no dividends in index funds!

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Big Dog
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Re: no dividends in index funds!

Post by Big Dog » Sat Nov 03, 2018 12:00 am

If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.

ladycat
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Re: no dividends in index funds!

Post by ladycat » Sat Nov 03, 2018 12:09 am

I have a question about dividends. I have Intel stock (INTC) that pays dividends. My Fidelity statement says they're "qualified dividends". Doesn't that mean they're taxed at the capital gains rate (15%), and not my marginal tax rate (22% fed).
I inherited the stock several years ago and kept it because it seemed like a good stock (I've never bought stocks, only mutual funds).

marcopolo
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Re: no dividends in index funds!

Post by marcopolo » Sat Nov 03, 2018 12:10 am

Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
But, in this scenario, the dividend is already being paid (and taxes owed) regardless of whether it is spent or re-invested.
Might as well spend it, other wise you have to withdraw money for your expenses from elsewhere, possibly incurring additional taxes due.
Once in a while you get shown the light, in the strangest of places if you look at it right.

jalbert
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Re: no dividends in index funds!

Post by jalbert » Sat Nov 03, 2018 12:19 am

riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
You can take withdrawals from the fund and get the equivalent total withdrawal in a more tax efficient manner because some of it will be return of capital.
Risk is not a guarantor of return.

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nedsaid
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Re: no dividends in index funds!

Post by nedsaid » Sat Nov 03, 2018 12:32 am

riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
Index funds do pay dividends but maybe not as much as you would like. I think what you have is good, you are still in the accumulation phase, wouldn't worry so much about dividends now.

I have owned 15-18 stocks in my Brokerage IRA and I have about matched the indexes over 15 year periods. They are mostly large, established companies and all but one pay dividends. GE recently cut its dividend to 1 cent a share, and I own that too. It shows the risks that you take with individual stocks. It just seems that all the effort I spent maintaining a stock portfolio wasn't worth the effort. Not only that but the back strain from hauling those annual reports to the recycle bin.

You might investigate the Low Volatility funds or something like Vanguard High Dividend Index. Vanguard Dividend Growth doesn't yield much more than the broad index funds. But while the valuations are getting better, this still isn't a big opportunity for a dividend strategy. I have posted about this many times. Want to see interest rates go up somewhat more and for Low Volatility to move back into the Large Value sector of the Morningstar Stylebox. For now, stick with what you have. It sounds like you are getting bored, and making investment decisions to create a little excitement is rarely a good idea.
A fool and his money are good for business.

Random Walker
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Re: no dividends in index funds!

Post by Random Walker » Sat Nov 03, 2018 1:44 am

marcopolo wrote:
Fri Nov 02, 2018 11:51 pm
Random Walker wrote:
Fri Nov 02, 2018 11:35 pm
naha66 wrote:
Fri Nov 02, 2018 10:47 pm
Random Walker wrote:
Fri Nov 02, 2018 9:25 am
Dividend policy is irrelevant to a stock’s total return I believe. Think there was a Nobel prize involved in that work. Dividends tend to be a not so great proxy for value stocks. The nice thing, I would think, about avoiding dividend stocks, is that one can decide when to sell and experience the capital gains tax rather than have to take dividend at defined times. And dividends taxed at ordinary income tax rate rather than capital gains rate I believe too.

Dave
Really Dave?
I’m guessing I was wrong? :-)

Dave
Dave,
Please tell me this was just a momentary brain lapse!
For someone who spends so much time thinking about constructing an efficient portfolio, and pays high fees to have tax-inefficient ALTs in their portfolio towards that end, it would be rather shocking to me if you did not fully understand every nuance of how dividends (qual and non-qual), cap gains, interest, etc. are taxed.
Hi Marcopolo,
I’ll call it semi momentary brain lapse. But I must confess, I don’t know a lot about taxes. I do appreciate that taxes are frequently the biggest portfolio expense, but I have loosened up on the tax efficiency mantra some in favor of not letting the tax tail wag the investing dog. As you know, the only thing worse than paying a tax is not having to pay one. Where possible, most of my equities are in tax managed funds, I have all my bonds as municipals in taxable account, and as much as possible the alts are in tax advantaged space. There is spillover of the alts into my taxable account. That is why I now use QRPRX instead of QSPRX and QMHRX. My decision on the alts was broadly based on pre tax equity like expected returns, after tax expected returns greater than my muni bonds but less than equities, big diversification benefit. Those tax inefficient decisions were basically made with the assumption that the alt gains would be taxed at my ordinary income tax rate. If they are taxed at a lower rate, that’s a bit of a bonus compared to my assumptions.
Now I’ve got a bit of homework for the weekend :-) I’ll read up a bit on the types of taxes and tax rates.

Dave

JustinR
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Re: no dividends in index funds!

Post by JustinR » Sat Nov 03, 2018 3:22 am

Petition to have dividends officially reframed as:

An annoying guy randomly sells off portions of your investments a few times a year, giving you extra taxes and lowering your return.

WanderingDoc
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Re: no dividends in index funds!

Post by WanderingDoc » Sat Nov 03, 2018 3:34 am

riptide wrote:
Fri Nov 02, 2018 10:02 am
I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....
As it happens, $800.00 is about the amount in cash flow that I receive quarterly from every $25K invested in a real estate private placement (usually 300+ unit apartment or self storage deal). When you have 8-10 of these going, looking at your bank account the first week of every quarter is a nice psychological boost :D
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

minimalistmarc
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Re: no dividends in index funds!

Post by minimalistmarc » Sat Nov 03, 2018 3:36 am

JustinR wrote:
Sat Nov 03, 2018 3:22 am
Petition to have dividends officially reframed as:

An annoying guy randomly sells off portions of your investments a few times a year, giving you extra taxes and lowering your return.
And even though you hate this annoying guy, everybody else around you seems to love him even though it is obvious that he is annoying when you look at the evidence. In fact, some people think it is smart to like him, and manage to convince others it is smart.

r

minimalistmarc
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Re: no dividends in index funds!

Post by minimalistmarc » Sat Nov 03, 2018 3:39 am

WanderingDoc wrote:
Sat Nov 03, 2018 3:34 am
riptide wrote:
Fri Nov 02, 2018 10:02 am
I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....
As it happens, $800.00 is about the amount in cash flow that I receive quarterly from every $25K invested in a real estate private placement (usually 300+ unit apartment or self storage deal). When you have 8-10 of these going, looking at your bank account the first week of every quarter is a nice psychological boost :D

That is income rather than a dividend

Grt2bOutdoors
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Re: no dividends in index funds!

Post by Grt2bOutdoors » Sat Nov 03, 2018 3:45 am

riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
Yeah, AT&T is a powerhouse alright - pays a $2.00 divy, do you miss the 10%+ decline in the stock price too? $2.00 received, $4 capital loss.

How about D, think the stock is down as well.

Want a dividend? Sell a couple of shares, homemade dividends on your terms.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

gd
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Re: no dividends in index funds!

Post by gd » Sat Nov 03, 2018 5:26 am

Well, I know someone with a strong desire to not sell principal eyeing preferred stock funds, specifically PFF. Good luck in a rising interest rate environment. Suggest you not bother asking for opinions about it here.

Stormbringer
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Re: no dividends in index funds!

Post by Stormbringer » Sat Nov 03, 2018 7:12 am

Warren Buffett wrote:A number of Berkshire shareholders – including some of my good friends – would like Berkshire to pay a
cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns,
but pay out nothing ourselves. So let’s examine when dividends do and don’t make sense for shareholders.
2012 Letter to Shareholders (see pages 19-21)
"Compound interest is the most powerful force in the universe." - Albert Einstein

retiredjg
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Re: no dividends in index funds!

Post by retiredjg » Sat Nov 03, 2018 7:32 am

Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
You are correct about the taxes, but you are going to pay the tax on the dividends anyway - whether you spend the dividends or not. There would be no point in not spending them.

Total return spending means that income comes from all the sources - dividends, capital gains, and return of principal.

MNS CA
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Re: no dividends in index funds!

Post by MNS CA » Sat Nov 03, 2018 7:33 am

barnaclebob wrote:
Fri Nov 02, 2018 9:04 am
Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.
Actually, dividends are worse than selling shares because you end up paying more in taxes. No recovery of basis with dividends. Plus you can't control the timing of taxes the way you can when you sell.

I'd like to find an index fund that pays no dividends to hold in a taxable account. Any suggestions?

Bronco Billy
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Re: no dividends in index funds!

Post by Bronco Billy » Sat Nov 03, 2018 7:48 am

Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
Please help me learn. I will retirement next year. My wife will still be working and we will still be in 20-25% tax bracket. My thinking was dividends and the LT tax of 15% would be best for me. Is that not CORRECT?

WanderingDoc
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Re: no dividends in index funds!

Post by WanderingDoc » Sat Nov 03, 2018 8:01 am

minimalistmarc wrote:
Sat Nov 03, 2018 3:39 am
WanderingDoc wrote:
Sat Nov 03, 2018 3:34 am
riptide wrote:
Fri Nov 02, 2018 10:02 am
I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....
As it happens, $800.00 is about the amount in cash flow that I receive quarterly from every $25K invested in a real estate private placement (usually 300+ unit apartment or self storage deal). When you have 8-10 of these going, looking at your bank account the first week of every quarter is a nice psychological boost :D

That is income rather than a dividend
Isn't it effectively the same? If you own an orange juice stand and have investors, you choose to distribute a dividend to share-holders, vs. giving each investor his percentage of income based on his or her interest in the company. Say you rent out orange stands and you earn income in the form of rent.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

afan
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Re: no dividends in index funds!

Post by afan » Sat Nov 03, 2018 8:11 am

Random Walker wrote:
Sat Nov 03, 2018 1:44 am


Hi Marcopolo,
I’ll call it semi momentary brain lapse. But I must confess, I don’t know a lot about taxes. I do appreciate that taxes are frequently the biggest portfolio expense, but I have loosened up on the tax efficiency mantra some in favor of not letting the tax tail wag the investing dog. As you know, the only thing worse than paying a tax is not having to pay one. Where possible, most of my equities are in tax managed funds, I have all my bonds as municipals in taxable account, and as much as possible the alts are in tax advantaged space. There is spillover of the alts into my taxable account. That is why I now use QRPRX instead of QSPRX and QMHRX. My decision on the alts was broadly based on pre tax equity like expected returns, after tax expected returns greater than my muni bonds but less than equities, big diversification benefit. Those tax inefficient decisions were basically made with the assumption that the alt gains would be taxed at my ordinary income tax rate. If they are taxed at a lower rate, that’s a bit of a bonus compared to my assumptions.
Now I’ve got a bit of homework for the weekend :-) I’ll read up a bit on the types of taxes and tax rates.

Dave

Great example. QRPRX. Wonderful pick. Hits all the requirements for choosing an investment:

1. No track record? Check
2. Astronomical fees? Check
3. Astronomical turnover? Check
4. Terrible performance over its short life? Check
5. Actively managed? Check

Most of us should put all our assets in this fund.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

dziuniek
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Re: no dividends in index funds!

Post by dziuniek » Sat Nov 03, 2018 8:15 am

In the end, you're switching from broader diversification and passive investing into a higher cost, actively managed fund.

Everything else is mental accounting.

Not that it's a bad way to go, but it certainly isn't the most optimal way to go.

I've read in the past that dividends accounted for 40 to 50 % of the stock market growth historically. (sorry, can't remember where)

If that's the case, then taking out dividends versus selling shares makes no difference as far as cashing out.

The difference is that with higher dividends you get the pleasure of paying more taxes, yay...

GrowthSeeker
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Re: no dividends in index funds!

Post by GrowthSeeker » Sat Nov 03, 2018 8:15 am

riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
There are ETFs that track an index, but by means of writing covered calls or other options strategies, they seek a stable price plus dividends attempting the same total return as the index.
For example, BXMX follows the S&P 500, dividend over 7%.
The catches:
1. higher ER, eg 0.90%
2. Plus would need to check what percent of the dividends are qualified.
3. How close does it come to the same total return?
Just because you're paranoid doesn't mean they're NOT out to get you.

rkhusky
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Re: no dividends in index funds!

Post by rkhusky » Sat Nov 03, 2018 8:25 am

FoolMeOnce wrote:
Fri Nov 02, 2018 10:34 pm
rkhusky wrote:
Fri Nov 02, 2018 5:13 pm
Who would invest in the stock market if there were no dividends and the only way to get your money back was to find someone else to buy your stock shares or have the companies go out of business and liquidate their equipment and real estate?
I would guess a good 90% of the thousands of members of this board, who seem to know a thing or two.
There probably wouldn't be a stock market because, if they were not going to get a cut of the profits, the first investors, way back when, would not have made the first investments. Who would invest in an endeavor if all they were going to get out of it was a piece of parchment that said that they owned x% of Company A?

And would you value a company based on future profits, if you weren't going to get any of the future profits? Is the value of Amazon or Google based solely on the amount of computers and real estate they own?

PFInterest
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Re: no dividends in index funds!

Post by PFInterest » Sat Nov 03, 2018 8:50 am

ladycat wrote:
Sat Nov 03, 2018 12:09 am
I have a question about dividends. I have Intel stock (INTC) that pays dividends. My Fidelity statement says they're "qualified dividends". Doesn't that mean they're taxed at the capital gains rate (15%), and not my marginal tax rate (22% fed).
I inherited the stock several years ago and kept it because it seemed like a good stock (I've never bought stocks, only mutual funds).
yes. qualified dividends are taxed as LTCG.

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JoMoney
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Re: no dividends in index funds!

Post by JoMoney » Sat Nov 03, 2018 8:57 am

rkhusky wrote:
Sat Nov 03, 2018 8:25 am
FoolMeOnce wrote:
Fri Nov 02, 2018 10:34 pm
rkhusky wrote:
Fri Nov 02, 2018 5:13 pm
Who would invest in the stock market if there were no dividends and the only way to get your money back was to find someone else to buy your stock shares or have the companies go out of business and liquidate their equipment and real estate?
I would guess a good 90% of the thousands of members of this board, who seem to know a thing or two.
There probably wouldn't be a stock market because, if they were not going to get a cut of the profits, the first investors, way back when, would not have made the first investments. Who would invest in an endeavor if all they were going to get out of it was a piece of parchment that said that they owned x% of Company A?

And would you value a company based on future profits, if you weren't going to get any of the future profits? Is the value of Amazon or Google based solely on the amount of computers and real estate they own?
Even if the company didn't/doesn't pay regular dividends, I would expect one would eventually be paid or the company might be bought out completely or in part (private buyout, merger, etc..). As long as the assets of the company continue to grow (and the accounting is reliable) that's what I would be looking at. If the company I own has cash coming in, and they keep it in the company bank account rather than transferring it to my personal bank account, it shouldn't make a big difference to me unless I really needed the money now - and in that case, it's good to have a highly liquid reasonably 'efficient' market to sell shares to.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

jj
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Location: Texas

Re: no dividends in index funds!

Post by jj » Sat Nov 03, 2018 9:10 am

Stormbringer wrote:
Sat Nov 03, 2018 7:12 am
Warren Buffett wrote:A number of Berkshire shareholders – including some of my good friends – would like Berkshire to pay a
cash dividend. It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns,
but pay out nothing ourselves. So let’s examine when dividends do and don’t make sense for shareholders.
2012 Letter to Shareholders (see pages 19-21)
Yes, YES!

As usual Warren Buffett can put this into words beautifully. Thanks for posting this Stormbringer.
...it is madness to risk losing what you need in pursuing what you simply desire. Warren E. Buffett

JackoC
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Re: no dividends in index funds!

Post by JackoC » Sat Nov 03, 2018 9:55 am

marcopolo wrote:
Sat Nov 03, 2018 12:10 am
Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
But, in this scenario, the dividend is already being paid (and taxes owed) regardless of whether it is spent or re-invested.
Might as well spend it, other wise you have to withdraw money for your expenses from elsewhere, possibly incurring additional taxes due.
I agree and this points to an underlying dichotomy I think, you v the whole market.

In a perfect world of not only rationality but total transparency and 'frictionlessness', dividends or not wouldn't matter. But in the real world that's not actually true *of the market*. There are various rational real world reasons for dividends. For example in the real world some companies have a profitable business in which their management is skillful, but it still has limited potential for expansion. That management *should* pay a dividend*, not try to reinvest that money at all costs even below the cost of capital. And the fact that *that* company doesn't have enough new projects to reinvest all their cashflow above the cost of capital doesn't mean eg. Amazon's management could do *that* company's business better. No dividend or high dividend is not an easy measure of good stock v bad stock for companies under real world constraints priced in a relatively efficient market. Careful study of statistics might indicate a correlation (confession of statistics under torture?) between dividend policy and stock return, but it's not valid to suppose zero dividend is the best policy for every company just because it's more tax efficient at the individual investor end for some* investors. One must be careful drawing inferences what to invest in based on dividend payout, either way.

OTOH, taking the market as you find it, on an individual basis it's like you say. Someone living off investments should consume the dividends first, since they pay tax on them in the year they are distributed by the fund whether reinvesting or not. It makes no sense to realize capital gains to meet spending needs but reinvest dividends. And getting higher dividends in that case isn't a problem except to the extent they are 'non qualified' or they actually exceed your spending needs. But getting higher dividends isn't particularly a benefit for anybody either (again at the individual investor end of things, assuming the whole market sorts itself out reasonably efficiently). And for someone accumulating a taxable portfolio dividend payouts are just a drag. However again, whether to steer money strictly to low dividend investments is a more complicated question. You have to carefully consider that in view of diversification.

*the objection could be raised, 'how about a stock buyback' but that gets back to real world limitations. Anyway the basic point is that reinvesting all profits isn't necessarily in investors' best interest.
**mainly, investors accumulating a portfolio in taxable accounts. Tax treatment of dividends v cg's doesn't matter for a lot of institutional (pension fund, etc) money or for individual tax deferred accounts, which together comprise a lot of the money in the market. And it only matters at the margin (qualified v non-qualified divs) for investors gradually consuming taxable portfolio's.

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arcticpineapplecorp.
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Re: no dividends in index funds!

Post by arcticpineapplecorp. » Sat Nov 03, 2018 10:16 am

ladycat wrote:
Sat Nov 03, 2018 12:09 am
I have a question about dividends. I have Intel stock (INTC) that pays dividends. My Fidelity statement says they're "qualified dividends". Doesn't that mean they're taxed at the capital gains rate (15%), and not my marginal tax rate (22% fed).
I inherited the stock several years ago and kept it because it seemed like a good stock (I've never bought stocks, only mutual funds).
What made it "seem like a good stock"? That it's done better than the broad market in the past? That doesn't tell you anything about future returns.

I'm not sure when you inherited it but over the past 10 years it's only done slightly better than the total stock market index fund, yet is more concentrated than owning 3000 some stocks (including intel) which you could have done with the total stock market index fund. So you took greater risk (by standard deviation 24.22% vs 15.38% for the total market) but weren't compensated enough (through CAGR) for the additional risk you took. While Intel had higher CAGR than the market, it also had higher standard deviation and worse drawdown. And most importantly it had a lower sharpe ratio than the total stock market over the past 10 years (.45 vs .57 for the total market) (see here):

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Image

Image

source:
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D
Last edited by arcticpineapplecorp. on Sat Nov 03, 2018 3:50 pm, edited 1 time in total.
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Random Walker
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Joined: Fri Feb 23, 2007 8:21 pm

Re: no dividends in index funds!

Post by Random Walker » Sat Nov 03, 2018 11:51 am

afan wrote:
Sat Nov 03, 2018 8:11 am
Random Walker wrote:
Sat Nov 03, 2018 1:44 am


Hi Marcopolo,
I’ll call it semi momentary brain lapse. But I must confess, I don’t know a lot about taxes. I do appreciate that taxes are frequently the biggest portfolio expense, but I have loosened up on the tax efficiency mantra some in favor of not letting the tax tail wag the investing dog. As you know, the only thing worse than paying a tax is not having to pay one. Where possible, most of my equities are in tax managed funds, I have all my bonds as municipals in taxable account, and as much as possible the alts are in tax advantaged space. There is spillover of the alts into my taxable account. That is why I now use QRPRX instead of QSPRX and QMHRX. My decision on the alts was broadly based on pre tax equity like expected returns, after tax expected returns greater than my muni bonds but less than equities, big diversification benefit. Those tax inefficient decisions were basically made with the assumption that the alt gains would be taxed at my ordinary income tax rate. If they are taxed at a lower rate, that’s a bit of a bonus compared to my assumptions.
Now I’ve got a bit of homework for the weekend :-) I’ll read up a bit on the types of taxes and tax rates.

Dave

Great example. QRPRX. Wonderful pick. Hits all the requirements for choosing an investment:

1. No track record? Check
2. Astronomical fees? Check
3. Astronomical turnover? Check
4. Terrible performance over its short life? Check
5. Actively managed? Check

Most of us should put all our assets in this fund.
Great points. There must be no rational reason to allocate a portion of the portfolio to this fund. Can’t imagine what I was thinking about.

Dave

delamer
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Re: no dividends in index funds!

Post by delamer » Sat Nov 03, 2018 3:39 pm

Bronco Billy wrote:
Sat Nov 03, 2018 7:48 am
Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
Please help me learn. I will retirement next year. My wife will still be working and we will still be in 20-25% tax bracket. My thinking was dividends and the LT tax of 15% would be best for me. Is that not CORRECT?
What you do mean by “best for me?”

Yes, it is correct that if in a taxable account you are earning qualified dividends, then are are probably paying a 15% tax rate in them (assuming your income isn’t really high or pretty low).

Bronco Billy
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Re: no dividends in index funds!

Post by Bronco Billy » Sat Nov 03, 2018 4:37 pm

delamer wrote:
Sat Nov 03, 2018 3:39 pm
Bronco Billy wrote:
Sat Nov 03, 2018 7:48 am
Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
Please help me learn. I will retirement next year. My wife will still be working and we will still be in 20-25% tax bracket. My thinking was dividends and the LT tax of 15% would be best for me. Is that not CORRECT?
What you do mean by “best for me?”
We will be in the 20-25% tax bracket. It would be best for me to only pay 15% LTCG on income i pull out to live on.

jalbert
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Re: no dividends in index funds!

Post by jalbert » Sat Nov 03, 2018 5:41 pm

Bronco Billy wrote:
Sat Nov 03, 2018 7:48 am
Big Dog wrote:
Sat Nov 03, 2018 12:00 am
If a person is in the withdrawal stage, taking and spending the dividends is fine and can be part of spending from a total return perspective.
I disagree; taxes can be higher with dividends over LT cap gain.
Please help me learn. I will retirement next year. My wife will still be working and we will still be in 20-25% tax bracket. My thinking was dividends and the LT tax of 15% would be best for me. Is that not CORRECT?
Correct. If you realize the LTCG by withdrawing from a mutual fund or selling ETF shares, you only realize a gain for the amount of the selling price that exceeds the cost basis. The rest of the withdrawal is return of capital and is not income.
Last edited by jalbert on Thu Nov 08, 2018 10:25 pm, edited 1 time in total.
Risk is not a guarantor of return.

TropikThunder
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Re: no dividends in index funds!

Post by TropikThunder » Sat Nov 03, 2018 7:00 pm

MNS CA wrote:
Sat Nov 03, 2018 7:33 am
barnaclebob wrote:
Fri Nov 02, 2018 9:04 am
Dividends are just something that makes you feel good, its not free money. Total return is all that matters. You can get the same result from selling shares if you need the cash.
Actually, dividends are worse than selling shares because you end up paying more in taxes. No recovery of basis with dividends. Plus you can't control the timing of taxes the way you can when you sell.

I'd like to find an index fund that pays no dividends to hold in a taxable account. Any suggestions?
This point seems to be constantly missed when people argue over which tax rate applies to dividends (regular income vs LTCG, qualified vs non-qualified, etc). The fact the entire dividend is taxed as opposed to just the gain on a sale (proceeds minus basis) makes a big difference on tax liability, regardless of the rates.

blevine
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Re: no dividends in index funds!

Post by blevine » Sat Nov 03, 2018 8:00 pm

White Coat Investor wrote:
Fri Nov 02, 2018 11:48 pm
riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
Just get GE and Sears.
And Kodak, Polaroid.... even cheaper.

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riptide
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Re: no dividends in index funds!

Post by riptide » Mon Nov 05, 2018 10:01 am

nedsaid wrote:
Sat Nov 03, 2018 12:32 am
riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
Index funds do pay dividends but maybe not as much as you would like. I think what you have is good, you are still in the accumulation phase, wouldn't worry so much about dividends now.

I have owned 15-18 stocks in my Brokerage IRA and I have about matched the indexes over 15 year periods. They are mostly large, established companies and all but one pay dividends. GE recently cut its dividend to 1 cent a share, and I own that too. It shows the risks that you take with individual stocks. It just seems that all the effort I spent maintaining a stock portfolio wasn't worth the effort. Not only that but the back strain from hauling those annual reports to the recycle bin.

You might investigate the Low Volatility funds or something like Vanguard High Dividend Index. Vanguard Dividend Growth doesn't yield much more than the broad index funds. But while the valuations are getting better, this still isn't a big opportunity for a dividend strategy. I have posted about this many times. Want to see interest rates go up somewhat more and for Low Volatility to move back into the Large Value sector of the Morningstar Stylebox. For now, stick with what you have. It sounds like you are getting bored, and making investment decisions to create a little excitement is rarely a good idea.
Thanks Ned, (Thank you Retired JG too),
Thank you for all the advice. It's all true, I'm bored with 5 passive index funds. I love excitement, so I was looking to mix things up like with Wellington, or a high dividend fund. I will take the advice and leave my boring portfolio alone, and will sell shares when I need the money. As well, I will forget about the dividend, which was a psychological boost to me, I admit it. I loved walking around with $1500.00 in cash in my pocket quarterly...
As my Dad told me, those that carry and flash large wads of cash in their pocket, really never have any money! :D
Brokerage account 70/30 | VG total Market 40% | VG total Intl 11% | VG small cap value 12% | VG Reit index 7% | VG Total Bond 30% | TSP Account 75/25 | C Fund 45%, S 15%, I 15%, G 25% | EE Bonds=Emergency Fund

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nedsaid
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Re: no dividends in index funds!

Post by nedsaid » Mon Nov 05, 2018 12:39 pm

riptide wrote:
Mon Nov 05, 2018 10:01 am
nedsaid wrote:
Sat Nov 03, 2018 12:32 am
riptide wrote:
Fri Nov 02, 2018 8:59 am
I miss the dividends I got from the blue chip powerhouses, such as AT&T , Dominion, Norfolk Southern. Now, will 5 index funds my dividends are puny. I would like to find funds (maybe Wellington) where I could get back to receiving some heavy dividends.
Index funds do pay dividends but maybe not as much as you would like. I think what you have is good, you are still in the accumulation phase, wouldn't worry so much about dividends now.

I have owned 15-18 stocks in my Brokerage IRA and I have about matched the indexes over 15 year periods. They are mostly large, established companies and all but one pay dividends. GE recently cut its dividend to 1 cent a share, and I own that too. It shows the risks that you take with individual stocks. It just seems that all the effort I spent maintaining a stock portfolio wasn't worth the effort. Not only that but the back strain from hauling those annual reports to the recycle bin.

You might investigate the Low Volatility funds or something like Vanguard High Dividend Index. Vanguard Dividend Growth doesn't yield much more than the broad index funds. But while the valuations are getting better, this still isn't a big opportunity for a dividend strategy. I have posted about this many times. Want to see interest rates go up somewhat more and for Low Volatility to move back into the Large Value sector of the Morningstar Stylebox. For now, stick with what you have. It sounds like you are getting bored, and making investment decisions to create a little excitement is rarely a good idea.
Thanks Ned, (Thank you Retired JG too),
Thank you for all the advice. It's all true, I'm bored with 5 passive index funds. I love excitement, so I was looking to mix things up like with Wellington, or a high dividend fund. I will take the advice and leave my boring portfolio alone, and will sell shares when I need the money. As well, I will forget about the dividend, which was a psychological boost to me, I admit it. I loved walking around with $1500.00 in cash in my pocket quarterly...
As my Dad told me, those that carry and flash large wads of cash in their pocket, really never have any money! :D
You have a good portfolio. Stick with what you have. Dividend strategies are not a bad idea but the timing isn't the best. Things are better for dividend strategies but we are a ways away from an opportune time to pursue such a strategy.
A fool and his money are good for business.

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Re: no dividends in index funds!

Post by Boglegrappler » Mon Nov 05, 2018 1:39 pm

Just for my own information, I looked up how many and which stocks in the S&P 500 do not currently pay a dividend.

If my counting is right, its about 75 of the companies that do not pay one.

I found the information on Barchart.com, which seems to be a relatively informative site for those interested in this sort of thing.

MathWizard
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Re: no dividends in index funds!

Post by MathWizard » Mon Nov 05, 2018 3:33 pm

I get about 2% in dividends annually from VTSAX, reinvested into the fund.
Dividends in tax advantaged funds do not cause any taxable events.

If you have filled all tax advantaged space, then you may or may not want dividends in taxable.

delamer
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Re: no dividends in index funds!

Post by delamer » Wed Nov 07, 2018 1:23 pm

There is a very good article in the November 2 WSJ about dividends.

Title is “GE Shows Dividend Investing Can Fail” and the author is James Mackintosh.

It doesn’t bash dividends, but discusses the pros and cons of a company paying dividends under different circumstances using GE’s recent decisions as background.

(I have a paper copy of that edition and cannot provide a web link.)

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linenfort
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Re: no dividends in index funds!

Post by linenfort » Wed Nov 07, 2018 3:20 pm

I’m not making the argument for dividends, but as I am in the 15% bracket, according to current U.S. tax laws, I pay zero federal tax on dividends.They are all qualified. So, not taxed as ordinary income.
Naturally, that can always change.
bogleheads, don't knock state lotteries. They helped defund the mafia.

WonderingDope
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Re: no dividends in index funds!

Post by WonderingDope » Wed Nov 07, 2018 4:19 pm

linenfort wrote:
Wed Nov 07, 2018 3:20 pm
I’m not making the argument for dividends, but as I am in the 15% bracket, according to current U.S. tax laws, I pay zero federal tax on dividends.They are all qualified. So, not taxed as ordinary income.
Naturally, that can always change.
I don't think that falling in a certain tax bracket makes a dividend qualified or not. If a dividend is not qualified, it's not qualified and will be reported on line 1a of 1099-DIV. If Qualified, it will be reported on line 1b. In other words if you receive a 1099-DIV with amounts reported on line 1a that will be taxed at your ordinary tax rate regardless of your bracket.

But yes qualified dividends are taxed at the same lower rates that long-term capital gains are taxed at, the specific rate based on your taxable income. The 15% bracket no longer exists for 2018. I think the amount of taxable income required for 0% qualified dividend/long-term capital gains rate is not tied to specific tax bracket cutoffs for 2018 but some amount of taxable income that falls between the new 12% and 22% brackets. I am not positive on that however.

Anyone feel free to correct me if I am wrong.

BogleMelon
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Re: no dividends in index funds!

Post by BogleMelon » Wed Nov 07, 2018 4:23 pm

OP
Some food for your thought:
Vanguard Debunks Dividend Myth
https://www.etf.com/sections/index-inve ... nopaging=1

Irrelevance Of Dividends
https://www.etf.com/sections/index-inve ... nopaging=1
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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linenfort
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Re: no dividends in index funds!

Post by linenfort » Wed Nov 07, 2018 6:39 pm

WonderingDope wrote:
Wed Nov 07, 2018 4:19 pm
linenfort wrote:
Wed Nov 07, 2018 3:20 pm
I’m not making the argument for dividends, but as I am in the 15% bracket, according to current U.S. tax laws, I pay zero federal tax on dividends.They are all qualified. So, not taxed as ordinary income.
Naturally, that can always change.
I don't think that falling in a certain tax bracket makes a dividend qualified or not.
...
Anyone feel free to correct me if I am wrong.
You’re not wrong, but that’s not what I was saying. :happy
However, my bracket is the reason I pay 0% on my stock dividends.
And yes, there are new rules now.
bogleheads, don't knock state lotteries. They helped defund the mafia.

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Re: no dividends in index funds!

Post by jalbert » Thu Nov 08, 2018 10:32 pm

linenfort wrote:
Wed Nov 07, 2018 3:20 pm
I’m not making the argument for dividends, but as I am in the 15% bracket, according to current U.S. tax laws, I pay zero federal tax on dividends.They are all qualified. So, not taxed as ordinary income.
Naturally, that can always change.
And when your life circumstance changes, you may have enough embedded capital gains that you cannot sell the dividend stocks. Changes might include moving to a state with a marginal state income tax rate of 9-10% at your current income level, or becoming self-employed, unemployed, or retired and getting insurance through an ACA exchange where untaxed dividends still count as income for the purpose of determining premium tax credits. Obviously being in a higher federal bracket is another case.

Getting the income as a split of return of capital and LTCG provides more control of income.
Risk is not a guarantor of return.

bradpevans
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Re: no dividends in index funds!

Post by bradpevans » Thu Nov 08, 2018 10:58 pm

BigMoneyNoWhammies wrote:
Fri Nov 02, 2018 1:45 pm
riptide wrote:
Fri Nov 02, 2018 10:02 am
I wanted the quarterly dividends like I used to get with the blue chip stocks. It would just be additional income, often just at the right times. It was great to get a quarterly $800.00 dividend check. With the Index Funds I am lucky to get $300.00 quarterly for dividends....
How is selling shares of the index funds in which you're invested any different in outcome than receiving a dividend check? If you want $800 quarterly, just sell $800 worth of the funds quarterly. The dividend thing is purely psychological. Total return is what matters. I don't care if the return is from dividends or capital appreciation; at the end of the day it's all part of the same pie.
because the former is active while the latter is passive. For some, that is a distinction without a difference. For others, that IS the difference.

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Re: no dividends in index funds!

Post by inbox788 » Fri Nov 09, 2018 12:24 am

Mountain Doc wrote:
Fri Nov 02, 2018 10:00 am
Jack FFR1846 wrote:
Fri Nov 02, 2018 9:56 am
Mountain Doc wrote:
Fri Nov 02, 2018 9:41 am
I wish my index funds paid smaller dividends.
BRK/B

:D
I gave that serious consideration for my taxable account, but decided the tax savings wasn't worth the decreased diversification. I also have little certainty that Berkshire will remain dividend-free.
I thought about it, decided against it. I never figured out what happened to the dividends they received from Apple and all those banks they own. Don't they pay taxes on it? There's also different possible double taxation issues. https://www.investopedia.com/ask/answers/03/102203.asp

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Re: no dividends in index funds!

Post by linenfort » Fri Nov 09, 2018 5:43 pm

jalbert wrote:
Thu Nov 08, 2018 10:32 pm
linenfort wrote:
Wed Nov 07, 2018 3:20 pm
I’m not making the argument for dividends, but as I am in the 15% bracket, according to current U.S. tax laws, I pay zero federal tax on dividends.They are all qualified. So, not taxed as ordinary income.
Naturally, that can always change.
And when your life circumstance changes, you may have enough embedded capital gains that you cannot sell the dividend stocks.
...
Always a possibility, yes. I hope I won't have to sell anything, but if I do, it will be shares of index funds.
bogleheads, don't knock state lotteries. They helped defund the mafia.

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CyclingDuo
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Re: no dividends in index funds!

Post by CyclingDuo » Sun Nov 11, 2018 1:07 pm

For some, based on their tax situation (AGI/MAGI), whether it is LTCG or Qualified Dividends becomes a wash since they have the potential to be taxed at 0% in taxable.

https://www.hcvt.com/insights-alerts-In ... anges.html
https://www.fool.com/investing/2018/06/ ... taxes.aspx

Excellent article on how one can potentially work with dividends and pay no taxes on them...

https://www.physicianonfire.com/paynotax/

The Top 5 Ways to Pay No Tax On Capital Gains & Dividends

1. Keep taxable income low (and be married).
(This is our strategy as we funnel money into retirement plans.)
2. Tax Loss Harvest/Tax Gain Harvest. (This is another strategy we use.)
3. Donate appreciated shares to charity.
4. Die.
(Great way for us to pass on taxable investments to our heirs with the step-up in basis they will utilize.)
5. Buy equities with low or no dividend. (We do this in taxable to have a mix of dividend paying stocks/funds/ETFs, non-dividend paying stocks such as Berkshire Hathaway, and low dividend paying/growth stocks.)

We had not originally planned on such a strategy, but a confluence of events a couple of years ago led to making the best possible lemonade out of a potential tax situation of lemons. In doing so, we were able to trim down the dividend paying stocks in qualified dividends enough in our taxable account - all due to absorbing some inheritance of dividend paying stocks on my spouse's side that involved an emotional attachment for her that I had to respect. Based on her attachment and me realizing I could only push her so far to sell some of them, we really only had one option based on our dual income to counter a higher tax situation and keep our taxable income low enough to pay 0% on the LTCG/Qualified dividends and still meet all of of our household expenses (wants/needs/variables). That option was to max out three retirement plans using the catch up contributions for being over age 50 (403b/401k and a 457b), plus her mandatory pension/DBP plan contribution.

Currently, the dividend spigot is set on reinvestment of dividends and I use some to diversify into Vanguard Index ETF's. Whether they are reinvested or taken - the taxes we are paying on them is 0% until they grow enough to have to pay 15% on some of them if we cross the taxable income $77,200 threshold. In the meantime, it has resulted in additional retirement savings going into our Vanguard Three Fund and Vanguard Core Four a la Rick Ferri tax deferred portfolios.

Anyway, it's one example of a strategy that we came up with to have dividends and not pay any taxes on them. Additional complications (lemons) occurred earlier this year due to a downsize which currently has resulted in a slight change in household income (mine lowered, spouse's raised when in combination sees us $10K lower in salary income going forward). At the time of the lay off, it resulted in me making a few tweaks on the dividend side assuming I would not be able to find work in my field and would require some replacement income to meet expenses. This had me mired in woe of thinking if I found no work, I would be forced to retire earlier than planned. The experience and my emotions at the time also led to a new title for our portfolio FIRE...D! for my play on words of exactly how I felt at the time of being laid off. :twisted:

That was before I was able to move on and fortunately secure some replacement work. So the lemonade strategy continues for the dividends and the green piece of the pie continues to grow as we funnel our retirement plan money into the index funds to max out everything we can each year for as long as we can.

Image

And, if forced to retire early - the dividend income stream spigot could be turned on as well as used in tandem with sales of shares of stocks/funds/ETFs to bridge the gap until pension/SS/RMD's occur. Gifting appreciated shares to heirs and charity is also an option when things collide down the road (RMD's/Pension/SS/Dividends/LTCG).

We are certainly studying and looking at strategies for the future as well...

https://www.physicianonfire.com/the-tax ... etirement/
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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