Author Topic: New investment - buy now or wait until dividends are paid?  (Read 3469 times)

FerrumB5

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New investment - buy now or wait until dividends are paid?
« on: December 15, 2015, 10:23:09 PM »
Hi!

I have 10k in Vanguard settlement fund just cleared and I want to buy VTSAX. In principle, I can buy immediately, but based on previous data we expect VTSAX to pay dividends in the next 3-5 days. Should I buy or wait until the div are paid and buy then? I think that it does not matter, but may be more experienced investors can help. (And no, I'm not timing the market - just happened so that I have 10k cleared now for purchase)

MDM

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Re: New investment - buy now or wait until dividends are paid?
« Reply #1 on: December 15, 2015, 11:10:37 PM »
Some assumptions, because we have to assume something:
1) The market goes up at a constant rate per day (~0.02%/day if the annual increase is ~7.5%)
2) You pay 15% tax on dividends
3) Short time frames so we can assume simple instead of compound interest

Say you have a share of stock (or fund, etc.) worth $P/share.  It pays an X% dividend, after which you have $P*X% in cash and a share worth ($P - $P*X%).  But, you now have to pay 15% tax on that $P*X%, leaving you with 0.85*$P*X% cash and $P - $P*X% in stock, or $P - 0.15*$P*X% total.

The value of X depends, by a factor of 4, on whether the dividends are distributed quarterly or annually.  VTSAX distributes quarterly, and currently does ~0.5%/qtr.

Thus, on the day of distribution, you lose 0.15*$P*X%.  By waiting N days to buy, you lose $P*0.02%*N.  Equating those, if X = 0.5, then N = 3.75.

In other words, if you are within ~4 days of the distribution then wait and buy afterward.  If you are more than 4 days away, buy now.

In real life, market fluctuations usually make the "constant 0.02%/day increase" a bad assumption.  Problem is, nobody knows if the real number will be higher or lower.

FerrumB5

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Re: New investment - buy now or wait until dividends are paid?
« Reply #2 on: December 16, 2015, 06:48:28 AM »
Thanks, MDM!

FerrumB5

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Re: New investment - buy now or wait until dividends are paid?
« Reply #3 on: December 16, 2015, 09:18:41 AM »
But won't I buy 0.5% more shares for my money after they pay dividends? Not sure if it will make any difference in the big picture

MDM

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Re: New investment - buy now or wait until dividends are paid?
« Reply #4 on: December 16, 2015, 09:38:39 AM »
If you believe the market gives positive returns over time the best time to invest is today. In theory the price of a stock should decrease by the exact amount of the dividend paid. As such if you reinvest the dividend you have the same out come if you invest before or after the dividend is paid except you miss out on 4 days of an average annual return of 11.7%.

I excluded tax analysis as one thing is clear, we do not have anywhere enough information about your situation to consider taxes.
Excluding tax analysis = assuming 0% tax on dividends.

That is a good assumption if the buyer is in such a tax bracket.  Not a good assumption if the buyer is not.

Then again, as FerrumB5 notes, in the big picture of overall portfolio value it likely makes little difference either way.

ShoulderThingThatGoesUp

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Re: New investment - buy now or wait until dividends are paid?
« Reply #5 on: December 16, 2015, 09:48:06 AM »
When stocks pay a dividend doesn't always equal when you have to be in the stock to get the dividend. What is VTSAX's ex-date? It may already be past.

seattlecyclone

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Re: New investment - buy now or wait until dividends are paid?
« Reply #6 on: December 16, 2015, 10:57:14 AM »
But won't I buy 0.5% more shares for my money after they pay dividends? Not sure if it will make any difference in the big picture

True, but the shares are worth 0.5% less after they pass out 0.5% of the fund value in the form of dividends, so it really doesn't matter. If this is a taxable account you may as well wait a week to invest to reduce this year's taxable income. If you're investing in a retirement account, go ahead and pull the trigger right now.

FerrumB5

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Re: New investment - buy now or wait until dividends are paid?
« Reply #7 on: December 16, 2015, 11:08:46 AM »
Yep, taxable.

FerrumB5

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Re: New investment - buy now or wait until dividends are paid?
« Reply #8 on: December 18, 2015, 12:27:56 PM »
Div was paid yesterday: https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#tab=4
Does it mean I can buy immediately and not be responsible for this distribution tax? thanks!