Author Topic: Dividends into cash or reinvest?  (Read 3664 times)

DrumAllDay

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Dividends into cash or reinvest?
« on: January 19, 2018, 06:40:27 AM »
I currently reinvest all of my dividends from both my 403b and Roth. I am thinking of changing my Roth account so that my dividends transfer to my bank account as cash in order to start collecting a larger pile of cash for when stocks get cheaper.

I am 25 years old with a lot of years left until FI. My Roth is 100% invested in VTSAX.

Curious as to what others do with dividends.

Thanks

boarder42

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Re: Dividends into cash or reinvest?
« Reply #1 on: January 19, 2018, 06:52:15 AM »
nope this is market timing plus you cant transfer dividends from a roth to your bank account with out a penalty

STOP TRYING TO TIME THE MARKET

nereo

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Re: Dividends into cash or reinvest?
« Reply #2 on: January 19, 2018, 08:06:44 AM »
Don't do it.
As long as you are in the accumulation-phase, reinvest all dividends.  As others have mentioned you also can't transfer dividends out of your tax-advantaged accounts this way wihtout incurring a penalty.

Provided that you are currently adding to your investments each month (highly recommended) you need not worry about market corrections.  When markets go down your monthly contributions will buy more shares.  This is already a form of Dollar Cost Averaging (DCA).  Holding cash waiting for a market downturn is a fool's errand - it creates a cash drag (considerable with bank accounts paying just 0-1.5% interest) and may not even work if the market goes up or sideways.

seattlecyclone

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Re: Dividends into cash or reinvest?
« Reply #3 on: January 19, 2018, 09:42:24 AM »
For the love of all that is holy, do not remove money from your Roth IRA just to hold it as cash in your savings account. Once it leaves the IRA, there's no putting it back in. If you absolutely must take that money out of the market, use a money market fund within the IRA. As others have said, that would be market timing, a tactic that backfires more often than not.

DrumAllDay

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Re: Dividends into cash or reinvest?
« Reply #4 on: January 19, 2018, 11:00:24 AM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

Eric

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Re: Dividends into cash or reinvest?
« Reply #5 on: January 19, 2018, 11:09:25 AM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

You're 25 years old.  You don't need more cash.  You need more investments.

DrumAllDay

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Re: Dividends into cash or reinvest?
« Reply #6 on: January 19, 2018, 01:23:58 PM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

You're 25 years old.  You don't need more cash.  You need more investments.

But cash buys things that make me look wealthier than I really am.. or wait thats credit :p

Telecaster

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Re: Dividends into cash or reinvest?
« Reply #7 on: January 19, 2018, 01:47:28 PM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

Instead of reinvesting, you can leave the cash for dividends in your Roth if you need more cash.  In fact, why wouldn't you? 

The part I think you're not getting (or maybe I'm not getting), is that you seem to want to buy stocks outside of your Roth.  Is that correct?  I don't think you want to do that.  You want to buy stocks inside your Roth first, then outside. 

Question:  What if stocks don't get cheaper? 

Holyoak

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Re: Dividends into cash or reinvest?
« Reply #8 on: January 19, 2018, 01:59:08 PM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

You're 25 years old.  You don't need more cash.  You need more investments.

But cash buys things that make me look wealthier than I really am.. or wait thats credit :p

But stealth wealth has a sweetness all of it's own, you'll see...  Good luck to you Drum, you are wise thinking of your financial future.

I'm retired, and when I did all taxable account dividends switched over to cash deposits, used for living expenses.  I can't touch my IRA's for another 8 years, and their dividends go into a settlement account.  I reinvest these dividends in the same, or several other IRA accounts, thus avoiding any tax penalty distributions. 

PDXTabs

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Re: Dividends into cash or reinvest?
« Reply #9 on: January 19, 2018, 02:07:45 PM »
You always want to be reinvesting dividends in your tax advantaged accounts.

This is in contrast to your taxable accounts where you probably do not want to be reinvesting dividends to avoid accidentally running afoul of the Wash-Sale Rule.

DrumAllDay

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Re: Dividends into cash or reinvest?
« Reply #10 on: January 19, 2018, 02:30:07 PM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

Instead of reinvesting, you can leave the cash for dividends in your Roth if you need more cash.  In fact, why wouldn't you? 

The part I think you're not getting (or maybe I'm not getting), is that you seem to want to buy stocks outside of your Roth.  Is that correct?  I don't think you want to do that.  You want to buy stocks inside your Roth first, then outside. 

Question:  What if stocks don't get cheaper?

I have come across arguments that are pro dividend and value investing. A simple strategy that is attractive to me is the Dogs of the Dow strategy. It would be a good way to diversify from index investing--which I know is the preferred way on this forum.

Basically I want some extra cash to diversify beyond equities that are more capital gains than dividends. I want to look into better cash flow investments, or investments that decrease my expenses (non traditional investments) and diversify beyond the stock market at some point.

Rob_bob

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Re: Dividends into cash or reinvest?
« Reply #11 on: January 19, 2018, 02:33:33 PM »
Just a point not mentioned about a Roth is that you can withdraw your contributions without penalty, but not gains.

Retire-Canada

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Re: Dividends into cash or reinvest?
« Reply #12 on: January 19, 2018, 02:45:41 PM »
...in order to start collecting a larger pile of cash for when stocks get cheaper.

That would be dumb. Keep reinvesting the dividends. Keep adding new money when you can. Buy all the time. You'll end up richer than if you sat on cash waiting for a crash. Look how that's worked out for people the last few years when every year was the year for the next "Big One"...except it wasn't.

2Birds1Stone

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Re: Dividends into cash or reinvest?
« Reply #13 on: January 19, 2018, 03:48:55 PM »
I did not realize that would be a distribution, so no I will not be doing that. I will just reduce my contributions if I need more cash.

You're 25 years old.  You don't need more cash.  You need more investments.

Eric hit the nail on the head.

neil

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Re: Dividends into cash or reinvest?
« Reply #14 on: January 19, 2018, 04:09:47 PM »
Whatever you would normally do with cash, you should do with your dividends. 

The only reason I don't have my taxable account reinvest is to limit the bookkeeping - newly invested money gets lumped in with the last round of divis and it goes in together.  It's not quite a passive approach and thus a downside - but I find that manually hitting the buttons satisfies my need to fiddle with my portfolio in other ways.

I absolutely don't pile cash for investing when the market is down.  At some point when your investment return becomes significant, it would start to make sense to sell out of everything if you actually knew what was to come.  Learn best practices early, and you'll stay focused through the downturns.

Telecaster

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Re: Dividends into cash or reinvest?
« Reply #15 on: January 19, 2018, 04:16:11 PM »
I have come across arguments that are pro dividend and value investing. A simple strategy that is attractive to me is the Dogs of the Dow strategy. It would be a good way to diversify from index investing--which I know is the preferred way on this forum.

Basically I want some extra cash to diversify beyond equities that are more capital gains than dividends. I want to look into better cash flow investments, or investments that decrease my expenses (non traditional investments) and diversify beyond the stock market at some point.

Diversification is surely a good thing.  But you can still diversity within your Roth.  You can move outside stocks by buying REIT funds for example.  It is isn't crazy to have some international exposure.  If you are looking for cash, there are preferred stock ETFs like PGF and PFF that pay nice dividends, but trade more like bonds.  Another thing to consider is equal weight ETFs like RSP, which logically make more sense than cap-weight, and good evidence of long term outperformance (RSP hasn't been around very long, so you have to really dig to find equal weight backtests.  They are out there, but takes some work).  It is sort of mid-cap strategy, if you like. 

The problem with the Dogs of the Dow (and its spin offs like the Foolish Four and Small Dogs of the Dow) as that it hasn't really worked post-discovery.  It seems to perform almost exactly like the Dow itself.  One problem is the Dow itself is an anachronism. 

But let me throw this out there:  Dividends themselves are anachronisms.  Sure, you get the bird in the hand, but what do you do with the bird?  You are still in accumulation phase, so you'd just reinvest the bird.  My advice is don't worry about dividends, they are an illusion.  Diversify yes, but don't worry about dividends.