Author Topic: Include dividend income from brokerage in savings rate calculation - cheating?  (Read 2901 times)

HeadedWest2029

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I know there are lots of threads on calculating savings rate, but I've been unable to find a consensus on how people handle dividends.  It would seem if you are a dividend income investor, you would logically include this in the calculation (I'm an indexer, so dividends not my primary strategy).  I think I've landed on including dividend income from my regular brokerage account, but exclude dividend income from tax sheltered accounts, but I confess this logic may be faulty.  I also exclude any capital gains regardless of account type.

So for income, I include:

Salary (after taxes, but including 401k contributions)
Bonuses (credit card cash back, signup bonuses, etc)
Dividends (brokerage)
Consulting (side hustle)
Cash gifts received
Interest (checking & online savings)
Rent (property)
Tax refunds

Curious, are there any impassioned responses for excluding some of this income from a proper savings rate calc?  I want to make sure I'm grading myself accordingly and have a realistic timeline for FI


NoStacheOhio

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You're taxed on it, so I think it's safe to consider it income.

life is short

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The way I understand it is that dividends should not be included as income for the purposes of savings rate, since they're just another way of getting returns from your investments. The share price can increase by 7% or 7% is paid out in dividends (usually some combination) it doesn't matter. You're tricking yourself.

I haven't seen anyone include capital gains or dividends in their savings calculation during the accumulation phase. (and if you were going to include one you should include both)
« Last Edit: December 22, 2015, 01:15:24 PM by life is short »

SuperSecretName

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The way I understand it is that dividends should not be included as income for the purposes of savings rate, since they're just another way of getting returns from your investments. The share price can increase by 7% or 7% is paid out in dividends (usually some combination) it doesn't matter. You're tricking yourself.
this.  it's not saving.  If your portfolio rises 10%, you wouldn't count that 10% as savings.

Exflyboy

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I think the norm is to take your take home pay as the base and maybe add any rental income to that.

Your savings rate is then the amount you save divided by the above, assuming your not going to owe a bunch of tax at the end of the year.

Your dividends and capital growth etc are really a part of your increasing NW, at least if you are pre FI.

There really is no exact way to do it.. Heck some people even exclude the equity of their house from their NW, even when it is paid off on the basis of you can't use the house asset as spending money and you always need somewhere to live.

johnny847

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As with any other discussion on the savings rate formula, It depends what you're using your savings rate metric for. If you're using it to try to guess at time left to FIRE, you shouldn't include it in savings rate. Thats not new money added to your portfolio. The 4% rule assumes that dividends were reinvested.

JZinCO

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I think the others have hit the hammer on the nail. Keep in mind two things:
1) Growth is not typically associated with savings. People normally separate the two. Consider a typical financial plan which states 'If I save/invest x$, which then grows at y% I will have z$ in the future."
2) A dividend does not increase the value you hold. When a dividend is paid out, the market cap on a security falls by an equivalent amount.

Both of these would suggest that including dividends in savings is poor accounting. Especially the second point, which would result in double counting.
« Last Edit: December 22, 2015, 01:33:53 PM by JZinCO »

ozbeach

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I must be missing something here. If you include dividends in your savings rate (effectively as income) that would make that side of the equation bigger and your savings rate would therefore go down - wouldn't it?

Spending / Income      vs     Spending / Income + Dividends

My dividends are automatically reinvested so I don't have to grapple with this.

HeadedWest2029

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Savings rate is (income-expenses)/income so adding dividends would increase the savings rate.  Thanks for the explanation everyone on why you exclude dividends.  Makes total sense.   

JZinCO

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I must be missing something here. If you include dividends in your savings rate (effectively as income) that would make that side of the equation bigger and your savings rate would therefore go down - wouldn't it?

Spending / Income      vs     Spending / Income + Dividends

My dividends are automatically reinvested so I don't have to grapple with this.
If you earn dividends than you would have to adjust for a drop in share value.
E.g. you have 1 share at $1. It spits out a dividend of $0.1 which is reinvested. You now have 1 share at $0.9 and one fractional share at $0.1. You cannot say 'I saved/invested $1 and now have $0.1 of earned dividend'. That is double counting. If you reinvest the dividend, you have still saved only $1. If you spend the dividend you actually have saved only $0.9.