Author Topic: No dividends: good, bad or neutral?  (Read 5109 times)

Burgis81

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No dividends: good, bad or neutral?
« on: May 25, 2014, 03:12:01 AM »
Hi there!

I have a newbie question :)

One of my monthly savings for a stache is an index fund that does not pay dividends. I have had it for quite some time and therefore I didn't think it would be important with dividends. Instead the gains are re-invested in the fund. Now I wonder how important it is to have quartely (or any other timing for payment) dividends? I mean isn't that the whole point, to have a cashflow generating asset to have the cash (in this case dividends) pay for the monthly living expenses? How does it work if there are no dividends? If I would sell the equivalent (4% withdrawl rate) of value/gain of the index fund (on e.g. a quarterly basis), doesn't that remove the cash generating power so to say? Like selling the chicken instead of the eggs?

Many thans for your thoughts on this, I'm confused :)


Emg03063

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Re: No dividends: good, bad or neutral?
« Reply #1 on: May 25, 2014, 03:24:18 AM »
It's fine to have dividends reinvested instead of paid out to you while you're 'staching.  When it's time to live off the money, then you may want to change that, which you can do either by moving money into an income generating fund that pays out dividends, or by selling shares periodically (a strategy sometimes referred to as 'homemade dividend').  As long as your withdrawal rate is below SWR, it's not killing the golden goose, just bleeding it a little, so to speak.

marty998

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Re: No dividends: good, bad or neutral?
« Reply #2 on: May 25, 2014, 05:20:32 AM »
It's better to have them reinvested. That's the whole point of compounding.

shadowmoss

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Re: No dividends: good, bad or neutral?
« Reply #3 on: May 25, 2014, 05:24:19 AM »
My basic understanding is that growth combined with income (dividends) is best.  So, and index fund combined with one or more that pay dividends that are reinvested is the best combo.  This is played out in an old, small 401(k) that I've had for 15 or so years.  It was my first one, and I only put in about $2K, evenly divided between a growth-only fund and a growth+dividend fund.  The growth+dividend is about 2x the amount of the growth-only.

This is only one instance, and could be accounted for by other factors as well.  However, for me I'll go for a balance of both.

Wesmon

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Re: No dividends: good, bad or neutral?
« Reply #4 on: May 25, 2014, 07:02:02 AM »
From an investment value standpoint it doesn't matter whether a company uses cash to pay out a dividend or keep it on its balance sheet - both situations get priced into to market value.

Where it does matter is your taxed. Dividends get taxed as income and capital gains get taxed at a flat rate.

TomTX

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Re: No dividends: good, bad or neutral?
« Reply #5 on: May 25, 2014, 12:14:38 PM »
One possible benefit of dividends is that the company is paying money to YOU instead of buying "stuff" which may or may not pay out more in the future (For example I have a hard time seeing Apple making back billions of dollars anytime soon from buying Beats)

ambimammular

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Re: No dividends: good, bad or neutral?
« Reply #6 on: May 27, 2014, 09:39:06 PM »
From an investment value standpoint it doesn't matter whether a company uses cash to pay out a dividend or keep it on its balance sheet - both situations get priced into to market value.

Where it does matter is your taxed. Dividends get taxed as income and capital gains get taxed at a flat rate.

So, would having the investment in a Roth make any difference?  Would it be beneficial to keep dividends in non-retirement accounts?


Emg03063

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Re: No dividends: good, bad or neutral?
« Reply #7 on: May 28, 2014, 04:44:07 AM »
The best strategy is to keep your income producing funds (bonds & dividend stocks) in your retirement accounts, and your non-income producing funds in your non-retirement accounts, to the extent that it makes sense with respect to your available assets & investment vehicles.

Wesmon

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Re: No dividends: good, bad or neutral?
« Reply #8 on: May 28, 2014, 04:55:24 AM »
Exactly what EMG said....

nereo

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Re: No dividends: good, bad or neutral?
« Reply #9 on: May 28, 2014, 05:59:46 AM »
So, would having the investment in a Roth make any difference?  Would it be beneficial to keep dividends in non-retirement accounts?
the opposite.  Roth accounts are never taxed, so you won't pay taxes on capitol gains or on dividends.  That's why they are such an important asset in a portfolio.

Wesmon

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Re: No dividends: good, bad or neutral?
« Reply #10 on: May 28, 2014, 06:56:27 AM »
So, would having the investment in a Roth make any difference?  Would it be beneficial to keep dividends in non-retirement accounts?
the opposite.  Roth accounts are never taxed, so you won't pay taxes on capitol gains or on dividends.  That's why they are such an important asset in a portfolio.

Well......it comes down to paying the taxes now or later, you have to evaluate your particular situation and consider your tax rate horizon.

If you have a low marginal tax rate now and expect it to be higher later, ROTH to the max, now.
If you have a high marginal tax rate now and expect it to be lower later, traditional IRA/401k to the max, now, maybe even convert to ROTH later when your marginal rate gets lower.

No matter what you do, just spend less and enjoy life.


nereo

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Re: No dividends: good, bad or neutral?
« Reply #11 on: May 28, 2014, 07:06:03 AM »
So, would having the investment in a Roth make any difference?  Would it be beneficial to keep dividends in non-retirement accounts?
the opposite.  Roth accounts are never taxed, so you won't pay taxes on capitol gains or on dividends.  That's why they are such an important asset in a portfolio.

Well......it comes down to paying the taxes now or later, you have to evaluate your particular situation and consider your tax rate horizon.

If you have a low marginal tax rate now and expect it to be higher later, ROTH to the max, now.
If you have a high marginal tax rate now and expect it to be lower later, traditional IRA/401k to the max, now, maybe even convert to ROTH later when your marginal rate gets lower.

No matter what you do, just spend less and enjoy life.
I read the question differently.  The OP asked whether he/she should keep dividends in non-retirement accounts.

I agree about your assessment for choosing between ROTH and t-IRA accounts.

ambimammular

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Re: No dividends: good, bad or neutral?
« Reply #12 on: May 28, 2014, 12:47:48 PM »
So, would having the investment in a Roth make any difference?  Would it be beneficial to keep dividends in non-retirement accounts?
the opposite.  Roth accounts are never taxed, so you won't pay taxes on capitol gains or on dividends.  That's why they are such an important asset in a portfolio.

Well......it comes down to paying the taxes now or later, you have to evaluate your particular situation and consider your tax rate horizon.

If you have a low marginal tax rate now and expect it to be higher later, ROTH to the max, now.
If you have a high marginal tax rate now and expect it to be lower later, traditional IRA/401k to the max, now, maybe even convert to ROTH later when your marginal rate gets lower.

No matter what you do, just spend less and enjoy life.

Yeah, I am all about the Roth.  And MMM loves him some dividends.  I guess where I've been getting hung up (regarding dividends and Roths) is that interim between ER and and penalty free withdrawing.  I know my contributions are tax free at anytime, but can I be paid out dividends before age 65 without incurring penalties?


Christof

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Re: No dividends: good, bad or neutral?
« Reply #13 on: May 28, 2014, 01:59:28 PM »
The tax advice in this thread really depends on where you are located and what kind of assets the fund owns.

Do you have snow where you live? Living off non-dividend assets is like having snow. You shovel  snow away in the morning (ie sell assets), but over the course of the day new snow keeps falling (ie shares keep rising). The next morning you have the same amount of snow and have to shovel again.

ambimammular

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Re: No dividends: good, bad or neutral?
« Reply #14 on: May 28, 2014, 02:47:57 PM »

Do you have snow where you live? Living off non-dividend assets is like having snow. You shovel  snow away in the morning (ie sell assets), but over the course of the day new snow keeps falling (ie shares keep rising). The next morning you have the same amount of snow and have to shovel again.

Lovely metaphor!  The hands on hips, faux frustration at money piling up is such a great visual.

Wesmon

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Re: No dividends: good, bad or neutral?
« Reply #15 on: May 28, 2014, 09:03:05 PM »
The tax advice in this thread really depends on where you are located and what kind of assets the fund owns.

Do you have snow where you live? Living off non-dividend assets is like having snow. You shovel  snow away in the morning (ie sell assets), but over the course of the day new snow keeps falling (ie shares keep rising). The next morning you have the same amount of snow and have to shovel again.

You can't just leave us with half of a metaphor! What's it like living off of dividend assets? Having a neighborhood kid shovel for you before you wake up?


Mr Mark

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Re: No dividends: good, bad or neutral?
« Reply #16 on: May 29, 2014, 09:31:51 AM »
From an investment value standpoint it doesn't matter whether a company uses cash to pay out a dividend or keep it on its balance sheet - both situations get priced into to market value.

Where it does matter is your taxed. Dividends get taxed as income and capital gains get taxed at a flat rate.

it could be argued earnings per share is a better measure for this reason - some companies return earnings via dividend,  others retain earnings and grow (like Berkshire Hathaway). Most a mix.

But it is known some companies get valued based on expected future earnings (think Amazon or facebook). The market can be wildly wrong about these companies, because of feedback loops, 'this time it's different' effect, every company gets valued as the one success in a 100, ... etc . These are companies a pure value investor would avoid like the plague as there is no underlying real earnings cashflow. It's not that the company isn't paying a dividend - it's business model is so cashflow negative it can't pay a dividend. 

one argument against index investing is that it is forced to put too much weight on a handful of hypervalued companies (think Apple) whose forward growth is bound to be lower than the broader market of smaller companies.