Author Topic: Dividend Investing?  (Read 872 times)

Mostachio

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Dividend Investing?
« on: January 02, 2021, 03:49:03 PM »
Just to start with, I know dividends are stock picking and market timing and it's far from the most optimal way to invest and this isnt really the forum for it. With all that being said, I highly value the opinions on this forum and require the helpful no bs statements Ive come to find here.

Id like to devote a small portion of my eventual portfolio to dividends, in what could eventually be kind of a personal UBI. My very first question is what type of account would be most effective for this for tax purposes? For easy and specific math, if one were making an income of $44.5k and contributing $19.5k pre-tax in a 401k in Montana (6.9% state income tax at $18k+)... would the best option be a brokerage account or a Roth IRA?

My second question is if it's a brokerage account how the short-term and long-term taxes work when dividends are reinvested. I understand that for the first 12 months of stock ownership even the reinvested dividends are taxed as short-term capital gains. When I purchase a stock, leaving the dividends reinvesting, does each dividend payout purchase a small chunk of stock with its own 12 month window of short-term capital gains taxes? Or is it nothing but long-term capital gains on all of it after 12 months?

Malcat

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Re: Dividend Investing?
« Reply #1 on: January 02, 2021, 03:54:17 PM »
The good news is that there are many, many threads dedicated to talking about dividend investing if you want to explore the pros and cons in more detail.

The other good news is that there are plenty of people here who can answer your questions. I'm not one of them, but I'm sure they're come along.

I would, however, challenge your categorization of dividend investing as a kind of UBI. Just because something pays dividends doesn't mean it will continue to pay dividends.

The only advantage of dividends is not having to sell stock. This isn't the same as creating a guaranteed income.

Mostachio

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Re: Dividend Investing?
« Reply #2 on: January 02, 2021, 04:15:30 PM »
I certainly enjoy seeing the different perspectives on dividends around here and I'm acutely aware of the long list of reasons they make poor investment vehicles. I simply think it would be a great idea to have some sharp and more experienced minds give me a little clarity in which to make my uninformed emotional decisions. :D I didnt truly mean to compare dividends to UBI in any technical sense, more colloquially. I see it as a way to give in to my irrational whimsy and learn a little bit with some disposable income.   

mistymoney

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Re: Dividend Investing?
« Reply #3 on: January 02, 2021, 06:04:28 PM »
what's a ubi?

ice_beard

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Re: Dividend Investing?
« Reply #4 on: January 02, 2021, 06:24:13 PM »
UBI = Universal basic income (?)  Which I don't know how a dividend could be considered that since those payments come from the government, right??  Dividends come from shares of stock you own in a company.

I have fortunately, recently seen the light regarding dividends.  For someone like me, in the accumulating phase, dividends seem nice, but the tax implications for someone like us (high tax bracket) and the effect on long term share price, make them seem less attractive in the long run. 

This video was helpful in understanding the "problems" with dividends 
https://www.youtube.com/watch?v=0WYcdzRa-SM

I've read of some instances, like newly retired people living off dividends, that sounds like a more reasonable plan when incomes and tax rates are lower.  That's unfortunately, not me at this time. 


bacchi

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Re: Dividend Investing?
« Reply #5 on: January 02, 2021, 06:49:24 PM »
My second question is if it's a brokerage account how the short-term and long-term taxes work when dividends are reinvested. I understand that for the first 12 months of stock ownership even the reinvested dividends are taxed as short-term capital gains. When I purchase a stock, leaving the dividends reinvesting, does each dividend payout purchase a small chunk of stock with its own 12 month window of short-term capital gains taxes? Or is it nothing but long-term capital gains on all of it after 12 months?

In a taxable account, there are 2 taxes related to dividends.

1) The dividend itself is taxed. This rate is based on your income and whether the dividend is a qualified or ordinary dividend (generally, whether you've held a US listed stock long enough).
2) The reinvestment is a purchase of stock with a new STCG timeline. This is a LOT easier now that most brokerages allow specific lot sales.

If you're going to do this, it's best to do it in a tax advantaged account.

ChpBstrd

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Re: Dividend Investing?
« Reply #6 on: January 02, 2021, 08:22:10 PM »
I agree you should put your dividend payers in a non-taxable account - ideally a pre-tax IRA like a traditional or rollover IRA at your brokerage.

The bad news is that dividend-paying stocks generally stink. They are paying dividends because they can identify no good prospects for reinvestment, growth, efficiency investments, entering new lines of business, etc. This is basically to say they are a declining company. Additionally, there is some political reason causing the board of directors to prefer being double-taxed on dividends instead of pursuing the much more tax-efficient route of stock buybacks. Some companies are jacking up their leverage and paying usurious interest rates on their shaky junk debt, all while paying a dividend. In these cases, the owners are looting the company and trying to get cash out of it before bankruptcy. This is why a search by dividend payers will uncover a lot of companies where you don't want to be invested. The term is "dividend trap".

There are two exceptions: REITs and MLPs are not double-taxed on dividends, but in return have to pay out the vast majority of their cash flow as dividends. These can be efficient companies that will last for decades, but do your DD first. I would not want to own retail or office real estate right now, and a lot of these firms are not earning as much as they're paying in dividends (so it's return of capital, not on capital).

Overall there's no reason to prefer dividend paying companies over companies that do stock buybacks or actually grow. Put your growers or index funds in your taxable accounts and your REITs, MLPs, preferred stock, and so on in tax-advantaged accounts at your brokerage. Just don't buy a "dividend fund" or the highest yielding stocks on the Yahoo screener, because that has never gone well!

mistymoney

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Re: Dividend Investing?
« Reply #7 on: January 03, 2021, 02:38:30 PM »
https://www.nytimes.com/2011/06/04/your-money/stocks-and-bonds/04wealth.html

this is an older article, but an interesting discussion on the pros and cons of dividends vs non-dividend stocks or bonds.

Mostachio

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Re: Dividend Investing?
« Reply #8 on: January 03, 2021, 07:29:51 PM »
Thanks for all the info from everyone! Mostly I was curious about the specific LTCG/STCG windows on dividends and got my questions answered soundly, so no face punches or links to intellectually ironclad articles needed just yet! I want to reassure you all, this is just a potential fun money learning experience that I probably wont even pull the trigger on. This would be like financial cosplay for me and I didnt mean any harm with my incoherent use of political buzzwords. :)