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Learning, Sharing, and Teaching => Investor Alley => Topic started by: moustacheverte on April 14, 2015, 06:01:10 PM

Title: Couchpotato investing and dividends
Post by: moustacheverte on April 14, 2015, 06:01:10 PM
Hi,

So I am wondering about couchpotato investing and gains. If I understand correctly, all gains on index investing are paper gains as in they are not realized until one sells all the securities and cashes out, right? Or when rebalancing, you capture a bit of that gain because you are selling high priced assets to buy cheaper ones.

But do these funds also pay dividends like stocks would? Or when you retire, you sell 4% of your portfolio every year and that works out OK because it is less than the growth (on paper) of your portfolio? Am I missing something?

Thanks,
Title: Re: Couchpotato investing and dividends
Post by: mrpercentage on April 14, 2015, 06:05:39 PM
I can only speak personally.
I didn't add to my dividend mutual fund for 3 years but the dividends were auto reinvested.. what happened? It doubled. Could be the timing, could be the fund.. I was being a couch potato so Im not sure.
Title: Re: Couchpotato investing and dividends
Post by: h2ogal on April 14, 2015, 06:11:33 PM
Hello - I think some index funds do pay dividends if the fund is made up of dividend paying companies. 

I have some inside index funds in my 401K and the dividend payments are just added to my balance and I don't pay tax on them.

Maybe this article will help?

http://www.spa-etf.com/how-do-index-funds-pay-dividends/
Title: Re: Couchpotato investing and dividends
Post by: Dodge on April 14, 2015, 06:25:56 PM
Hi,

So I am wondering about couchpotato investing and gains. If I understand correctly, all gains on index investing are paper gains as in they are not realized until one sells all the securities and cashes out, right? Or when rebalancing, you capture a bit of that gain because you are selling high priced assets to buy cheaper ones.

But do these funds also pay dividends like stocks would? Or when you retire, you sell 4% of your portfolio every year and that works out OK because it is less than the growth (on paper) of your portfolio? Am I missing something?

Thanks,

If the mutual fund includes stocks which pay dividends, then yes, the mutual fund will pay dividends.  You can see this as the SEC Yield:

https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT

The biggest mutual fund in the world, Vanguard's VTSAX, pays a 1.84% dividend.  I have yet to see a mutual fund which paid 0 dividends, but I suppose they can exist.  If you're buying the market index, expect to receive regular dividends.
Title: Re: Couchpotato investing and dividends
Post by: moustacheverte on April 14, 2015, 06:33:07 PM
Thank you all for your replies.

So you are really playing on two fronts: appreciation of your securities on which you cash in when you rebalance by selling an expensive asset to buy more of a cheaper one and also from dividends which are reinvested.

But most of the upside is still on paper, i.e. to actually use the money you'd have to sell 100% of your assets. Thus, is it wise to rely on the portfolio's overall value to assess how far along your FI/RE goals you are?
Title: Re: Couchpotato investing and dividends
Post by: My Own Advisor on April 14, 2015, 07:00:00 PM
Your focus should be on total return and maximizing that.

Dividends and capital appreciation could be considered as two sides of a coin.  It's hard to have both in spades!

With Couch Potato investing, you are getting some distributions from the ETF/fund but mostly capital appreciation (growth).  You will eventually need to sell some of your capital to live from; unless you course have enough capital that generates enough distributions so you can live off the distributions alone.

Personally, I'm not focused on portfolio value.  I'm more focused on sustainable and growing cash flow; which means I will try and avoid selling any income generated assets and simply live off the distributions or dividends or both derived from the capital.

Title: Re: Couchpotato investing and dividends
Post by: moustacheverte on April 14, 2015, 07:44:38 PM
Isn't the MMM plan to have enough capital so you never need to sell any and can live off the 4% growth it generates?

I guess my question is whether that growth comes from dividends or is it from selling part of your portfolio?
Title: Re: Couchpotato investing and dividends
Post by: Wolf359 on April 14, 2015, 08:05:38 PM
Isn't the MMM plan to have enough capital so you never need to sell any and can live off the 4% growth it generates?

I guess my question is whether that growth comes from dividends or is it from selling part of your portfolio?
Yes.

Okay, I'll explain.  Dividends and capital gains (growth)are effectively the same thing.  If you sell part of your portfolio, you get taxed on capital gains, and your portfolio value drops by the value of the amount you sold.
If you get paid a dividend, you get taxed at the dividend rate, and your portfolio value drops by the amount of the dividend.
Title: Re: Couchpotato investing and dividends
Post by: Retire-Canada on April 14, 2015, 08:21:36 PM
Isn't the MMM plan to have enough capital so you never need to sell any and can live off the 4% growth it generates?

I guess my question is whether that growth comes from dividends or is it from selling part of your portfolio?

That will depend on how much you get in dividends vs. how much you need over the same period to live off of.

The MMM espoused 4% SWR plan doesn't specify what the split between selling stocks [capital] and dividend income will be since that will vary from person to person.

He's basing his rule of thumb on the Trinity Study with say you have a high chance [96%] of surviving 30yrs at 4% WR based on historical data testing. That means in some cases you burn through every penny in 30yrs and in some cases you end up with millions you don't spend.

-- Vik
Title: Re: Couchpotato investing and dividends
Post by: Heckler on April 14, 2015, 11:49:58 PM


But do these funds also pay dividends like stocks would?
Thanks,

Yes.  Per unit that you own.  VAB is monthly, VCN and VUN quarterly and XEF every 6 months.

VAB: https://www.vanguardcanada.ca/individual/etf-distribution-history.htm?portId=9552

XEF: https://www.blackrock.com/ca/individual/en-ca/products/251421/ishares-msci-eafe-imi-index-etf#tabsDistributions

VUN: https://www.vanguardcanada.ca/individual/etf-distribution-history.htm?portId=9557

VCN: https://www.vanguardcanada.ca/individual/etfs/etf-distribution-history.htm?portId=9561

Title: Re: Couchpotato investing and dividends
Post by: My Own Advisor on April 16, 2015, 05:50:21 PM
I'm banking on 3-4% yield from dividend paying stocks from my investments.

If the market returns long-term, 7%, then the difference, close to 3%, should fight inflation and I never have to touch the capital until old age.

Title: Re: Couchpotato investing and dividends
Post by: Gmullz on April 17, 2015, 06:40:23 AM
I'd rather not create my own thread - would anyone mind critiquing my current portfolio?

My TFSA allocation is:

VAB - 10%
XEC - 15%
XEF - 15%
XUS - 50%
ZCN - 10%

My RRSP allocation is:

VAB - 10%
XEF - 30%
VUS - 50%
ZCN - 10%

First of all, does anyone have any thoughts on these allocations?

My next question is, should I concern myself with the state of the Canadian Dollar, or would that be market timing? I bought $3k worth of XUS in my TFSA this week only to have the CAD jump 2% (upward). If I had of bought VUS, which is CAD-hedged, this fluctuation wouldn't have hit me. That being said, if the CAD dropped 2% I'd have been happy with my XUS purchase of course. On that note I guess it sounds like market timing.
Title: Re: Couchpotato investing and dividends
Post by: Heckler on April 17, 2015, 07:36:44 PM
I'd rather not create my own thread - would anyone mind critiquing my current portfolio?

My TFSA allocation is:

VAB - 10%
XEC - 15%
XEF - 15%
XUS - 50%
ZCN - 10%

My RRSP allocation is:

VAB - 10%
XEF - 30%
VUS - 50%
ZCN - 10%

First of all, does anyone have any thoughts on these allocations?



I would consolidate holdings to reduce transaction costs if that applies to your broker.  Also it will increase unit quantities in each account, and improve dividend reinvestment efficiency.

two things for you to read:

http://www.moneysense.ca/invest/asset-ocation-everything-in-its-place


http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
http://www.moneysense.ca/columns/a-spreadsheet-to-manage-multiple-accounts



you could look at both accounts as one total value and go:

TSFA (I treat this as the lower risk account in case I need to spend it)
VAB 20%
ZCN 25%

RRSP (higher risk, longer term)
VAB 10% (to allow for rebalancing)
XEF 20%
XUS 25%

Of course, depending on your TFSA vs RRSP account total, you may need to adjust.

Title: Re: Couchpotato investing and dividends
Post by: My Own Advisor on April 18, 2015, 08:46:52 PM
I would further simplify:

TFSA = 100% ZCN or VCN

RRSP = VUS, VAB and XEF.

I would use your TFSA for CDN content and higher risk myself.