find a stock you like (say, O), wait for the share price to get into a range that the dividend is at a yield % that's attractive (I like 4.5 - 5+%), and buy. Hold forever, and ignore the share price. (I realize that's sacrilege to many here, but that strategy is going to help me meet my goal of retiring by 55, also unless something unforeseen goes totally haywire). I picked up pretty much every stock I own at a yield > 5% and you can't get 5% reasonably guaranteed anywhere..especially if a bear market hits us as many expect. The share price will drop, but the 5% income stream is something that's very hard to find a reasonable alternative to.

FWIW..
Dividends in the retirement phase are a totally different animal than dividends during the accumulation phase (especially when they are not spent, because they are taxed when they are not needed for expenses). Retirees have lower brackets to fill where dividends are untaxed. Those in the accumulation phase are presumably working and have income, making the tax hit higher, depending on their bracket.

This board is focused on low-expense investing, which includes minimizing taxes, so that is the natural bias of posters (myself included). It's also focused on control, and dividends are taxable income that one cannot control (amount or timing).
It is true that retirees can enjoy favorable tax rates when compared to those working years. Just remember that IRMAA has a tendency to raise its head a bit more frequently than you'd think. If you will be withdrawing a lot of money from your tax-deferred accounts plus taking those high-dividend payments in your taxable account, you may be setting yourself up for higher Medicare premiums than you anticipated. And those numbers are affecting more people since they're currently not indexed to inflation.

https://www.fedsmith.com/2017/01/25/why ... -premiums/

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

Post by snarlyjack » Sun Oct 08, 2017 7:04 pm

Another problem is long term capital gains on switching funds:

Let's say your in a low dividend paying fund during your accumulation
years (say TSM). Then at retirement you switch your TSM fund into
a dividend paying fund (say HDY). As soon as you make the switch
your hit with capital gains tax. On what could be a very sizable account.

It seems to me your forced to choose strategies at the beginning of
your investment career. And their are pro's & con's to both strategies.
If you were totality investing in a IRA it would not be a problem
but their are situations (like mine) that it just isn't possible.

When I do the "Ben Franklin" list of pro's & con's it's not a total
clean deal. It could cost a investor $Thousands of dollars.

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

Post by KlangFool » Sun Oct 08, 2017 7:20 pm

snarlyjack wrote:
Sun Oct 08, 2017 7:04 pm
Another problem is long term capital gains on switching funds:

Let's say your in a low dividend paying fund during your accumulation
years (say TSM). Then at retirement you switch your TSM fund into
a dividend paying fund (say HDY). As soon as you make the switch
your hit with capital gains tax. On what could be a very sizable account.
snarlyjack,

You get to decide how much to switch for every year. Who says that you must switch everything in one year? In fact, for most people with good tax management, the tax will be 0%. Just sell and switch enough to stay below 25% tax bracket.

You get to choose when and how much capital gain to generate every year with TSM. You do not get that with your dividend fund. You are forced to pay tax every year for your dividend with your dividend fund.

You are in control.

KlangFool

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

Post by nedsaid » Sun Oct 08, 2017 9:47 pm

Wakefield1 wrote:
Sun Oct 08, 2017 5:46 pm
nedsaid wrote:
Sun Oct 08, 2017 4:46 pm
RAchip wrote:
Sun Oct 08, 2017 12:59 pm
“Look at AT&T stock price on Thursday/Friday. It closed Thursday at 39.51 and opened Friday at 39.00 after going ex-divided with a .49 dividend. What else do you think drove the bulk of that price change?“

I dont care what the opening stock price is the morning after ex dividend. That is set by brokers. It adjusts to market over the following days and weeks. Lets get back to my question: What do tou think would happen if ATT stopped paying dividends? Answer: The stock would completely tank. It seems to me that paying dividends generally causes a company’s market price to be higher than it would be if they didnt pay dividends.
If AT&T stopped paying dividends, cash would build on the balance sheet and the P/E ratio of the stock would go up to account for the cash hoard. Stocks mostly trade as a multiple of earnings but attention is also paid to the balance sheet. The people who own the stock for the dividend would sell and maybe temporarily depress the price but others would step in and buy.

One good argument for dividends is that companies with too much cash are tempted to make acquisitions that turn out to be unprofitable for the firm. Acquisitions gone bad can actually destroy value. If a company has more cash than it can reinvest in its own business, then it is better to return the cash to shareholders. Too much cash also makes a company an attractive takeover target, the acquiring company will use the acquired company's own cash to help finance the purchase.
I guess T. Boone Pickens used to be attracted to such companies with his takeover and shareholder proposal activities. Haven't heard as much such of his activities lately.
Well, he is getting older. He also took a bath on windfarms too.
A fool and his money are good for business.

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

Post by nedsaid » Sun Oct 08, 2017 9:50 pm

patrick013 wrote:
Sun Oct 08, 2017 5:18 pm
nedsaid wrote:
Sun Oct 08, 2017 4:46 pm
One good argument for dividends is that companies with too much cash are tempted to make acquisitions that turn out to be unprofitable for the firm. Acquisitions gone bad can actually destroy value. If a company has more cash than it can reinvest in its own business, then it is better to return the cash to shareholders. Too much cash also makes a company an attractive takeover target, the acquiring company will use the acquired company's own cash to help finance the purchase.
There is a tax penalty if too much cash is accumulated. Some large payouts
are often started to avoid that tax penalty. Royal Dutch was paying out 8%
recently so I suspect that amount was so high to avoid being penalized.
Yes, I did read that. I have seen companies like Microsoft, Berkshire-Hathaway, and Apple accumulate huge amounts of cash on their balance sheet. Not sure when the tax penalty kicks in.
A fool and his money are good for business.

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

Post by Bfwolf » Sun Oct 08, 2017 10:31 pm

snarlyjack wrote:
Sun Oct 08, 2017 7:04 pm
Another problem is long term capital gains on switching funds:

Let's say your in a low dividend paying fund during your accumulation
years (say TSM). Then at retirement you switch your TSM fund into
a dividend paying fund (say HDY). As soon as you make the switch
your hit with capital gains tax. On what could be a very sizable account.

It seems to me your forced to choose strategies at the beginning of
your investment career. And their are pro's & con's to both strategies.
If you were totality investing in a IRA it would not be a problem
but their are situations (like mine) that it just isn't possible.

When I do the "Ben Franklin" list of pro's & con's it's not a total
clean deal. It could cost a investor $Thousands of dollars.
Hi Snarlyjack,

I was actually about to make this exact point to you. You are right that there is a high cost to switching investments in a taxable account after capital gains have accumulated. I would hate for you to build up sizable capital gains in these high dividend funds and then realize 15 years from now you should have been in TSM the whole time for tax reasons.

I think you overestimate the benefits you'll get from being in a high dividend fund in retirement. Yes, the withdrawals from your account that you need to pay for your lifestyle are more automatic with the high dividend fund, but it will still require oversight. What if stock prices drop and the dividend yield increases to 5% or 6% in a high dividend fund? Now you're potentially withdrawing more than the 4% rule would allow for and need to reinvest some of the dividends to avoid over-withdrawal. Conversely, I think you'll find that the amount of energy necessary to sell shares from TSM to pay for your lifestyle while still staying within the 4% rule is not nearly as big as you are thinking. In summary, whether you have a high dividend fund or TSM, overseeing your withdrawals during retirement will be necessary but not onerous. Thus, I do not think that if you switch to TSM now, you'll feel the need to switch out to a high dividend fund once you get to retirement many years from now.

On top of that, if you DO want to own higher dividend funds in retirement, you will probably have sizable tax advantaged assets by then like IRAs. In such accounts, the tax advantages of TSM are eliminated, and both funds become more or less equally acceptable (TSM has an additional diversification benefit, but a Vanguard high dividend fund in your IRA is likely to be diversified enough when combined with TSM in your taxable account). So if you still had an urge to have some high dividend funds in your portfolio, you could just buy them in your IRA (though you'll probably want to stick a lot of your bonds in there too).

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

Post by Admiral » Mon Oct 09, 2017 6:20 am

snarlyjack wrote:
Sun Oct 08, 2017 7:04 pm
Another problem is long term capital gains on switching funds:

Let's say your in a low dividend paying fund during your accumulation
years (say TSM). Then at retirement you switch your TSM fund into
a dividend paying fund (say HDY). As soon as you make the switch
your hit with capital gains tax. On what could be a very sizable account.

It seems to me your forced to choose strategies at the beginning of
your investment career. And their are pro's & con's to both strategies.
If you were totality investing in a IRA it would not be a problem
but their are situations (like mine) that it just isn't possible.

When I do the "Ben Franklin" list of pro's & con's it's not a total
clean deal. It could cost a investor $Thousands of dollars.
What is your situation that you require a stream of dividends from a taxable account at age 23? Are you not able to support yourself? Are you long-term unemployed or disabled? I'm not being snarky I just want to know. You seems to be running in circles figuring out ways to rely on this inheritance for some portion of your income (distribution phase) when most people your age would be in the accumulation phase.

If you DON'T need the money, then you do realize you are being taxed for no good reason, right? You are choosing to pay higher taxes. I just want to make sure you understand that. If you are obsessed with getting what you seem to think are "interest" payments (which dividends are NOT, but that's what it appears you think they are) why don't you just buy bonds or bond funds in your taxable account? You'll get a stream of 2-3% interest payments and your principal will be (generally) protected.

If I were you, I'd take a little of that money and spend some time with an accountant who can explain the tax consequences of your current investment plan. Many have tried to explain this to you on the board, and you still seem to be unclear.

snarlyjack
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Location: Montana

Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Mon Oct 09, 2017 8:31 am

Good Morning Everyone,

I' am on my way to work...but I have a special treat
for you today. JLCollins first article to his daughter.
It's excellent...I hope you enjoy it like I did.

I also wanted to thank everyone for all your help.
Bogleheads is full of excellent advise...

Admiral, Montana is a rural state. It's breath taking beautiful,
Yellowstone & Glacier National Parks & wonders in-between.
(The last best place)! It's to beautiful to ever move. However,
the pay & earning potential here is limited. Most people would
rather, fish, hunt, camp, ski, boat, etc. than live in a city & try
to make a fortune. I like to do the above things (recreate) but I
also want to support my lifestyle while I' am out camping & boating.
It's a life choice...a very nice life choice...a special life choice...

Enjoy this article from JLCollins. A simple path to wealth...it's special!

http://jlcollinsnh.com/2011/06/08/how-i ... to-wealth/

Admiral
Posts: 812
Joined: Mon Oct 27, 2014 12:35 pm

Re: Dividends vs. Capital Gains for Spending Needs?

Post by Admiral » Mon Oct 09, 2017 8:45 am

snarlyjack wrote:
Mon Oct 09, 2017 8:31 am
Good Morning Everyone,

I' am on my way to work...but I have a special treat
for you today. JLCollins first article to his daughter.
It's excellent...I hope you enjoy it like I did.

I also wanted to thank everyone for all your help.
Bogleheads is full of excellent advise...

Admiral, Montana is a rural state. It's breath taking beautiful,
Yellowstone & Glacier National Parks & wonders in-between.
(The last best place)! It's to beautiful to ever move. However,
the pay & earning potential here is limited. Most people would
rather, fish, hunt, camp, ski, boat, etc. than live in a city & try
to make a fortune. I like to do the above things (recreate) but I
also want to support my lifestyle while I' am out camping & boating.
It's a life choice...a very nice life choice...a special life choice...

Enjoy this article from JLCollins. A simple path to wealth...it's special!

http://jlcollinsnh.com/2011/06/08/how-i ... to-wealth/
Yes, I am a skier, I've been to Montana, and I appreciate all it has to offer. I didn't say "live in a city and try to make a fortune." But there are jobs everywhere... even Montana! If you want to live a lifestyle that includes jobs with low wages (and that's a fine choice if it works for you) then I might suggest that minimizing your taxes is even MORE important.

Wakefield1
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Wakefield1 » Mon Oct 09, 2017 9:35 am

I think there is a big difference between a stock fund that has (hoped for) share appreciation as part of its total return as well as a modest dividend stream (which might be mostly "qualified dividends" vs. a bond or mostly bond fund which has "dividends"(mixture of qualified dividends but mostly non-qualified interest from bonds) that are its main return and mostly non-qualified.
If I am correct,for someone in the 15% or barely touching into the 25% top margin tax brackets the qualified dividends and (long term) capital gains distributions get a considerable break compared against the taxation of salary income or non-qualified dividend and Interest income. As I recall in the state of Virginia all of these usually end up taxed at 5.75%.

Do dividend adverse investors avoid Total Stock Market and S&P 500 Index funds?

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

Post by dbr » Mon Oct 09, 2017 9:43 am

Wakefield1 wrote:
Mon Oct 09, 2017 9:35 am
Do dividend adverse investors avoid Total Stock Market and S&P 500 Index funds?
You don't hear practical suggestions to concentrate in stocks that do not pay dividends. A reason for that could include the possibility that this would mean tilting to growth rather than value factor which is the opposite of the usual strategy. On the other hand one could invest in BRK-B.

An important feature of large diverse index funds is low turnover which limits taxable capital gains distributions. These can be much more tax costly than dividends in active funds. Also, ETF share classes can be used by a fund to reduce taxable distributions.

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

Post by Admiral » Mon Oct 09, 2017 9:51 am

Wakefield1 wrote:
Mon Oct 09, 2017 9:35 am
I think there is a big difference between a stock fund that has (hoped for) share appreciation as part of its total return as well as a modest dividend stream (which might be mostly "qualified dividends" vs. a bond or mostly bond fund which has "dividends"(mixture of qualified dividends but mostly non-qualified interest from bonds) that are its main return and mostly non-qualified.
If I am correct,for someone in the 15% or barely touching into the 25% top margin tax brackets the qualified dividends and (long term) capital gains distributions get a considerable break compared against the taxation of salary income or non-qualified dividend and Interest income. As I recall in the state of Virginia all of these usually end up taxed at 5.75%.

Do dividend adverse investors avoid Total Stock Market and S&P 500 Index funds?
The opposite. TSM has relatively low qualified dividends, low expense ratio, and almost no capital gains (low turnover). S&P is just a smaller slice of the market but similar in terms of expense.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by PhysicianOnFIRE » Mon Oct 09, 2017 1:21 pm

dbr wrote:
Mon Oct 09, 2017 9:43 am
Wakefield1 wrote:
Mon Oct 09, 2017 9:35 am
Do dividend adverse investors avoid Total Stock Market and S&P 500 Index funds?
You don't hear practical suggestions to concentrate in stocks that do not pay dividends. A reason for that could include the possibility that this would mean tilting to growth rather than value factor which is the opposite of the usual strategy. On the other hand one could invest in BRK-B.

An important feature of large diverse index funds is low turnover which limits taxable capital gains distributions. These can be much more tax costly than dividends in active funds. Also, ETF share classes can be used by a fund to reduce taxable distributions.
If there were a no-dividend version of the Total Stock Market or S&P 500 fund with equally low fees, I would expect them to be extremely popular choices for a taxable account.

Vanguard has tax managed funds that attempt to keep costs low, but the fees are higher, and the diversity lower. They're not bad options, but they're not a free lunch, either. The White Coat Investor discussed the pros and cons of tax managed funds recently.

:beer
-PoF

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Mon Oct 09, 2017 1:32 pm

snarlyjack wrote:
Mon Oct 09, 2017 8:31 am
Good Morning Everyone,

I' am on my way to work...but I have a special treat
for you today. JLCollins first article to his daughter.
It's excellent...I hope you enjoy it like I did.

I also wanted to thank everyone for all your help.
Bogleheads is full of excellent advise...

Admiral, Montana is a rural state. It's breath taking beautiful,
Yellowstone & Glacier National Parks & wonders in-between.
(The last best place)! It's to beautiful to ever move. However,
the pay & earning potential here is limited. Most people would
rather, fish, hunt, camp, ski, boat, etc. than live in a city & try
to make a fortune. I like to do the above things (recreate) but I
also want to support my lifestyle while I' am out camping & boating.
It's a life choice...a very nice life choice...a special life choice...

Enjoy this article from JLCollins. A simple path to wealth...it's special!

http://jlcollinsnh.com/2011/06/08/how-i ... to-wealth/
You can do all of what you describe with a Total Market index rather than being a dividend chaser and paying more of your money to the State of Montana in taxes every year.

In fact, your own article disagrees with you and recommends a total market index fund (though it does commit an error in stating a safe withdrawal rate is the dividend yield of the fund). You invest in a high dividend yield fund over the total market fund because you find the total market yield too low. Applying that logic repeatedly, the safest stocks are those that pay the highest dividend yield? A company which returns all earnings to shareholders is worth more than one which redirects some of earnings into attempts to grow earnings? This makes no sense.

And of course there is the tax issue which you have written an entire post again without addressing.

It doesn't sound like you are reading or engaging with much of the feedback and advice people on this forum are giving you. Why not? They/We have shown your behavior to be inefficient to the long-term creation of wealth.
"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 The Wizard » Mon Oct 09, 2017 3:41 pm

Personal opinion: I think this thread is focusing too much on what a particular individual is doing as regards slightly suboptimal investing.

If that Particular Individual accumulates several million dollars in mostly high dividend paying stocks over the next forty years, I think he'll be fine, just fine.

My primary financial focus is on my own investment situation, not other people's...
Attempted new signature...

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

Post by PhysicianOnFIRE » Mon Oct 09, 2017 5:02 pm

The Wizard wrote:
Mon Oct 09, 2017 3:41 pm
Personal opinion: I think this thread is focusing too much on what a particular individual is doing as regards slightly suboptimal investing.

If that Particular Individual accumulates several million dollars in mostly high dividend paying stocks over the next forty years, I think he'll be fine, just fine.

My primary financial focus is on my own investment situation, not other people's...
In general, I agree with this sentiment, althought there's nothing wrong with mentoring a young investor as long as the suggestions or corrections don't morph into personal attacks.

But overall, one can do a lot worse than investing in dividend stocks or funds, even if it's not the perfect strategy. It beats buying a Ferrari with the inheritance / insurance. The closing statement from my article that Taylor shared to start this conversation:

"Owning a dividend focused portfolio in a taxable account is less than ideal, but there are many far more agregious sins in the investing world. For example, you could:

Own actively managed funds in taxable that create far more taxable events due to high turnover.
Invest haphazardly with no defined plan or goals. Buy high; sell low.
Keep all of your savings in a savings account, slowly losing buying power to inflation.
Fail to save enough money to have anything left over to invest.
Buy loaded funds. You’re automatically down about 5% the first day.
Trust your money to someone else without knowing or understanding how it’s invested.

I’ve learned that dividend investors treasure their dividend paying stocks and funds and to some, suggesting dividends are anything but awesome is akin to kicking their dogs or talking trash about their grandmothers. The dialog can quickly become emotionally charged.

The truth is, if you are savvy enough to consider the pros and cons of dividends in your portfolio, you are likely in a position to excel no matter how you choose to invest. The 0.5% you might come out ahead or behind won’t be the difference between boating in a dinghy or a 54-foot yacht.

Nevertheless, I want to help you get the most bang for your invested buck. For the high income professional, understand that a high dividend strategy can work against you."

:beer
-PoF

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

Post by snarlyjack » Mon Oct 09, 2017 5:43 pm

Thank you Wizard & PhysicianOnFire,
(your comments are much appreciated).

When I received the life insurance settlement I just happened
to land on JLCollins stock series. Thank heavens! Through
JLCollins I found Vanguard and the Bogleheads.

In studying his stock series I started looking at the Trinity
study 4% rule. The Trinity study was mostly for a 30 year
retirement. At the time I was 20 years old & I knew that
the 30 year Trinity study would not work for me due to
the time length.

JLCollins talked about living on the dividends of the TSM &
the Trinity Study. I began studying both options. Because
of the time length & the 3% withdrawal rate is forecast 100%
success over a longer period of time I started looking at the
3% dividend level of HDY fund. I knew that being 20 years old
that bonds were suboptimal. I knew I had to toughen up mentally
(toughen up cupcake) & go 100% stocks. The dividends create
the 3% Trinity level & buy additional shares in a down market.
Granted their is a Montana tax but their is also a tax on the TSM
dividends. I think over the long term that everything will work out.
I didn't happen to just pull this strategy out of the air. This
strategy has been well researched by JLCollins & numerous
other investors on the internet. All I have to do is fund it &
toughen up mentally in the downturns. With the help of the
Bogleheads I think I can do it. I won't be the only investor
in a downturn...(looking at you Nedsaid...thanks).

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

Post by TropikThunder » Mon Oct 09, 2017 9:57 pm

snarlyjack wrote:
Mon Oct 09, 2017 5:43 pm
The Trinity study was mostly for a 30 year
retirement. At the time I was 20 years old & I knew that the 30 year Trinity study would not work for me due to the time length.
Most of what people perceive as an "anti-dividends" bias is a criticism of focusing on dividends during accumulation. There's nothing wrong with a dividend-focused withdrawal phase except that if your only withdrawals are dividends, you'll need a bigger portfoilio than if you also sold some shares. I've always suspected that that was the distinction you fail to grasp, that strategies can and should differ during accumulation vs withdrawal. Pretty sure I was right since from your above post you appear to believe that the 30 year time period from the Trinity study includes the accumulation phase. It's for a 30-year retirement (I.e., 65-95). When you say the problem is the time length, do you mean your retirement will be significantly longer than 30 years, such as 60-110? The fact that you're 20-something now has nothing to do with it, the Trinity study isn't talking about accumulation.

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

Post by snarlyjack » Mon Oct 09, 2017 10:58 pm

TropikThunder,

Hello, nice meeting you.

(Now were getting into the math of the strategy).

Their is a difference between the accumulation stage &
DE accumulation stage. I agree they are totality different.

The problem as I see it:

It is extremely difficult in a taxable account to shift over a
large amount of money from one fund (accumulation fund) to
a (de accumulation fund) without a huge tax consequence.
Or, it would take many years to do it. That is why I figured I'd
start in a dividend fund & just continue with it. Just pay the
tax & get on with life.

All I need is a couple of doubles in the account. If an account
doubles every 10 years, 2 doubles would be approx. 20 years.
I' am 23 years old now, so 2 doubles would make me approx. 43 years
old. The portfolio would need to last age 100 - age 43 = 57 years.
Age 43 is the very earliest that I could fire. And that might
be questionable?
250,000 to 500,000 = 1 double.
500,000 to 1 Million = 2 doubles.
This is all fairly new to me & I appreciate your suggestions.

naha66
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by naha66 » Mon Oct 09, 2017 11:01 pm

I love dividends!

Well, not exactly, but I do tilt toward dividend paying stocks in my portfolio. I simply do so in my Roth IRA. Value stocks tend to be more likely to pay a dividend as compared to growth stocks, and I own Vanguard’s small cap and mid cap indexes in my Roth IRA. I also own the REIT index fund in Roth, which pays a higher dividend (trailing twelve month yield of 3.76%) than many dividend focused ETFs and mutual funds.


Nevertheless, I want to help you get the most bang for your invested buck. For the high income professional, understand that a high dividend strategy can work against you.


The above is from the beginning and the end of article. Why all the negatively about dividends, is it because Larry showed so much disdain for them, I read some of his rants on seeking alpha. He was down right mean to some posters.

The above explains it all Most people are not high income professionals. My mid 6 figure portfolio( split @ 50/50 between taxable and deferred),SS and a small pension will most likely never have a problem with dividends. Yes i'm already retired. Too many people assume what's right for them is right for everybody, ever hear of lemmings.

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Mon Oct 09, 2017 11:12 pm

snarlyjack wrote:
Mon Oct 09, 2017 10:58 pm
TropikThunder,

Hello, nice meeting you.

(Now were getting into the math of the strategy).

Their is a difference between the accumulation stage &
DE accumulation stage. I agree they are totality different.

The problem as I see it:

It is extremely difficult in a taxable account to shift over a
large amount of money from one fund (accumulation fund) to
a (de accumulation fund) without a huge tax consequence.
Or, it would take many years to do it. That is why I figured I'd
start in a dividend fund & just continue with it. Just pay the
tax & get on with life.

All I need is a couple of doubles in the account. If an account
doubles every 10 years, 2 doubles would be approx. 20 years.
I' am 23 years old now, so 2 doubles would make me approx. 43 years
old. The portfolio would need to last age 100 - age 43 = 57 years.
Age 43 is the very earliest that I could fire. And that might
be questionable?
250,000 to 500,000 = 1 double.
500,000 to 1 Million = 2 doubles.
This is all fairly new to me & I appreciate your suggestions.
I suggest that because you will be earning money at the same time you are earning dividends, and since this dividend stream is increasing, the likelihood of ending up in a higher tax bracket at some point is not small. You're planning to have the dividends completely replace your income, right? That means in the few years before retirement your income may be 2x or more of what it is now. This could easily push you into the 25% bracket where you'll pay 15% on qualified dividends. With Montana state taxes that puts you at a 21.9% drag on dividend returns just to reinvest. The same may not even hold for Total Stock Market: the dividend yield is expected to be smaller and may not push you into a higher bracket. Even if it does, you will have less income in that bracket.

You are 100% correct about the problem being that it is costly to switch to a dividend fund later. It's an excellent observation! However, there is not need to switch to a dividend fund later. Just withdraw at a safe withdrawal rate from a total market fund. As has been mentioned before, the inability to switch funds without paying taxes goes both ways: if you find yourself wishing you received fewer dividends and a more tax efficient investing strategy, it will be costly to switch because you will likely have appreciation in your shares held currently.

Paying more taxes than needed to in order set yourself up for a particular withdrawal strategy 40+ years down the road is a costly behavorial error.

P.S. Also, without speculating on future policy, the only way to insulate yourself from future federal taxes on dividends is to minimize dividends to a reasonable extent (without sacrificing diversification).
"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 triceratop » Mon Oct 09, 2017 11:15 pm

naha66 wrote:
Mon Oct 09, 2017 11:01 pm
I love dividends!

Well, not exactly, but I do tilt toward dividend paying stocks in my portfolio. I simply do so in my Roth IRA. Value stocks tend to be more likely to pay a dividend as compared to growth stocks, and I own Vanguard’s small cap and mid cap indexes in my Roth IRA. I also own the REIT index fund in Roth, which pays a higher dividend (trailing twelve month yield of 3.76%) than many dividend focused ETFs and mutual funds.


Nevertheless, I want to help you get the most bang for your invested buck. For the high income professional, understand that a high dividend strategy can work against you.


The above is from the beginning and the end of article. Why all the negatively about dividends, is it because Larry showed so much disdain for them, I read some of his rants on seeking alpha. He was down right mean to some posters.

The above explains it all Most people are not high income professionals. My mid 6 figure portfolio( split @ 50/50 between taxable and deferred),SS and a small pension will most likely never have a problem with dividends. Yes i'm already retired. Too many people assume what's right for them is right for everybody, ever hear of lemmings.
I make less than the median American wage and dividends are a problem for me. Why? They are an inefficiency which costs me extra money at tax-time, because California taxes me 6% on my dividends.

I am negative on dividends in a taxable account because I see the negative impact they have on after-tax returns. Simple math, and my reason for negativity is as simple as that.

I agree with you that in an IRA the tax concerns do not apply.
"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 » Mon Oct 09, 2017 11:44 pm

Triceratop,

First of all I want to thank you for your advice &
being patient with me, I appreciate it.

I understand exactly what you are saying.

When I posted articles about the Janitor Next Door
(Ronald Read) (The Millionaire Next Door). Ronald
Read had accumulated $6 Million in stocks & $2 Million
in cd's. for a total of at least $8. Million dollars (possibly more).
All of this was in dividend paying stocks. I read where he
made approx. $20,000 a month in dividends.

Ronald Read must have had a tax problem. He probably
used some of his dividends to pay Fed. & State taxes.
I agree this isn't the most efficient way to do taxes. But
for the life of me I can't figure out how he could have paid his
taxes without the dividends paying them.

All I can think of is he looked at the whole thing as the cost
of doing business? I wish I could see his returns. He was in
individual dividend paying stocks which would be a real hassle.
Vanguard's HDY is 100% more efficient than what he was doing...

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Tue Oct 10, 2017 12:07 am

snarlyjack wrote:
Mon Oct 09, 2017 11:44 pm
Triceratop,

First of all I want to thank you for your advice &
being patient with me, I appreciate it.

I understand exactly what you are saying.

When I posted articles about the Janitor Next Door
(Ronald Read) (The Millionaire Next Door). Ronald
Read had accumulated $6 Million in stocks & $2 Million
in cd's. for a total of at least $8. Million dollars (possibly more).
All of this was in dividend paying stocks. I read where he
made approx. $20,000 a month in dividends.

Ronald Read must have had a tax problem. He probably
used some of his dividends to pay Fed. & State taxes.
I agree this isn't the most efficient way to do taxes. But
for the life of me I can't figure out how he could have paid his
taxes without the dividends paying them.

All I can think of is he looked at the whole thing as the cost
of doing business? I wish I could see his returns. He was in
individual dividend paying stocks which would be a real hassle.
Vanguard's HDY is 100% more efficient than what he was doing...
How could he have paid his taxes without the dividends? Simple! If he didn't receive the dividends he wouldn't owe taxes on them. The inefficiency creates the tax problem, so removing the inefficiency removes the tax problem. This makes sense when you understand that you only pay taxes on capital gains and dividends distributed to you, not share appreciation prior to sale.

He could have simply withdrawn slightly more funds than needed and paid taxes on a much smaller amount of funds. It would have been a mix of dividends and capital gains.

"Vanguard's HDY is 100% more efficient than what he was doing..."

Yes, in terms of complexity. But perhaps not 100% more tax efficient than what he was doing. However, why compare HDY to individual stocks? Vanguard total stock market is at least as easy as HDY so the same argument holds vs. individual stocks.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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

Post by Longtermgrowth » Tue Oct 10, 2017 1:17 am

All this talk about tax efficient funds got me thinking about Total Stock Market Index's low 90% range qualified dividend income in 2016.
I remember reading that if the QDI is at a minimum of (or was it just above?) 95%, it counts as 100% QDI for the fund holders. How likely do you all think it is, that whatever changed in TSM to make it miss that mark in 2016, will continue in the future?

I've thought about taking advantage of any tax loss harvesting opportunity, to switch to the S&P 500 Index, thinking this may be the new normal for Total Stock Index...

naha66
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by naha66 » Tue Oct 10, 2017 1:21 am

I make less than the median American wage and dividends are a problem for me. Why? They are an inefficiency which costs me extra money at tax-time, because California taxes me 6% on my dividends.

Another apples to oranges case i pay no state taxes where I live. It not my fault you live in California and I lived there off and on in my younger years. I have VTI in my portfolio,and of course the offending VEIPX.

The Wizard
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by The Wizard » Tue Oct 10, 2017 4:15 am

snarlyjack wrote:
Mon Oct 09, 2017 10:58 pm

...All I need is a couple of doubles in the account. If an account
doubles every 10 years, 2 doubles would be approx. 20 years.
I' am 23 years old now, so 2 doubles would make me approx. 43 years
old. The portfolio would need to last age 100 - age 43 = 57 years.
Age 43 is the very earliest that I could fire. And that might
be questionable?
250,000 to 500,000 = 1 double.
500,000 to 1 Million = 2 doubles.
This is all fairly new to me & I appreciate your suggestions.
This doesn't sound like a sufficient plan by itself. You seem to be omitting new contributions.

$1 Million is not enough to live on today in your mid 40s, forget 20 years from now. That amount generates only $20,000 to $25,000 in dividends per year.

At age 23, you should plan to be decently employed for the foreseeable future. You should max out 401(k) and Roth IRA contributions each year. That's $18,000 pretax and $5500 after tax each year.
If your earned income isn't large enough to let you easily put that much away each year, use some of the inheritance money dollar for dollar to fund those accounts, especially the Roth.

Once money is in those sheltered accounts, the dividend taxation arguments go away.

Over the next twenty years, you should be able to contribute $500,000 to your 401(k) and Roth IRA. With normal growth of those investments, you should then be in good shape...
Attempted new signature...

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

Post by Admiral » Tue Oct 10, 2017 6:32 am

The Wizard wrote:
Tue Oct 10, 2017 4:15 am
snarlyjack wrote:
Mon Oct 09, 2017 10:58 pm

...All I need is a couple of doubles in the account. If an account
doubles every 10 years, 2 doubles would be approx. 20 years.
I' am 23 years old now, so 2 doubles would make me approx. 43 years
old. The portfolio would need to last age 100 - age 43 = 57 years.
Age 43 is the very earliest that I could fire. And that might
be questionable?
250,000 to 500,000 = 1 double.
500,000 to 1 Million = 2 doubles.
This is all fairly new to me & I appreciate your suggestions.
This doesn't sound like a sufficient plan by itself. You seem to be omitting new contributions.

$1 Million is not enough to live on today in your mid 40s, forget 20 years from now. That amount generates only $20,000 to $25,000 in dividends per year.

At age 23, you should plan to be decently employed for the foreseeable future. You should max out 401(k) and Roth IRA contributions each year. That's $18,000 pretax and $5500 after tax each year.
If your earned income isn't large enough to let you easily put that much away each year, use some of the inheritance money dollar for dollar to fund those accounts, especially the Roth.

Once money is in those sheltered accounts, the dividend taxation arguments go away.

Over the next twenty years, you should be able to contribute $500,000 to your 401(k) and Roth IRA. With normal growth of those investments, you should then be in good shape...
If you read upthread, you will note that he does not plan to earn or save much additional money (or at least expect to) based on his lifestyle choice. That's the reason for this whole conversation. He says there are only low paying jobs in Montana and he prefers to camp/hunt/fish/ski. etc. :? At this point, I've learned he will not be swayed by any arguments herein.

The Wizard
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by The Wizard » Tue Oct 10, 2017 8:37 am

Admiral wrote:
Tue Oct 10, 2017 6:32 am

If you read upthread, you will note that he does not plan to earn or save much additional money (or at least expect to) based on his lifestyle choice. That's the reason for this whole conversation. He says there are only low paying jobs in Montana and he prefers to camp/hunt/fish/ski. etc. :? At this point, I've learned he will not be swayed by any arguments herein.
I saw that earlier post but didn't read it quite that way.
He said he was on his way to work at the start of that post.

So the questions arise: what is his current employment income and what are his annual expenses?

Based on his tone in that post, I'm guessing he may not have enough employment income to max out 401(k) and Roth IRA contributions, which would be $23,500 this year.
But having even low employment income would allow him to shift money from his taxable account into those two tax deferred and tax free options.
Over coming decades, that would reduce his tax bite nicely...
Attempted new signature...

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by KlangFool » Tue Oct 10, 2017 9:17 am

snarlyjack wrote:
Mon Oct 09, 2017 11:44 pm
Triceratop,

First of all I want to thank you for your advice &
being patient with me, I appreciate it.

I understand exactly what you are saying.

When I posted articles about the Janitor Next Door
(Ronald Read) (The Millionaire Next Door). Ronald
Read had accumulated $6 Million in stocks & $2 Million
in cd's. for a total of at least $8. Million dollars (possibly more).
All of this was in dividend paying stocks. I read where he
made approx. $20,000 a month in dividends.

Ronald Read must have had a tax problem. He probably
used some of his dividends to pay Fed. & State taxes.
I agree this isn't the most efficient way to do taxes. But
for the life of me I can't figure out how he could have paid his
taxes without the dividends paying them.

All I can think of is he looked at the whole thing as the cost
of doing business? I wish I could see his returns. He was in
individual dividend paying stocks which would be a real hassle.
Vanguard's HDY is 100% more efficient than what he was doing...
snarlyjack,

You have 250K.

The dividend yield for VHDYX is 2.89%
The dividend yield for VTSAX is 1.85%.

The difference is 1.04%. At about 250K, it is about $2,500. You pay an additional 6.9% (Montana State Income Tax) on this additional $2,500 = $172.50. It is not so bad.

But, if you are at low-income level and this $2,500 costs you to miss out the tax credits such as Earned Income Tax Credit or Saver's credit, this could cost thousand to you.

It is your choice whether this is worthwhile for you to take a look.

KlangFool

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

Post by snarlyjack » Tue Oct 10, 2017 9:43 am

Good Morning everyone,
(additional information).

I just graduated from the U of M last year (at 22 years old)
with a B.S. Degree in Finance. I just got my first job out of
college (about 1 1/2 years ago). I make about $15.00 per hour,
$31,200. I' am single with no debt & save about 50% of my income.
I put 5% of my income into a Roth 401K with a company match of 80%.
The rest of my money goes into my Roth IRA ($450. month),
& my taxable account ($1,000. month). Total savings $1500.
month. I live pretty frugal with the goal of bringing up
my account as quickly as possible.

I' am finding this whole process being somewhat complicated.
Not only do you have to have your budget down pat, you
also need to have Vanguard funds down pat & your taxes down pat.
I 'am finding that you need to have your act together, in quite a
few different ways. Financial planning isn't easy & as you know
the choices do have consequences. My support line (Aunts, Cousins, etc
are in Montana). My Aunts & Uncles are monitoring me...
Thanks for all your help & suggestions!

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by triceratop » Tue Oct 10, 2017 9:48 am

naha66 wrote:
Tue Oct 10, 2017 1:21 am
I make less than the median American wage and dividends are a problem for me. Why? They are an inefficiency which costs me extra money at tax-time, because California taxes me 6% on my dividends.

Another apples to oranges case i pay no state taxes where I live. It not my fault you live in California and I lived there off and on in my younger years. I have VTI in my portfolio,and of course the offending VEIPX.
I was not stating what was best for your case. You said not everyone was a high income professional and I wanted to correct that that isn't the correct way to think about it. Even for those who pay no federal taxes on their qualified dividends due to being low earners, the decision to be tax efficient is important.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

naha66
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by naha66 » Tue Oct 10, 2017 10:27 am

triceratop wrote:
Tue Oct 10, 2017 9:48 am
naha66 wrote:
Tue Oct 10, 2017 1:21 am
I make less than the median American wage and dividends are a problem for me. Why? They are an inefficiency which costs me extra money at tax-time, because California taxes me 6% on my dividends.

Another apples to oranges case i pay no state taxes where I live. It not my fault you live in California and I lived there off and on in my younger years. I have VTI in my portfolio,and of course the offending VEIPX.
I was not stating what was best for your case. You said not everyone was a high income professional and I wanted to correct that that isn't the correct way to think about it. Even for those who pay no federal taxes on their qualified dividends due to being low earners, the decision to be tax efficient is important.

You just don't get it. I get it that most people need to be tax efficient, but you won't give it up that to some people it doesn't matter. :beer

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

Post by KlangFool » Tue Oct 10, 2017 10:39 am

snarlyjack wrote:
Tue Oct 10, 2017 9:43 am
Good Morning everyone,
(additional information).

I just graduated from the U of M last year (at 22 years old)
with a B.S. Degree in Finance. I just got my first job out of
college (about 1 1/2 years ago). I make about $15.00 per hour,
$31,200. I' am single with no debt & save about 50% of my income.
I put 5% of my income into a Roth 401K with a company match of 80%.
The rest of my money goes into my Roth IRA ($450. month),

& my taxable account ($1,000. month). Total savings $1500.
month. I live pretty frugal with the goal of bringing up
my account as quickly as possible.

I' am finding this whole process being somewhat complicated.
Not only do you have to have your budget down pat, you
also need to have Vanguard funds down pat & your taxes down pat.
I 'am finding that you need to have your act together, in quite a
few different ways. Financial planning isn't easy & as you know
the choices do have consequences. My support line (Aunts, Cousins, etc
are in Montana). My Aunts & Uncles are monitoring me...
Thanks for all your help & suggestions!
snarlyjack,

So, essentially, you choose to give up collecting Earned Income Tax Credit from the federal government. This is worth about $510 per year to you. You should not contribute to Roth 401K. In fact, you should contribute the full 18K into Trad. 401K.

https://www.irs.gov/credits-deductions/ ... it-amounts

<<Investment Income Limit
Investment income must be $3,400 or less for the year.>>

https://www.irs.gov/credits-deductions/ ... -next-year

There could be additional saver's credit too.

https://www.bogleheads.org/wiki/Saver%27s_credit

Do you file your own tax? Do you use a tax software?

Is $1,000 to $2,000 more per year by moving your investment around worthwhile to you?

KlangFool

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

Post by triceratop » Tue Oct 10, 2017 10:45 am

It is possible my statement was too strong, but I think there's a bit more that you're not considering. I would say that for most people it's impossible to know whether or not the dividend strategy will affect them. There is precisely one case in which the decision to use high yield funds in a taxable account is a tax-efficient decision; note that it requires knowledge about the future:

If you (1) pay no federal tax on qualified dividends (2) The dividends you receive do not push you into a higher federal tax bracket[1] (3) you pay no state income tax, and will never move to a state which does (or conversely, your state will never introduce an income tax) (4) you spend all your dividends every year (5) you will always spend all your dividends every year, even as the dividend stream grows (6) Your extra dividend income does not disqualify you from any tax credits, now and forever in the future[1],

then pursuing a dividend strategy in taxable is equally tax-efficient.

[1]: justification: by selling shares of broad market index funds with a lower dividend yield part of the funds you receive are return of capital and are not taxed, reducing your needed additional income for tax purposes relative to dividends.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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

Post by PhysicianOnFIRE » Tue Oct 10, 2017 2:44 pm

naha66 wrote:
Mon Oct 09, 2017 11:01 pm
I love dividends!

Well, not exactly, but I do tilt toward dividend paying stocks in my portfolio. I simply do so in my Roth IRA. Value stocks tend to be more likely to pay a dividend as compared to growth stocks, and I own Vanguard’s small cap and mid cap indexes in my Roth IRA. I also own the REIT index fund in Roth, which pays a higher dividend (trailing twelve month yield of 3.76%) than many dividend focused ETFs and mutual funds.


Nevertheless, I want to help you get the most bang for your invested buck. For the high income professional, understand that a high dividend strategy can work against you.


The above is from the beginning and the end of article. Why all the negatively about dividends, is it because Larry showed so much disdain for them, I read some of his rants on seeking alpha. He was down right mean to some posters.

The above explains it all Most people are not high income professionals. My mid 6 figure portfolio( split @ 50/50 between taxable and deferred),SS and a small pension will most likely never have a problem with dividends. Yes i'm already retired. Too many people assume what's right for them is right for everybody, ever hear of lemmings.
Also from the article:

"*Of course, it is possible to keep income low enough to avoid taxes on dividends and long-term capital gains. Live in a state with no income tax and you may avoid taxes on dividends entirely.

But numerous income streams can foil those plans, sending your taxable income north of the magic number of about $75,000 for couples (half that for singles) including Social Security Income, withdrawals from tax deferred accounts, unanticipated blog income, and yes, dividends themselves. The tax code could also change, and the tax-free dividends in the 10% and 15% federal income tax brackets could disappear."


I have heard of lemmings! They're adorable.

I try to consider all angles, including the low-income retiree who won't have an issue as stated above. I expect to be one of them someday.

I'm not assuming I know what's best for everyone, but I do like to explain how I invest, including the math and rationale behind it. Of course, not everyone is a high income professional, but most of my readers are, and I have them in mind when I write. I think they would be wise to consider the impact of dividends in a taxable account, particularly during the accumulation phase. It's not hatred of dividends; it's math.

:beer
-PoF

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

Post by Artsdoctor » Wed Oct 11, 2017 12:00 pm

There is a thread elsewhere that has just begun. The OP offers a good, simple, well done overview by Allan Roth.

viewtopic.php?p=3568320#p3568320

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Phineas J. Whoopee
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Re: Dividends vs. Capital Gains for Spending Needs?

Post by Phineas J. Whoopee » Wed Oct 11, 2017 5:43 pm

naha66 wrote:
Mon Oct 09, 2017 11:01 pm
...
The above is from the beginning and the end of article. Why all the negatively about dividends, is it because Larry showed so much disdain for them, I read some of his rants on seeking alpha. He was down right mean to some posters.
...
We are not against dividends. We are against misunderstandings about dividends. Dividends are a very important part of total return, but in and of themselves they do not increase an investor's wealth. They are not like interest, which does increase wealth. That's the misunderstanding we are against.

There is no negativity, except in response to posters who claim dividends are a superior source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior source.

There will be discussions of the advantages and disadvantages of placing dividend-producing stocks in taxable vs. tax-advantaged accounts, and about the risks of concentrating one's portfolio into certain types of stocks, dividend-paying or otherwise.

We are not against dividends.

PJW

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by snarlyjack » Fri Oct 13, 2017 6:31 am

1st of all I want to thank everyone for all your help.

After sleeping on this for a few days & thinking to myself
what can I do to maximize the portfolio. In my mind were building a rocket ship.
A super efficient, streamlined, shoot to the moon rocket ship.
Were building a 2 stage or 3 stage rocket ship. Each stage
represents a different stage of life. Each stage will be a
different fund for different purposes. In my case:

1). The HDY fund is the base. The thruster, (somewhat tax advantaged, index fund).
2). The TSM fund is the afterburner, (tax advantaged, medium/long term, index fund).
3). The Roth 401K is tax advantaged, super long term (managed fund with low ER).

With the rocket in mind I' am going to tweak my portfolio.
I' am going to change my portfolio to 2 funds. HDY with a limited
amount of money in it. The majority of my money will be in the TSM fund.

This will accomplish a couple of things. The tax situation of switching funds
will be very limited. The majority of my money will be in the tax efficient
TMS fund. The company Roth 401K will stay the same. 3 funds, low ER,
very efficient & very fast.

I want to thank everyone for helping me get a super efficient plan, that
meets my needs. Both psychological & financial needs going into the future.
This plan has been a work in progress for a long time but I feel good
about it. The Bogleheads can teach people to maximize their portfolios.
Good job Bogleheads!!!

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Re: Dividends vs. Capital Gains for Spending Needs?

Post by mnnice » Fri Oct 13, 2017 8:41 am

I am solidly in the capital gains camp (at least for taxable funds). Better control of income. The current tax code has so many cliffs built in and we overshot one this year due to a “special” dividend :oops:. It will end up being $6,000 difference.My state taxes both capital gains and dividends the same as earned income so not a real difference there :|

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