Is it time to rethink automatic reinvestment of dividends in a taxable account?

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corp_sharecropper
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Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by corp_sharecropper »

Like many, I have not reinvested dividends in taxable accounts because I was concerned about it making life difficult when it came time for choosing tax lots during TLH or simply selling shares to withdraw. After spending time looking at my options it seems that both Fidelity and Interactive Brokers have a number of tax lot strategies to suit my needs, including specific id, that's easy and can very quickly handle the small odd lots I was previously concerned about.

In an era where we wrong hands over single digit basis points in expense ratio it seems ridiculous for a "time in the market beats timing the market" boglehead to accumulate a lifetime of thousands of months of uninvested dividends waiting till they accumulate or until they remember to login to manually reinvest. Is there any reason in 2021 to not reinvest them automatically? Unless you actually are depending on them to rebalance, I no longer see any reason to do this manually, very rarely are dividends necessary for rebalancing vs new money, either new money is enough or I need TLH or selling to accomplish a rebalance.
JD2775
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by JD2775 »

I am going the opposite way. I have had automatic reinvestment turned on the entire time I have had my taxable account (3 years), with 90% VTSAX and 10% VBTLX. VBTLX especially throws off lots of very small dividend lots.

I just recently turned off automatic reinvestment on both funds, and am going to wait until my money market account builds up a decent amount and then invest it all at once. I wish I had done it sooner, it seems like it will be easier to manage in the long run.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by livesoft »

We automatically reinvested mutual fund distributions in our taxable accounts back in the 1980s, 1990s, and 2000s. We didn't have any problems tracking cost basis. In the beginning there were no apps, no spreadsheet software, no tax prep software, and so on.

Sure, this is the 2020s, but what will people ins 2040 be saying?
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dewey
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by dewey »

JD2775 wrote: Fri May 07, 2021 5:40 pm I am going the opposite way. I have had automatic reinvestment turned on the entire time I have had my taxable account (3 years), with 90% VTSAX and 10% VBTLX. VBTLX especially throws off lots of very small dividend lots.

I just recently turned off automatic reinvestment on both funds, and am going to wait until my money market account builds up a decent amount and then invest it all at once. I wish I had done it sooner, it seems like it will be easier to manage in the long run.
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lazynovice
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by lazynovice »

There is not really any great reason as long as you are comfortable with wash sales and know how to handle them and as you said, don’t need them to rebalance or pay bills. Those are the main reasons not to reinvest.
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GerryL
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by GerryL »

For 20+ years I had my taxable account set up for auto-reinvest. I knew nothing about what I was doing, just save, and save some more. So every month I auto-invested $100 from my paycheck, each quarter my dividends auto-reinvested, and a few times a year I added part of any bonuses I got.

Once I retired, I stopped auto reinvest so I could use the dividends to help cover expenses until I started SS a few years later. Have never turned auto-reinvest back on, but I often reinvest the dividends if my cash stash is adequate. It is a balanced index fund, so I don't have to think about rebalancing, but I ended up with hundreds of small lots, (All documented in Quicken.)

I've never sold any shares of the fund, and I continue to invest extra cash into it (e.g., excess from RMD) so my dividends continue to grow. Have not decided what cost basis method I would use if I eventually want to sell any shares. If I'd known what I was doing, I might have saved up my monthly auto-investments and dividends and made one purchase each quarter.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Iorek »

lazynovice wrote: Fri May 07, 2021 5:54 pm There is not really any great reason as long as you are comfortable with wash sales and know how to handle them and as you said, don’t need them to rebalance or pay bills. Those are the main reasons not to reinvest.
The brokerage companies will track and properly report wash sales that might occur as a result of dividend reinvestment (that is, assuming the issue arises with a sale and purchase of the same security in the same account). That is no more a reason not to do dividend reinvestment than the idea that basis is uard to track (since again your brokerage or fund company will track all that for you, at least these days).
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by goingup »

I always thought reinvesting dividends was the best way to accumulate wealth. Automatic reinvestment means you stay invested, allow compounding, and receive the full stated return of the fund.

Some people like to sweep their dividends for investment elsewhere. For me the fewer decisions I have to make the better. It can be difficult to purchase shares in either up or down markets, but automation executes regardless. :beer
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by lazynovice »

Iorek wrote: Fri May 07, 2021 6:02 pm
lazynovice wrote: Fri May 07, 2021 5:54 pm There is not really any great reason as long as you are comfortable with wash sales and know how to handle them and as you said, don’t need them to rebalance or pay bills. Those are the main reasons not to reinvest.
The brokerage companies will track and properly report wash sales that might occur as a result of dividend reinvestment (that is, assuming the issue arises with a sale and purchase of the same security in the same account). That is no more a reason not to do dividend reinvestment than the idea that basis is uard to track (since again your brokerage or fund company will track all that for you, at least these days).
That was my point. For you or me, it is not an issue. And apparently not OP either. But we are not everybody-

If you read this forum, there are a lot of people who freak out about wash sales. And if you read the wiki, you will see that it is suggested that those people do not reinvest dividends.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Karamatsu »

Unless you actually are depending on them to rebalance, I no longer see any reason to do this manually, very rarely are dividends necessary for rebalancing vs new money, either new money is enough or I need TLH or selling to accomplish a rebalance.
I think the advantages of automatic reinvestment greatly outweigh the disadvantages. The only time I ever turn it off is when I no longer want more shares of a particular issue/fund.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Vanguard Fan 1367 »

I used to automatically reinvest. I got involved with a wash sale last March so I turned off automatic reinvesting.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by jsprag »

corp_sharecropper wrote: Fri May 07, 2021 5:36 pm In an era where we wrong hands over single digit basis points in expense ratio it seems ridiculous for a "time in the market beats timing the market" boglehead to accumulate a lifetime of thousands of months of uninvested dividends waiting till they accumulate or until they remember to login to manually reinvest. Is there any reason in 2021 to not reinvest them automatically? Unless you actually are depending on them to rebalance, I no longer see any reason to do this manually, very rarely are dividends necessary for rebalancing vs new money, either new money is enough or I need TLH or selling to accomplish a rebalance.
Reasons not to automatically reinvest in 2021:
  • You use ETFs and don't want fractional shares
  • You use ETFs and the broker doesn't support automatic reinvestment
  • Wash sale management. Perhaps you have substantially identical securities in different CUSIP, account, or brokerage and can't rely on brokerage(s) to properly track wash sales.
  • You don't want any more shares of that security
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wander
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by wander »

I only invest in ETFs in taxable account and do not like to reinvest automatically. It's not a big deal.
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Harry Livermore
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Harry Livermore »

goingup wrote: Fri May 07, 2021 6:04 pm
I always thought reinvesting dividends was the best way to accumulate wealth. Automatic reinvestment means you stay invested, allow compounding, and receive the full stated return of the fund.
That's my opinion as well. Others may disagree.
I keep a spreadsheet for each fund, or individual stock, or DRIP stock, that I won in taxable. It takes a few minutes a few times a year to have all the data at my fingertips. I have had access to some kind of spreadsheet software since I started using a computer in the late 1980s, basically my entire investing career.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by z3r0c00l »

I still accumulate dividends until I have something round, say $1000, to invest all at once normally this hits each quarter when the stock funds pay. With a bond fund in taxable you are talking 12+ small payments a year then maybe 4 or 8 for your stock fund(s). Over 20-30 years it is hundreds of tiny lots, I'd rather not have that clutter. It is easier to rebalance with this chunk of money too, I just put it all into whatever is down.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Doc »

z3r0c00l wrote: Sat May 08, 2021 8:12 am I still accumulate dividends until I have something round, say $1000, to invest all at once normally this hits each quarter when the stock funds pay. With a bond fund in taxable you are talking 12+ small payments a year then maybe 4 or 8 for your stock fund(s). Over 20-30 years it is hundreds of tiny lots, I'd rather not have that clutter. It is easier to rebalance with this chunk of money too, I just put it all into whatever is down.
I agree.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by ipdiddly »

lazynovice wrote: Fri May 07, 2021 6:18 pm
If you read this forum, there are a lot of people who freak out about wash sales. And if you read the wiki, you will see that it is suggested that those people do not reinvest dividends.
I noticed there are many on this forum who freak out about lots of minuscule issues - tax efficiency, dividends, wash sales, etc. - perhaps to the point of losing sight of the bigger picture - i.e., growing the portfolio.

As to reinvesting dividends, Fidelity tracks my purchase history for every position and makes it possible to sell specified shares. So no issue there.

Perhaps someone can explain to me how reinvesting dividends will create some humongous wash sale problem. After all, the reinvested dividend is relatively small compared to the size of the position. In any event, the brokerage firm should correctly calculate the profit/loss on the position according to IRS rules.

The only issue (if you can call it an issue) that I've run into has occurred when I decided to sell out of a particular long term mutual fund position, then noticed my 1099 reported part of the sale was short term because of the reinvested dividend that occurred that year. Not a big deal, however.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by jsprag »

ipdiddly wrote: Sat May 08, 2021 9:27 am Perhaps someone can explain to me how reinvesting dividends will create some humongous wash sale problem. After all, the reinvested dividend is relatively small compared to the size of the position. In any event, the brokerage firm should correctly calculate the profit/loss on the position according to IRS rules.
Brokerage will generally only correctly calculate if it's the same security (CUSIP) in the same account.

Don't count on the brokerage correctly adjusting basis on wash sales if *any* of the following are involved:
- Different (but substantially identical) securities in the same account
- Substantially identical securities across multiple accounts (including spouse)
- Substantially identical securities at different brokerages

If none of those apply then I agree: auto reinvest from day one. If any of them do apply then it's still certainly manageable, but the investor should weigh tracking and reporting effort against the additional time in the market they get by automatically reinvesting.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by lazynovice »

jsprag wrote: Sat May 08, 2021 10:38 am
ipdiddly wrote: Sat May 08, 2021 9:27 am Perhaps someone can explain to me how reinvesting dividends will create some humongous wash sale problem. After all, the reinvested dividend is relatively small compared to the size of the position. In any event, the brokerage firm should correctly calculate the profit/loss on the position according to IRS rules.
Brokerage will generally only correctly calculate if it's the same security (CUSIP) in the same account.

Don't count on the brokerage correctly adjusting basis on wash sales if *any* of the following are involved:
- Different (but substantially identical) securities in the same account
- Substantially identical securities across multiple accounts (including spouse)
- Substantially identical securities at different brokerages

If none of those apply then I agree: auto reinvest from day one. If any of them do apply then it's still certainly manageable, but the investor should weigh tracking and reporting effort against the additional time in the market they get by automatically reinvesting.
All good points. And a wash sale where one of the transactions involves an IRA can defeat the purpose of TLH. Some people get very confused by it all.

And yes, you can solve that by not owning the same fund in both accounts.

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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Dandy »

If your TIRA is all or mostly fixed income and your taxable account is mostly equities when in retirement keeping a moderate allocation is a bit of a challenge. I'm 73 and stopped reinvesting my taxable distributions and adjusted my TIRA very modest equity allocation a bit to try keep my overall equity allocation a bit south of 50%. Otherwise I'd incur unnecessary taxes by selling taxable equity funds that have large cap gains.

Our pension and SS income almost equal our normal expenses so a large RMD is mostly excess and will keep us in a high tax bracket going forward so not adding cap gains taxes seems the best route. I was hoping heirs would inherit taxable equities on a stepped up basis but I understand that feature may not survive. :oops:
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by TropikThunder »

ipdiddly wrote: Sat May 08, 2021 9:27 am Perhaps someone can explain to me how reinvesting dividends will create some humongous wash sale problem. After all, the reinvested dividend is relatively small compared to the size of the position. In any event, the brokerage firm should correctly calculate the profit/loss on the position according to IRS rules.
Right? It's not like the entire TLH transaction a considered a wash, only the number of shares purchased by the reinvested dividend. And if you're TLH transaction is only on the scale of your dividend maybe it's not worth doing in the first place.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by JustinR »

It's optimal to rebalance with dividends anyway, so turn off the automatic reinvestment.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by gtwhitegold »

I would say that it's a matter of preference. Both options are logical if you have a plan and are able to execute it. I don't currently have anything in taxable, but I've considered disabling DRIP and utilizing a modest amount of margin (less than 10%) once I do invest in a taxable account in order to TLH and keep my desired allocation in taxable.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by gideon trumpet »

TLH is for "losers" (meaning those with capital losses). Never let that tail wag the dog.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by acegolfer »

I have been using automatic reinvestment for 20+ yrs for the reasons given in OP. I don't mind doing more work, when I selling stocks. It's not hard for me.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by sixtyforty »

I also have automatic re-investment turned on in my taxable account, for the reasons listed by the OP.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by markjk »

I'm assuming you hold index funds and this is longer term money. Reinvest the dividends. Tax lost harvesting and rebalancing both have their place but if I had to pick between the three, it would be reinvesting the dividends at the expense of the other two. You really should be able to do all three without much trouble as noted in earlier posts. If you don't reinvest the dividends (and it's a long term investment), you could be giving up 2 - 3% or more of growth over time. That is significant. Doing it manually could get you into a situation where you miss reinvestment opportunities, even by a few days. It's also just simpler.

Sorry if you saw a few other posts created/deleted by me. I was trying to edit this post and goofed up. Haven't had enough coffee yet this am.
Last edited by markjk on Sun May 09, 2021 6:52 am, edited 1 time in total.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by UpperNwGuy »

When I started investing I did not auto-reinvest. After several years of manually reinvesting dividends, I decided it was a lot of hassle with few benefits. I turned on auto-reinvesting for all my funds and have been happy ever since.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Silverado »

markjk wrote: Sun May 09, 2021 6:45 am I'm assuming you hold index funds and this is longer term money. Reinvest the dividends. Tax lost harvesting and rebalancing both have their place but if I had to pick between the three, it would be reinvesting the dividends at the expense of the other two. You really should be able to do all three without much trouble as noted in earlier posts. If you don't reinvest the dividends (and it's a long term investment), you could be giving up 2 - 3% or more of growth over time. That is significant.
Seems like maybe there is a disconnect on definitions, and I know I use non exact language at times.

I take distributions from a taxable mutual fund with a higher ER as cash. Then a few days later I send that cash to Vanguard and buy a much lower cost mutual fund. Did I ‘reinvest dividends'? I would have said 'no' when talking about that high ER fund...until reading some responses here. I will be more careful in the future when recommending to turn off automatic reinvestment and make sure to state 'immediately buy xxxxx'.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Doc »

JustinR wrote: Sat May 08, 2021 11:03 pm It's optimal to rebalance with dividends anyway, so turn off the automatic reinvestment.
Buying more equites with equity dividends tends to make you get to the rebalncing point sooner not later. That's not optimum in my opinion.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by aristotelian »

Since dividends come out of the market value of the position, reinvesting would maintain your allocation. Personally I like to do it manually in case I am overweight or underweight somewhere, plus I don't want a bunch of odd sized lots to deal with when selling in the future. Really it's a personal preference thing.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Doc »

aristotelian wrote: Sun May 09, 2021 10:31 am Since dividends come out of the market value of the position, reinvesting would maintain your allocation.
My equity position is going up because equity prices tend to rise over time while FI prices tend to be more stable hence my asset allocation tends to go toward a higher equity percent and eventually I need to rebalance. Adding to my equity position even at a lower price by reinvesting dividends only accelerates that process.

Not reinvesting those equity dividends or buying FI with them tends to postpone my reaching the rebalancing point.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by RetiredAL »

ipdiddly wrote: Sat May 08, 2021 9:27 am
I noticed there are many on this forum who freak out about lots of minuscule issues - tax efficiency, dividends, wash sales, etc. - perhaps to the point of losing sight of the bigger picture - i.e., growing the portfolio.
+1
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by lazynovice »

Doc wrote: Sun May 09, 2021 11:23 am
aristotelian wrote: Sun May 09, 2021 10:31 am Since dividends come out of the market value of the position, reinvesting would maintain your allocation.
My equity position is going up because equity prices tend to rise over time while FI prices tend to be more stable hence my asset allocation tends to go toward a higher equity percent and eventually I need to rebalance. Adding to my equity position even at a lower price by reinvesting dividends only accelerates that process.

Not reinvesting those equity dividends or buying FI with them tends to postpone my reaching the rebalancing point.
For me as well. I don’t have any issues remembering to log in and reinvest either so I don’t have money sitting in cash waiting for even a day. I’d rather buy what is underweight. I can no longer rebalance in tax deferred so rebalancing now will involve selling in taxable if new money cannot get me there quickly.

I also do not care how many lots of anything I have. The brokerage tracks all that for me.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by stan1 »

JD2775 wrote: Fri May 07, 2021 5:40 pm I just recently turned off automatic reinvestment on both funds, and am going to wait until my money market account builds up a decent amount and then invest it all at once. I wish I had done it sooner, it seems like it will be easier to manage in the long run.
This is what I do also. I rebalance with dividend cash flow plus even with the brokerage tracking cost basis I just find it a little simpler to have fewer, larger lots to look through. I would agree with others it is a minor point and a personal preference even.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Broken Man 1999 »

DW and I have $31.84 in our only taxable investment account. I don't foresee our taxable account growing very much. It certainly wouldn't be growing because of any intent from me.

If we were required to take RMDs TODAY we might have $$ left of the RMDs, as we currently have a very low percentage distribution needed for expenses.

I would most likely buy I-bonds for the children and/or grandchildren, or add to the 529 plans for the grandchildren with any leftover RMD funds that weren't spent to support us.

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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Northern Flicker »

If the taxable account only allows distributions either to land in a money market fund or be reinvested in the investment that generated the distribution, then support for rebalancing would be a reason to turn off automatic reinvestment, at least for the overweight asset(s), so that their distributions may be invested in the underweight asset(s).
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by rockstar »

I reinvest for the most part. If I don't want to increase the asset percentage in my portfolio, then I don't. For example, I don't want to grow my REIT percentage anymore, so I don't reinvest.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Doc »

rockstar wrote: Sun May 09, 2021 2:28 pm I reinvest for the most part. If I don't want to increase the asset percentage in my portfolio, then I don't. For example, I don't want to grow my REIT percentage anymore, so I don't reinvest.
So if you don't want your REIT percentage to grow and the price increases by 2% while the rest of your portfolio increases by only 1% do you sell some REITs instead? :happy

I THINK that this whole "rethink" discussion is unanswerable because each of us have different objectives and starting points.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by rockstar »

Doc wrote: Sun May 09, 2021 3:27 pm
rockstar wrote: Sun May 09, 2021 2:28 pm I reinvest for the most part. If I don't want to increase the asset percentage in my portfolio, then I don't. For example, I don't want to grow my REIT percentage anymore, so I don't reinvest.
So if you don't want your REIT percentage to grow and the price increases by 2% while the rest of your portfolio increases by only 1% do you sell some REITs instead? :happy

I THINK that this whole "rethink" discussion is unanswerable because each of us have different objectives and starting points.
I just let it run. I don't rebalance taxable. I'll add more new money to positions that I want to grow.
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Gabelli2020 »

I’ve always reinvested dividends. Used to keep meticulous records on my purchases in the 70s-90s, then transferred all cost basis info to Schwab when the started keeping track- at least 10 years ago. I still have the original records, just in case.
Dividend reinvestment is the key to the castle. My original $5000 purchase of MSFT is worth over 600K now ( despite not paying dividends in the early years).
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Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by Wannaretireearly »

I've recently switched to reinvest dividends into a different, EM fund. Most excitement/change my portfolio has had over the years. I don't know whether I'll regret it, I am terrible at keeping track of lots.
This time next year, we'll be millionaires!
rossington
Posts: 854
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by rossington »

Gabelli2020 wrote: Sun May 09, 2021 6:04 pm I’ve always reinvested dividends. Used to keep meticulous records on my purchases in the 70s-90s, then transferred all cost basis info to Schwab when the started keeping track- at least 10 years ago. I still have the original records, just in case.
Dividend reinvestment is the key to the castle. My original $5000 purchase of MSFT is worth over 600K now ( despite not paying dividends in the early years).
It couldn't be more simple than what you have said. Dividend reinvesting (DRIP only back in the "old days") has never been about how many "annoying" share lots you have. It has been about growing your wealth through compounding and share price appreciation over the long term. No different than regular paycheck contributions to investment accounts that will be taxable at some point.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
aristotelian
Posts: 9220
Joined: Wed Jan 11, 2017 8:05 pm

Re: Is it time to rethink automatic reinvestment of dividends in a taxable account?

Post by aristotelian »

rossington wrote: Mon May 10, 2021 4:16 am It couldn't be more simple than what you have said. Dividend reinvesting (DRIP only back in the "old days") has never been about how many "annoying" share lots you have. It has been about growing your wealth through compounding and share price appreciation over the long term. No different than regular paycheck contributions to investment accounts that will be taxable at some point.

Of course reinvesting gains and dividends is the key to compounding. However, as long as the amount is the same it does not matter whether it is done manually or automatically. Same with paycheck contributions.
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