Author Topic: Vanguard dividend tab help and general dividend questions  (Read 5977 times)

Druid

  • Stubble
  • **
  • Posts: 103
  • Age: 37
  • Location: California
Vanguard dividend tab help and general dividend questions
« on: November 23, 2014, 02:34:39 AM »
I am pulling the below info from:
https://personal.vanguard.com/us/funds/snapshot?FundId=0540&FundIntExt=INT#tab=4

Distributions
Distributions for this fund are scheduled Quarterly

Dividend and capital gains distributions
Distribution Type   Most Recent
Distribution   Record Date   Reinvest Date   Payable Date   Reinvest Price   Distribution Yield   SEC Yield
Dividend   $0.88300   09/18/2014   09/19/2014   09/22/2014   $185.43   —                           1.95%  B
Dividend   $0.81500   06/19/2014   06/20/2014   06/23/2014   $181.01   —   —
Dividend   $0.78500   03/20/2014   03/21/2014   03/24/2014   $172.03   —   —
Dividend   $0.92000   12/20/2013   12/23/2013   12/24/2013   $168.41   —   —
Dividend   $0.79300   09/19/2013   09/20/2013   09/23/2013   $157.56   —   —
Dividend   $0.74300   06/20/2013   06/21/2013   06/24/2013   $146.71   —   —

Ok so if I am reading this correctly dividends are paid out every quarter as reflected by the .88, .815, .78, .92(so just over 3% of dividends over last year)? Am I reading this correctly? If so what is that SEC Yield figure of 1.95%?

Sorry if this is really basic stuff, but does Vanguard send you a quarterly dividend check in the mail or do they reinvest it? My guess is you get to choose(but either way you need to pay ordinary income tax on the dividend)? Anyway to defer this on taxable accounts?

I am trying to figure out my retirement tax planning strategy with the 4% rule, and I now feel stupid I never factored in dividend income. For example if i withdraw 4% annually from a million dollar portfolio a big percentage of this would come from dividends and be taxed accordingly?

I am wondering if people who follow the 4% rule invest in growth stocks to try to tilt their portfolio more towards the favorable capital gains tax rates, or do they just reinvest the dividend each quarter and make monthly withdrawals on the principle. What is the most tax efficient way to do this?
« Last Edit: November 23, 2014, 02:38:18 AM by Druid »

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1049
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Vanguard dividend tab help and general dividend questions
« Reply #1 on: November 23, 2014, 05:27:32 AM »
Dividends are taxed on your holdings in taxable account even if you reinvest it

Chuck

  • Bristles
  • ***
  • Posts: 404
  • Age: 31
  • Location: Northern VA
Re: Vanguard dividend tab help and general dividend questions
« Reply #2 on: November 23, 2014, 09:23:10 AM »
Dividends are taxed on your holdings in taxable account even if you reinvest it
Truth.

However, typically banks don't charge transaction fees to reinvest. So in a taxable account there's still some benefit.

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 2080
  • Age: 53
  • Location: Ann Arbor, Michigan
Re: Vanguard dividend tab help and general dividend questions
« Reply #3 on: November 23, 2014, 06:12:40 PM »
Regarding the taxation of the dividends from the Vanguard 500 Index fund, these dividends will be considered qualified dividends.  Therefore, these dividends are taxed at the long term capital gains tax rate.  So if you are in the 10% or 15% ordinary income tax bracket you don't pay any federal income tax on these kinds of dividends.

I think one way to help you in your retirement planning is to download a tax return from the IRS.gov website and just play around with what your taxes would be in various income scenarios. You might want to think about what it would take to be in the 15% ordinary income tax bracket.  If you're in the 25% tax bracket you'll be paying a 15% tax rate on the qualified dividends.

If you had a million dollars invested in the Vanguard 500 Index, and you wanted to withdraw 4%, you can use the qualified dividends to make up about half the $40,000 (SEC Yield figure of 1.95%), and then whatever shares you sold you would probably have some long term capital gains to declare, also taxed at a lower than ordinary income tax rate.  Vanguard allows you to choose which method you want to use for tax purposes when selling shares of your portfolio, you can use an average cost method, or a specific id method, or first in first out method. You can call up Vanguard and they can go over that with you to help you with that. There is also a cost basis reference page on Vanguard that explains this. The reason the cost basis method matters is because it will affect how much capital gains you'll have to declare when you eventually sell shares.

All the above information does not discuss the state income tax rates which will differ between states.  You could also download your state income tax forms to figure out what kind of taxes you would pay on qualified dividends and capital gains that are long term.

skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: Vanguard dividend tab help and general dividend questions
« Reply #4 on: November 24, 2014, 09:48:49 AM »
Ok so if I am reading this correctly dividends are paid out every quarter as reflected by the .88, .815, .78, .92(so just over 3% of dividends over last year)? Am I reading this correctly? If so what is that SEC Yield figure of 1.95%?

Yes, you're basically reading it correctly, except I'm not sure where you got your "3%" number from.  "Yield" is basically calculated as the dividend amount divided by the share price ("reinvest price" in this chart), and then extrapolated to a full year of dividend payments. So, for last quarter, it was ($0.88 dividend / $185.43 share price) * 4 quarters = 1.90%, which is close enough to the SEC 1.95% for me. I guess maybe you just added up the the dividend amounts to get to "just over 3%"? But those dividends are dollar amounts, not percentages.

Sorry if this is really basic stuff, but does Vanguard send you a quarterly dividend check in the mail or do they reinvest it? My guess is you get to choose(but either way you need to pay ordinary income tax on the dividend)? Anyway to defer this on taxable accounts?

I believe the default is to reinvest dividends, but yes, you have the option to not reinvest (being Vanguard, I'm sure they prefer to do an electronic transfer rather than actually sending you a check!) And yes, you pay tax regardless of whether you reinvest or take the dividend. There is no way to defer those taxes in an unsheltered account.

I am wondering if people who follow the 4% rule invest in growth stocks to try to tilt their portfolio more towards the favorable capital gains tax rates, or do they just reinvest the dividend each quarter and make monthly withdrawals on the principle. What is the most tax efficient way to do this?

I'm actually impressed; it seems like most people learning about dividends for the first time get all excited and mistakenly see them as a free lunch and try to get as many of them as possible. While you've already (correctly) seen that, due to taxation, they're actually a *drain* on your money's growth.

The research that created the 4% SWR effectively ignored dividends. It simply used the "total return" numbers of the stock market, which includes both reinvested dividends and price-appreciation (and it also ignored the effects of taxes). So I think most Boglehead-type investors take a similar "blind" approach: neither avoid nor embrace dividends. Just buy the whole market, and accept whatever dividends you get. I'm sure there must be some people out there who expressly avoid dividends, but I've never heard of them. Much more common is the opposite, the investor that invests only in dividend-paying stocks. Both approaches would hurt your diversification, so they aren't recommended.

Vanguard does have a few "Tax-Managed" funds designed to reduce the impact of taxes if held in a taxable account, but I don't think focusing on non-dividend payers is really a strategy they use. My impression has been that they're more focused on reducing capital gains payouts, but Vanguard isn't really clear about what their strategies are. A lot of index funds are "tax efficient" just by their very nature, without any extra effort required (in fact, Vanguard recently merged the Tax-Managed International fund into another, non-tax-managed fund, saying that there effectively hadn't been any difference between the two).

GoldenStache

  • Stubble
  • **
  • Posts: 239
  • Location: Washington, DC
Re: Vanguard dividend tab help and general dividend questions
« Reply #5 on: November 24, 2014, 11:48:31 AM »
I see dividends more of an increased forced savings than a drain (assuming taxable account)

If I make $1000 in dividends and keep them reinvested, I will have to pay taxes on that income.  I gladly will pay more in taxes knowing that I made $1000 reducing my future tax liability even though I have to pay (say 20%) $200 more this year because of it (I have to pay those taxes, therefore I did not spend that $200) 

This method/ mindset would not work for someone that is on a budget and maximizing their actual savings.

I also believe that future taxes will be higher than they currently are.


skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: Vanguard dividend tab help and general dividend questions
« Reply #6 on: November 24, 2014, 01:01:25 PM »
I see dividends more of an increased forced savings than a drain (assuming taxable account)

If I make $1000 in dividends and keep them reinvested, I will have to pay taxes on that income.  I gladly will pay more in taxes knowing that I made $1000 reducing my future tax liability even though I have to pay (say 20%) $200 more this year because of it (I have to pay those taxes, therefore I did not spend that $200) 

Either I don't understand what you're saying, or you don't understand what a dividend payment is.

Say you own $10k of Company A, and they generated enough profits last year that they could pay you as a $1000 dividend. If they pay out that dividend, the value of your holding drops to $9k. Then, when you reinvest the $1000 with them, you're back to holding $10k. Except you're also out $200 in taxes.

Alternatively, they could just hold the $10k in their own bank account. No transaction is made, you pay no taxes, and you still hold the same $10k value in Company A.

Why would you gladly pay an extra $200 in taxes, and how does that reduce your future tax liability?

If anything, the company holding onto its profits is more of a "forced savings" than if they pay you a dividend.

Also, if you didn't reinvest the dividend payment, then sure, your future tax liability for that stock would be lowered, but that's just because you'd be owning less of that stock and getting less of its future gains.

GoldenStache

  • Stubble
  • **
  • Posts: 239
  • Location: Washington, DC
Re: Vanguard dividend tab help and general dividend questions
« Reply #7 on: November 24, 2014, 01:45:23 PM »
So using $10k of company A, say it is 1000 shares ($10 a share), they pay the 10% dividend $1000 and you reinvest buy back shares (111 additional shares assuming the value is now 9K ($9 a share) you now own 1111 shares.  In reality though, the price of the dividend does not make the stock drop by an equal amount.   

If the value of a position of stock A goes up 100% after 10 years without dividends.
If the value of a position of stock B goes up 100% after 10 years with dividends
The value of A and B both start and end at the same value.

So comparing A with B, the amount of taxes owed when selling all of the position is significantly less for B than A, because you have been paying for the dividends with taxes along way with B.  This is increased if there will be a tax change in the future (I think there will be) that increases the tax rate.   



 

 

skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: Vanguard dividend tab help and general dividend questions
« Reply #8 on: November 24, 2014, 04:04:39 PM »
In reality though, the price of the dividend does not make the stock drop by an equal amount.
[citation needed]

Perhaps you mean that the price drop is not always visible because it's obscured by other market noise? But it's there. http://groupssa.com/ex-dividendstockpriceadjustment.html

If the value of a position of stock A goes up 100% after 10 years without dividends.
If the value of a position of stock B goes up 100% after 10 years with dividends
The value of A and B both start and end at the same value.

So comparing A with B, the amount of taxes owed when selling all of the position is significantly less for B than A, because you have been paying for the dividends with taxes along way with B.

Sure, you'll pay less tax (zero) with B than A during your final transaction, but so what? You'll end up with more total money with A, which is what people actually care about.

We'll assume that in both cases, you initially pay $10k for 1000 shares of each company at $10/share. Both companies produce the same profit, and repeat it every year, allowing for a $1000 dividend payout to you. We'll further assume that both companies' value changes only by their book value, and broader economic factors or "market sentiment" have no effect on their share prices. We'll also assume capital gains and dividend taxes are an equal 20%.

In B, each year the share price rises from $10 to $11, recognizing the growing cash surplus. Then they pay you a $1000 dividend, the share price drops to $10, and you purchase 100 new shares at $10/share. You pay your $200 dividend tax with external income. By the end of 10 years, you'll have 2000 shares @ $10, which you can sell for $20k. You pay zero capital gains tax, because there were no capital gains. Ending value: $20000

In A, each year the share price rises $1 over the previous year, recognizing the growing cash surplus. They hold onto their cash, so over the years the share price continues to rise. The $200 of external income that you used in B to pay your dividend tax in this case can be used to buy $200 worth of Company A shares at the current share price, every year. By the end of 10 years, you'll have 1134 shares (1000 original plus 134 from the yearly purchases), and since the share price is now $20, total value is $22675. Your cost basis is $12000, so you'll pay 20% capital gains tax on the difference, for a tax bill of $2135. Ending value: $20540

Essentially this is just illustrating the basic principle that a dollar today is more valuable than a dollar tomorrow, and thus, it's best to defer any taxes for as long as possible. Dividend-paying stocks prevent you from making that deferral.

This is increased if there will be a tax change in the future (I think there will be) that increases the tax rate.

Sure, if you assume the capital gains rate increases to something greater than 25% in year 10, while leaving the dividend rate unaffected all of the previous years, then A would win. But that's a really specific and odd assumption. And to be logically consistent with your belief, then you'd want to be regularly selling your stock positions, paying your capital gains taxes at their current "low" rates, and repurchasing them with a higher cost basis in order to reduce your future tax liability. Are you doing that?
« Last Edit: November 24, 2014, 04:08:28 PM by skyrefuge »

Druid

  • Stubble
  • **
  • Posts: 103
  • Age: 37
  • Location: California
Re: Vanguard dividend tab help and general dividend questions
« Reply #9 on: November 24, 2014, 04:27:27 PM »
Regarding the taxation of the dividends from the Vanguard 500 Index fund, these dividends will be considered qualified dividends.  Therefore, these dividends are taxed at the long term capital gains tax rate.  So if you are in the 10% or 15% ordinary income tax bracket you don't pay any federal income tax on these kinds of dividends.


@DavidAnnArbor Thanks that is some great info! Do you know if dividends in single stock investments are taxed differently?

@skyrefuge. I also appreciate your help and I got my 3% figure from thinking the distribution amounts(that are clearly labeled with $ signs) were quarterly percentages. So now I know the distributions are dollar amounts per share and the SEC yield is the actual percentage per investment dollar. Do you know if the SEC yield is year to date, last four quarters, or the total life of the fund?

Do you agree with DavidAnnArbor quote above which states that most dividends are taxed at capital gain rates? When you are using the 20% tax rate in your example directly above this post you are using someone who is in the 39.6% ordinary income bracket(thus 20% capital gain rate)?
« Last Edit: November 24, 2014, 04:57:15 PM by Druid »

Druid

  • Stubble
  • **
  • Posts: 103
  • Age: 37
  • Location: California
Re: Vanguard dividend tab help and general dividend questions
« Reply #10 on: November 24, 2014, 04:33:55 PM »
Another thing I could use clarification on is how dividends are taxed in traditional and roth ira accounts.

I understand that money going into traditional IRAs reduces your income and when you withdraw from a traditional account you pay income taxes. So how are the dividends on a traditional IRA taxed in all those years leading to retirement?

I also understand that a Roth does not reduce taxable income, but you can make tax free withdrawals after age 59, but are dividends taxed each year?

My intuition tells me that as long as the dividends are reinvested in both type of IRAs they are not taxed. Is this correct?

« Last Edit: November 24, 2014, 04:45:25 PM by Druid »

skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: Vanguard dividend tab help and general dividend questions
« Reply #11 on: November 24, 2014, 05:16:26 PM »
@DavidAnnArbor Thanks that is some great info! Do you know if dividends in single stock investments are taxed differently?

Dividends from mutual funds are just an accumulation of the dividends from the underlying stocks. In the case of the 500 Index fund, all the underlying stocks are "qualified", so they get the lower, "qualified" rate, just as the stock would if you held it directly for 60 days. All the rules and rates are here: http://en.wikipedia.org/wiki/Qualified_dividend

Do you know if the SEC yield is year to date, last four quarters, or the total life of the fund?

As the link next to the yield number on Vanguard's site says, it's for the most recent 30-day period.

Do you agree with DavidAnnArbor quote above which states that most dividends are taxed at capital gain rates? When you are using the 20% tax rate in your example directly above my post you are using someone who is in the 39.6% ordinary income bracket?

Capital gains rates and dividend rates have moved around quite a bit over the years, so the 20% I used was just an easy-math example. Generally, dividends have been taxed at higher rates than capital gains, but since 2003, qualified dividends have been taxed at the capital gains rate, currently 15% for most people (capital gains and dividend tax rates are basically the lowest they've ever been, so don't be shocked if they change sometime in the not-too-distant future).

Another thing I could use clarification on is how dividends are taxed in traditional and roth ira accounts.

Neither dividends nor capital gains are taxed in Traditional or Roth IRAs. You are never taxed on any money coming out of a Roth IRA, and you're only taxed on a Traditional IRA when you take the money out; at that point, it's simply taxed as ordinary income, as if the knowledge that the money came from investments is erased. What happens behind the tax-shelter stays behind the tax-shelter! Those are two of the big advantages of tax-shelters: you can place your dividend-producing assets behind them to optimize your tax situation, and you can trade freely without inducing capital gains taxes (though then you cannot benefit from capital losses either).

Druid

  • Stubble
  • **
  • Posts: 103
  • Age: 37
  • Location: California
Re: Vanguard dividend tab help and general dividend questions
« Reply #12 on: November 24, 2014, 07:46:26 PM »
Thanks again!

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 2080
  • Age: 53
  • Location: Ann Arbor, Michigan
Re: Vanguard dividend tab help and general dividend questions
« Reply #13 on: November 24, 2014, 10:01:08 PM »
I don't know if the IRS actually applies a  tax penalty to corporations for this, but there is a part of the IRS Code that will tax accumulated earnings so as to discourage the accumulation of earnings and profits "beyond the reasonable needs of the business for the purpose of avoiding income taxes on its shareholders."  The failure by a corporation to "distribute dividends or minimal payments indicates that earnings may have been accumulated to avoid shareholder taxes."  http://www.irs.gov/irm/part4/irm_04-010-013.html

Druid

  • Stubble
  • **
  • Posts: 103
  • Age: 37
  • Location: California
Re: Vanguard dividend tab help and general dividend questions
« Reply #14 on: November 24, 2014, 10:41:23 PM »
I don't know if the IRS actually applies a  tax penalty to corporations for this, but there is a part of the IRS Code that will tax accumulated earnings so as to discourage the accumulation of earnings and profits "beyond the reasonable needs of the business for the purpose of avoiding income taxes on its shareholders."  The failure by a corporation to "distribute dividends or minimal payments indicates that earnings may have been accumulated to avoid shareholder taxes."  http://www.irs.gov/irm/part4/irm_04-010-013.html

I actually learned about this at school. Ironically I am studying to become a tax accountant, but I have not taken my taxation of investment class yet:) Based on my recollection companies are only affected by that law when they are small and resemble personal holding companies. Most companies that have stocks would probably not be affected by that requirement. There is a form where companies can explain why they need to hold surplus cash/investments to avoid penalty. You can be fairly certain that no fortune 500 companies are required to meet that requirement(or their tax accountants know away around it).
« Last Edit: November 24, 2014, 10:44:16 PM by Druid »

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 2080
  • Age: 53
  • Location: Ann Arbor, Michigan
Re: Vanguard dividend tab help and general dividend questions
« Reply #15 on: November 24, 2014, 11:00:50 PM »
Good for you Druid.  I recently completed a masters in accounting but I had a tough time getting a job in that field, so I continue along with my current work. In retrospect not sure it was worth the money I spent for the degree.

Druid

  • Stubble
  • **
  • Posts: 103
  • Age: 37
  • Location: California
Re: Vanguard dividend tab help and general dividend questions
« Reply #16 on: November 25, 2014, 12:44:04 AM »
Yah pursuing a Masters in accounting/taxation is a gamble. I was going to drop out mid way if I didn't get a job offer, but luckily I did get one(and only one). However my job offer is contingent on me graduating with a MST degree and the 30k of student loan debt that comes along with it.

The majority of people graduate from these programs without job offers, and find out that the Accounting Industry doesn't value a masters degree without also having accounting work experience. I think if your still interested in the accounting profession you may consider pursing the CPA exam. I found that me passing the CPA exam opened up doors with firms that were mainly interviewing students with 4.0 gpa's.
« Last Edit: November 25, 2014, 12:47:53 AM by Druid »

GoldenStache

  • Stubble
  • **
  • Posts: 239
  • Location: Washington, DC
Re: Vanguard dividend tab help and general dividend questions
« Reply #17 on: November 25, 2014, 06:38:37 AM »
Perhaps you mean that the price drop is not always visible because it's obscured by other market noise? But it's there. http://groupssa.com/ex-dividendstockpriceadjustment.html

By market noise you mean the actual price of the stock, exactly.  Stocks do not sell for an exact value, the price of stock fluctuates without a change in value of the company.  That is why I said in theory, in reality, stocks are sold for what people are willing to pay for them, nothing more, nothing less.

The $200 of external income that you used in B to pay your dividend tax in this case can be used to buy $200 worth of Company A shares at the current share price, every year.  - That is the forced savings.  If you would not automatically be putting in that additional $200 you would not end up ahead.  The forced savings is the taxes that you have to pay.

Essentially this is just illustrating the basic principle that a dollar today is more valuable than a dollar tomorrow, and thus, it's best to defer any taxes for as long as possible.  - Unless you think your future tax rate will be higher than it is today

And to be logically consistent with your belief, then you'd want to be regularly selling your stock positions, paying your capital gains taxes at their current "low" rates, and repurchasing them with a higher cost basis in order to reduce your future tax liability. Are you doing that?
[/quote] - Yes, I am getting dividends :)  It also allows me to tax-loss harvest (harder to do with the markets up, but was able to get some losses in Oct during the dip.)   With the new taxes (Obama care) on capital gains and dividends it will make it a harder process.  I still haven't figured out exactly how I am going to play it when I cross that new magic number.