Author Topic: Dividends vs high interest savings  (Read 2047 times)

doneby35

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Dividends vs high interest savings
« on: August 17, 2018, 12:33:38 PM »
I'm trying to figure this out so maybe someone here can give me a quick and simple explanation to it.
Let's say I have 10,000 dollars and I have 2 choices: 1) invest in VTSAX or 2) put it in savings account with 2% interest.

Strictly from a dividend standpoint and ignoring stock returns, since owning VTSAX also means quarterly dividends, if VTSAX's dividend rate was similar to the savings account, in this case 2%, would it not always be better to buy VTSAX instead of putting money in the savings account? or am I understanding this incorrectly?

dandarc

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Re: Dividends vs high interest savings
« Reply #1 on: August 17, 2018, 12:37:08 PM »
Sure, if you ignore the downside risk. "Stock returns" can be negative, and often are in the short-term.

doneby35

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Re: Dividends vs high interest savings
« Reply #2 on: August 17, 2018, 01:06:50 PM »
Yes but ignoring stock returns and only considering dividends, wouldn't investing in VTSAX be equivalent to putting your money in a high interest savings account?

FIRE@50

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Re: Dividends vs high interest savings
« Reply #3 on: August 17, 2018, 01:10:37 PM »
I think the tax treatment would be different.

sisto

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Re: Dividends vs high interest savings
« Reply #4 on: August 17, 2018, 01:11:49 PM »
Yes but ignoring stock returns and only considering dividends, wouldn't investing in VTSAX be equivalent to putting your money in a high interest savings account?
Sure unless you need to pull the money out and the returns are negative. It depends on whether or not you will need the money short or long term. If you don't have any reason to need it then VTSAX always wins. If it's your emergency stash Savings wins.

doneby35

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Re: Dividends vs high interest savings
« Reply #5 on: August 17, 2018, 01:49:54 PM »
So do the dividends also go down when the stock market is not doing so well? are the dividends per share? in that case I would assume it stays the same no?

Proud Foot

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Re: Dividends vs high interest savings
« Reply #6 on: August 17, 2018, 02:04:53 PM »
So do the dividends also go down when the stock market is not doing so well? are the dividends per share? in that case I would assume it stays the same no?

Dividends typically go down when the stock market is not doing well. Yes, the dividends are per share but it is not like a dividend paying stock. The VTSAX dividend is based upon the dividends received during the quarter. So if there is a dividend cut with the underlying stocks or stocks paying dividends at an uneven frequency then your quarterly VTSAX dividend will not stay the same.

MustacheAnxiety

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Re: Dividends vs high interest savings
« Reply #7 on: August 17, 2018, 02:25:50 PM »
If you are looking for safe long-term income dividends are a better choice than a savings account as they should generally grow with inflation.

Dividends can be cut and generally will go down during a recession.  But they tend to be far less volatile than stock valuations.  https://www.indexologyblog.com/2016/09/12/dividend-volatility-and-correlations/ Dividends are slightly less than half as volatile as stock valuations.  The rate for a savings account or money market can also go down.  You can buy a CD to lock in an interest rate for a fixed period.

As others have pointed out, for long term investments Stocks are the better choice.  After owning a stock for a year you will also have "qualified dividends" meaning you pay taxes at the lower capital gains tax rate vs. interest which is always at the income tax rate. 

If you are looking for the most favorable tax treatment consider an ETF instead of a mutual fund for investments held outside of retirement accounts. https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency

For investments within a retirement account consider FZROX. It is total market fund from Fidelity with 0 fees.  Fidelity won the race to the bottom and is hoping you will stick around and buy funds with fees too. VTSAX and FZROX are both total market funds and as a result will pay slightly less dividends than an S&P 500 fund due to the smaller stocks in a total market mutual fund.

I tend to go with stocks for everything even the emergency fund.  While we still work almost all rare emergencies can be handled by cash flow before the credit card is due.  If we occassionally need to pull from stocks on average we will come out ahead.

The only time I would recommend cash/savings account is if you have a known near term expense. 
« Last Edit: August 17, 2018, 02:49:09 PM by MustacheAnxiety »

doneby35

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Re: Dividends vs high interest savings
« Reply #8 on: August 17, 2018, 05:29:49 PM »
Good stuff. Thanks for the explanation.