I completely understand and agree with the seemingly airtight case that dividends tend to be a sub-optimal way to take profits from your investment portfolio. That said, I also have to cop to an irrational feeling of satisfaction I get when a tax-inefficient monthly dividend deposit is made in my account and I buy more shares. My brain does not always make the correct decisions, which is why the Boglehead framework (IPS and all) have been so good to me over the years.burritoLover wrote: ↑Sat Apr 17, 2021 8:13 am
I've put forth this argument more than a few times and the yield-chasing dividend lovers all have non-sensical responses to it. I've come to the conclusion that some investors just invest with the emotional side of their brain - they see a nice shiny dividend payment and that's enough for them - facts don't matter. It doesn't help either that there are numerous sites that peddle crap about living off the dividends without spending down the principal.
What’s the problem with dividends?
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Re: What’s the problem with dividends?
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Re: What’s the problem with dividends?
So I have to accept a higher tax drag on equities because some other investors have trouble stsying the course?burritoLover wrote: ↑Sat Apr 17, 2021 9:37 am Well, there is a behavioral component to dividends. Investors receiving regular higher dividends might be, from a behavioral perspective, more likely to stay the course. The biggest enemy to the average investor's performance is themselves by far - selling low (fear), buying high (FOMO), they often underperform the funds they invest in by quite a bit. If a high yield stock fund causes an investor to stay the course because of the anticipation of those big dividend payments, then they are likely better off than if they invested in the total market, even though the high yield fund underperforms the total market.
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Re: What’s the problem with dividends?
Say whatNorthern Flicker wrote: ↑Sat Apr 17, 2021 2:03 pmSo I have to accept a higher tax drag on equities because some other investors have trouble stsying the course?burritoLover wrote: ↑Sat Apr 17, 2021 9:37 am Well, there is a behavioral component to dividends. Investors receiving regular higher dividends might be, from a behavioral perspective, more likely to stay the course. The biggest enemy to the average investor's performance is themselves by far - selling low (fear), buying high (FOMO), they often underperform the funds they invest in by quite a bit. If a high yield stock fund causes an investor to stay the course because of the anticipation of those big dividend payments, then they are likely better off than if they invested in the total market, even though the high yield fund underperforms the total market.
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Re: What’s the problem with dividends?
Stock buybacks have limitations. Share buybacks reduce liquidity of the remaining shares. Consider a utikity company that has a history of delivering about a 4% dividend. Stock buybacks would buy back all of the shares in 25 years. At some point in the process liquidity problems would make share buybacks inferior for shareholders relative to declaring a dividend. Not every company is a good candidate for share buybacks. There also is a question of whether share buybacks disproportionately benefit company executives. There has been a fair bit of borrowing at low bond rates to fund share buybacks. This is not returning excess capital but converting equity to debt and increasing leverage. I'm not saying tgat is a bad (or good) business decision. I don't think investors see borrowing money to declare a dividend as a win, however. It is like the company requiring you to do a cashout refi on your house.
Because some companies have stable business models and cannot always make use of all revenue productively, as pointed out. If share buybacks would be less effective than dividends as a mechanism for returning capital to investors for a particular company, then that company should declare dividends rather than holding the capital or executing share buybacks.
Thus, if you want to hold a fully diversified equity portfolio, have some dividends distributed is just part of the territory, regardless of the tax consequences. What I disfavor is portfolio construction for robust dividends. This just potentially increases tax cost in a taxable account with no benefit.
What I would favor is indexes that exclude REITs. Then these could be held in a taxable account, and equity investors could set their REIT allocation in a tax-qualified account. Splitting int'l so that countries that deliver qualified dividends could be held in a taxable account, and those that don't held in tax-qualified space would be another useful configuration.
Because some companies have stable business models and cannot always make use of all revenue productively, as pointed out. If share buybacks would be less effective than dividends as a mechanism for returning capital to investors for a particular company, then that company should declare dividends rather than holding the capital or executing share buybacks.
Thus, if you want to hold a fully diversified equity portfolio, have some dividends distributed is just part of the territory, regardless of the tax consequences. What I disfavor is portfolio construction for robust dividends. This just potentially increases tax cost in a taxable account with no benefit.
What I would favor is indexes that exclude REITs. Then these could be held in a taxable account, and equity investors could set their REIT allocation in a tax-qualified account. Splitting int'l so that countries that deliver qualified dividends could be held in a taxable account, and those that don't held in tax-qualified space would be another useful configuration.
Re: What’s the problem with dividends?
I believe your logic is wrong. This dividend scenario isn't the same as buying the same number of shares as was bought the first year. The remaining shares would all things being equal be worth more, so each year the number of shares purchased would be less, no? I can't see that this would deplete all the shares.Northern Flicker wrote: ↑Sat Apr 17, 2021 3:10 pm Consider a utikity company that has a history of delivering about a 4% dividend. Stock buybacks would buy back all of the shares in 25 years. At some point in the process liquidity problems would make share buybacks inferior for shareholders relative to declaring a dividend.
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Re: What’s the problem with dividends?
It is true that depletion of shares would not follow a straight line for 25 years because everything is not static. I was not offering the pount to be taken literally, but to demonstrate that buybacks at a high enough level harm liquidity. The flaw in the logic is not that buybacks increase the value of remaining shares-- 4% of the total cap is 4% of the total cap whether the cap is spread over more shares or fewer shares. The flaw is that the value of the compsny/business likely is growing over time so the matket cap is growing from intrinsic growth in the value of the business.
But executives of a company are not in the 0% QDI tax bracket. Whenever a share buyback is the mire attractive way to distribute capital, that is ehat they will do.
But executives of a company are not in the 0% QDI tax bracket. Whenever a share buyback is the mire attractive way to distribute capital, that is ehat they will do.
Re: What’s the problem with dividends?
That reasoning works for bonds.Northern Flicker wrote: ↑Sat Apr 17, 2021 2:03 pmSo I have to accept a higher tax drag on equities because some other investors have trouble stsying the course?burritoLover wrote: ↑Sat Apr 17, 2021 9:37 am Well, there is a behavioral component to dividends. Investors receiving regular higher dividends might be, from a behavioral perspective, more likely to stay the course. The biggest enemy to the average investor's performance is themselves by far - selling low (fear), buying high (FOMO), they often underperform the funds they invest in by quite a bit. If a high yield stock fund causes an investor to stay the course because of the anticipation of those big dividend payments, then they are likely better off than if they invested in the total market, even though the high yield fund underperforms the total market.
I have not often seen the members of this forum tell people to reduce the amount of bonds because of the drag on returns. Most people here actually recommend holding some bonds. When it comes to dividends, all of a sudden the tax on a 1% to 2% higher payout is worth 5 pages of discussions.
Dividends are relatively stable (https://www.simplysafedividends.com/int ... ar-markets), if they help you sleep at night you should buy some.
I would say that unless your asset allocation is equal to or more aggressive than the pro-dividend forum member, you shouldn't complain about the tax drag as the total return will likely be higher.
Re: What’s the problem with dividends?
The shares would literally never deplete, your original point isn't valid IMO. They could split the stock if they somehow hit a low number of outstanding shares that caused issues (or a share price that was greater than some amount which matters to companies who aren't BRK), but I doubt it would come to that. I don't think this an actual concern about buybacks.Northern Flicker wrote: ↑Sat Apr 17, 2021 3:45 pm It is true that depletion of shares would not follow a straight line for 25 years because everything is not static. I was not offering the pount to be taken literally, but to demonstrate that buybacks at a high enough level harm liquidity. The flaw in the logic is not that buybacks increase the value of remaining shares-- 4% of the total cap is 4% of the total cap whether the cap is spread over more shares or fewer shares. The flaw is that the value of the compsny/business likely is growing over time so the matket cap is growing from intrinsic growth in the value of the business.
But executives of a company are not in the 0% QDI tax bracket. Whenever a share buyback is the mire attractive way to distribute capital, that is ehat they will do.
Sporadic buybacks when management "feels" the company is undervalued may reflect bad motives by the management team, but as a 1:1 substitution for planned dividends don't see that is an issue.
Re: What’s the problem with dividends?
There is no analogy for most bonds. Periodic payments is part of the intrinsic nature of the many bonds, and can't be avoided (unlike the dividend vs buyback discussion). People do discuss proper placement of bonds (and other asset) to minimize the tax bite, so it certainly is a consideration. And discuss Munis because of the tax bite of bond interest payments. But for some bonds, e.g. I-bonds, where you can defer the payment of taxes on the interest until you cash it out, that deferral is considered a desirable feature (you can also choose to pay annually on your I-bonds).Schlabba wrote: ↑Sat Apr 17, 2021 3:48 pmThat reasoning works for bonds.Northern Flicker wrote: ↑Sat Apr 17, 2021 2:03 pmSo I have to accept a higher tax drag on equities because some other investors have trouble stsying the course?burritoLover wrote: ↑Sat Apr 17, 2021 9:37 am Well, there is a behavioral component to dividends. Investors receiving regular higher dividends might be, from a behavioral perspective, more likely to stay the course. The biggest enemy to the average investor's performance is themselves by far - selling low (fear), buying high (FOMO), they often underperform the funds they invest in by quite a bit. If a high yield stock fund causes an investor to stay the course because of the anticipation of those big dividend payments, then they are likely better off than if they invested in the total market, even though the high yield fund underperforms the total market.
I have not often seen the members of this forum tell people to reduce the amount of bonds because of the drag on returns. Most people here actually recommend holding some bonds. When it comes to dividends, all of a sudden the tax on a 1% to 2% higher payout is worth 5 pages of discussions.
Dividends are relatively stable (https://www.simplysafedividends.com/int ... ar-markets), if they help you sleep at night you should buy some.
I would say that unless your asset allocation is equal to or more aggressive than the pro-dividend forum member, you shouldn't complain about the tax drag as the total return will likely be higher.
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Re: What’s the problem with dividends?
Huh? Nobody is recommending reducing stock allocation, and by the way peopke regularly discuss managing the tax drag on bonds by tax-efficient placement.Schlabba wrote: ↑Sat Apr 17, 2021 3:48 pmThat reasoning works for bonds.Northern Flicker wrote: ↑Sat Apr 17, 2021 2:03 pmSo I have to accept a higher tax drag on equities because some other investors have trouble stsying the course?burritoLover wrote: ↑Sat Apr 17, 2021 9:37 am Well, there is a behavioral component to dividends. Investors receiving regular higher dividends might be, from a behavioral perspective, more likely to stay the course. The biggest enemy to the average investor's performance is themselves by far - selling low (fear), buying high (FOMO), they often underperform the funds they invest in by quite a bit. If a high yield stock fund causes an investor to stay the course because of the anticipation of those big dividend payments, then they are likely better off than if they invested in the total market, even though the high yield fund underperforms the total market.
I have not often seen the members of this forum tell people to reduce the amount of bonds because of the drag on returns. Most people here actually recommend holding some bonds. When it comes to dividends, all of a sudden the tax on a 1% to 2% higher payout is worth 5 pages of discussions.
Dividends are relatively stable (https://www.simplysafedividends.com/int ... ar-markets), if they help you sleep at night you should buy some.
I would say that unless your asset allocation is equal to or more aggressive than the pro-dividend forum member, you shouldn't complain about the tax drag as the total return will likely be higher.
It is very difficult to imagine what retirement portfolio and income management will look like when someone is say 35-40. But a portfolio of stocks with s higher than average dividend yield may drive more realized income than you want or need, push you into a higher medicare IRMAA bracket, and have an embedded gain that precludes fixing the problem.
Re: What’s the problem with dividends?
I have noticed in my personal experience. However, being retired the problem is not that much.
Re: What’s the problem with dividends?
I also had to account for it when managing my ACA MAGI as early retiree before it became moot (for me).Northern Flicker wrote: ↑Sat Apr 17, 2021 6:09 pm It is very difficult to imagine what retirement portfolio and income management will look like when someone is say 35-40. But a portfolio of stocks with s higher than average dividend yield may drive more realized income than you want or need, push you into a higher medicare IRMAA bracket, and have an embedded gain that precludes fixing the problem.
Re: What’s the problem with dividends?
Great post, I feel the same. Receuving dividends gives me an irrational sense of satisfaction as well, even though objectively nothing is really changing, especially since what I usually do is to take those money and use them to buy more shares.happyisland wrote: ↑Sat Apr 17, 2021 2:02 pm
I completely understand and agree with the seemingly airtight case that dividends tend to be a sub-optimal way to take profits from your investment portfolio. That said, I also have to cop to an irrational feeling of satisfaction I get when a tax-inefficient monthly dividend deposit is made in my account and I buy more shares. My brain does not always make the correct decisions, which is why the Boglehead framework (IPS and all) have been so good to me over the years.
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Re: What’s the problem with dividends?
The marginal tax drag on dividends is significant if eligible for a premium tax credit when buying individual insurance. I have a mild-to-moderate tilt away from market dividend yield for US equities, and have never regretted it. It has enhanced flexibility at all phases of the holding period.Da5id wrote: ↑Sat Apr 17, 2021 6:24 pmI also had to account for it when managing my ACA MAGI as early retiree before it became moot (for me).Northern Flicker wrote: ↑Sat Apr 17, 2021 6:09 pm It is very difficult to imagine what retirement portfolio and income management will look like when someone is say 35-40. But a portfolio of stocks with s higher than average dividend yield may drive more realized income than you want or need, push you into a higher medicare IRMAA bracket, and have an embedded gain that precludes fixing the problem.
Re: What’s the problem with dividends?
I think I wasn’t clear. I’ll rephrase it:Northern Flicker wrote: ↑Sat Apr 17, 2021 6:09 pmHuh? Nobody is recommending reducing stock allocation, and by the way peopke regularly discuss managing the tax drag on bonds by tax-efficient placement.Schlabba wrote: ↑Sat Apr 17, 2021 3:48 pmThat reasoning works for bonds.Northern Flicker wrote: ↑Sat Apr 17, 2021 2:03 pmSo I have to accept a higher tax drag on equities because some other investors have trouble stsying the course?burritoLover wrote: ↑Sat Apr 17, 2021 9:37 am Well, there is a behavioral component to dividends. Investors receiving regular higher dividends might be, from a behavioral perspective, more likely to stay the course. The biggest enemy to the average investor's performance is themselves by far - selling low (fear), buying high (FOMO), they often underperform the funds they invest in by quite a bit. If a high yield stock fund causes an investor to stay the course because of the anticipation of those big dividend payments, then they are likely better off than if they invested in the total market, even though the high yield fund underperforms the total market.
I have not often seen the members of this forum tell people to reduce the amount of bonds because of the drag on returns. Most people here actually recommend holding some bonds. When it comes to dividends, all of a sudden the tax on a 1% to 2% higher payout is worth 5 pages of discussions.
Dividends are relatively stable (https://www.simplysafedividends.com/int ... ar-markets), if they help you sleep at night you should buy some.
I would say that unless your asset allocation is equal to or more aggressive than the pro-dividend forum member, you shouldn't complain about the tax drag as the total return will likely be higher.
It is very difficult to imagine what retirement portfolio and income management will look like when someone is say 35-40. But a portfolio of stocks with s higher than average dividend yield may drive more realized income than you want or need, push you into a higher medicare IRMAA bracket, and have an embedded gain that precludes fixing the problem.
1. Most forum members here loose total return by allocating to bonds. If the bonds stops them from worrying about financial trouble, it is worth is.
The same can be said for dividends. If the regular dividend payments reduce your stress during downturns, it is worth it.
2. The most important driver of portfolio returns is asset allocation. So the endless discussion on taxes seem a lot less relevant considering many here willingly put a large chunk of their money into an asset that will likely have very low returns.
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Re: What’s the problem with dividends?
Dividend-oriented stocks can crash as hard or harder than the market. The dividend payment offered by a stock is not contractually guaranteed like a bond coupon payment, and can be eliminated at any time. It is a mistake to view a dividend-oriented stock as a bond substitute.Schiabba wrote: 1. Most forum members here loose total return by allocating to bonds. If the bonds stops them from worrying about financial trouble, it is worth is.
The same can be said for dividends. If the regular dividend payments reduce your stress during downturns, it is worth it.
You are compensated for taking risks. You are not compensated for ignoring tax efficiency.Schiabba wrote: 2. The most important driver of portfolio returns is asset allocation. So the endless discussion on taxes seem a lot less relevant considering many here willingly put a large chunk of their money into an asset that will likely have very low returns.
Last edited by Northern Flicker on Sun Apr 18, 2021 2:53 pm, edited 2 times in total.
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Re: What’s the problem with dividends?
If dividends help you stay the course, then that is fine for you, but the reason for holding bonds is much more than behavioral.Schlabba wrote: ↑Sun Apr 18, 2021 1:10 am 1. Most forum members here loose total return by allocating to bonds. If the bonds stops them from worrying about financial trouble, it is worth is.
The same can be said for dividends. If the regular dividend payments reduce your stress during downturns, it is worth it.
2. The most important driver of portfolio returns is asset allocation. So the endless discussion on taxes seem a lot less relevant considering many here willingly put a large chunk of their money into an asset that will likely have very low returns.
Historically, bonds have reduced a portfolio's volatility while improving risk adjusted returns. Over-weighting high dividend yield companies, however, has not significantly reduced portfolio volatility nor improved risk adjusted returns (except arguably as part of their incidental correlation with the value factor, etc, in which case it would be better to tilt toward those directly).
Re: What’s the problem with dividends?
It is highly personal. It seems like you manage it well for your situation.Northern Flicker wrote: ↑Sat Apr 17, 2021 8:22 pmThe marginal tax drag on dividends is significant if eligible for a premium tax credit when buying individual insurance. I have a mild-to-moderate tilt away from market dividend yield for US equities, and have never regretted it. It has enhanced flexibility at all phases of the holding period.Da5id wrote: ↑Sat Apr 17, 2021 6:24 pmI also had to account for it when managing my ACA MAGI as early retiree before it became moot (for me).Northern Flicker wrote: ↑Sat Apr 17, 2021 6:09 pm It is very difficult to imagine what retirement portfolio and income management will look like when someone is say 35-40. But a portfolio of stocks with s higher than average dividend yield may drive more realized income than you want or need, push you into a higher medicare IRMAA bracket, and have an embedded gain that precludes fixing the problem.
My situation is that my modest pension precludes my ever qualifying for ACA tax credits. Thankfully, I have found part-time self-employment, and that $21,000 bill can be paid from pre-tax money. (I REALLY missed that entitlement when I didn't have it.) In my situation, a small portion of my bills get paid from dividends, which are taxed at the long-term capital gains rate, and that is a lower tax rate than a withdrawal from my 401k.
Re: What’s the problem with dividends?
This can be very roughly approximated by holding separate value and growth index funds since, by design or coincidence, value index funds typically have significantly higher yield than their growth counterparts.Northern Flicker wrote: ↑Sat Apr 17, 2021 3:10 pm What I would favor is indexes that exclude REITs. Then these could be held in a taxable account, and equity investors could set their REIT allocation in a tax-qualified account. Splitting int'l so that countries that deliver qualified dividends could be held in a taxable account, and those that don't held in tax-qualified space would be another useful configuration.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: What’s the problem with dividends?
Sort of. The problem with REITs is that the dividends are not qualified dividends. The new QBI designation may offset that. Also separating value and growth incurs additional transaction cost as stocks move between value and growth. Also, REITs can be value or growth. I have a mild tilt away from dividends without a growth tilt, while still being very tightly co-integrated with a market index.vineviz wrote: ↑Sun Apr 18, 2021 1:08 pmThis can be very roughly approximated by holding separate value and growth index funds since, by design or coincidence, value index funds typically have significantly higher yield than their growth counterparts.Northern Flicker wrote: ↑Sat Apr 17, 2021 3:10 pm What I would favor is indexes that exclude REITs. Then these could be held in a taxable account, and equity investors could set their REIT allocation in a tax-qualified account. Splitting int'l so that countries that deliver qualified dividends could be held in a taxable account, and those that don't held in tax-qualified space would be another useful configuration.
Re: What’s the problem with dividends?
FWIW, the S&P 500's allocation to REITs is something around 2.5%, and despite that allocation Vanguard's 500 fund has pretty consistently been 100% qualified dividends.Northern Flicker wrote: ↑Sun Apr 18, 2021 2:58 pmSort of. The problem with REITs is that the dividends are not qualified dividends. The new QBI designation may offset that. Also separating value and growth incurs additional transaction cost as stocks move between value and growth. Also, REITs can be value or growth. I have a mild tilt away from dividends without a growth tilt, while still being very tightly co-integrated with a market index.vineviz wrote: ↑Sun Apr 18, 2021 1:08 pmThis can be very roughly approximated by holding separate value and growth index funds since, by design or coincidence, value index funds typically have significantly higher yield than their growth counterparts.Northern Flicker wrote: ↑Sat Apr 17, 2021 3:10 pm What I would favor is indexes that exclude REITs. Then these could be held in a taxable account, and equity investors could set their REIT allocation in a tax-qualified account. Splitting int'l so that countries that deliver qualified dividends could be held in a taxable account, and those that don't held in tax-qualified space would be another useful configuration.
https://advisors.vanguard.com/VGApp/iip ... endfigures
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: What’s the problem with dividends?
Index providers like CRSP and Morningstar use buffer rules to reduce the impact of this, which honestly in the modern age isn't great to begin with.Northern Flicker wrote: ↑Sun Apr 18, 2021 2:58 pm Also separating value and growth incurs additional transaction cost as stocks move between value and growth.
A 50/50 split using Vanguard Value Index Inv (VIVAX) and Vanguard Growth Index Investor (VIGRX) along with reasonably relaxed rebalancing bands (e.g. 5/15) has produced an ever-so-slightly HIGHER return net of expenses and transaction costs relative to Vanguard Total Stock Market. And using the ETFs would reduce the tax risk to basically nothing as well.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: What’s the problem with dividends?
I can hold a DFA fund (DFFVX or DFSTX) in a 401K to filter out REITs and pair either with a large or large/mid cap fund, so not an unsolvable problem for me. I was writing my thoughts more generally, which is that I would like to see REIT-less indices so that people can set their REIT exposure explicitly, and as low as zero. This not only gives investors more control of dividends for tax reasons, but investors in direct real estate holdings may not want more real estate exposure in a stock portfolio.
Re: What’s the problem with dividends?
It's good that you can solve the issue for you. I expect it's probably not that big of an issue, I haven't seen/heard/read from people that believe it's creating a problem for them. If there was a sizable amount of people that wanted to control their portfolio on that vector, I'm sure some fund company would be offering it. As it is, REITs make up a very small fraction of the 'total market'. An S&P 500 index fund dividends are considered 100% qualified. The people that show the most interest in REITs seem to want more than market weightings, not less.Northern Flicker wrote: ↑Sun Apr 18, 2021 4:18 pm I can hold a DFA fund (DFFVX or DFSTX) in a 401K to filter out REITs and pair either with a large or large/mid cap fund, so not an unsolvable problem for me. I was writing my thoughts more generally, which is that I would like to see REIT-less indices so that people can set their REIT exposure explicitly, and as low as zero. This not only gives investors more control of dividends for tax reasons, but investors in direct real estate holdings may not want more real estate exposure in a stock portfolio.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Re: What’s the problem with dividends?
I agree with you. I see no advantage to bonds vs dividends. Dividends are taxed at lower rates and most solid companies increase them yearly. I just got a 10% pay raise on my PG dividends. When do bonds increase their payout? (Hint: never.) Bonds are also subject to interest rate risk. The 20 year bull market in bonds as a result of declining to stable interest rates is probably at an end. Bond holders are not going to like seeing their principal erode as interest rates start to climb. I simply don't understand the animosity toward holding dividend stocks. But then again, if you don't like them, don't buy them. For those that like seeing those quarterly payments, go for it. I know that when I see those dividends paid into my account, my reaction is not: "Damn! I'm going to have to pay tax on that!"Schlabba wrote: ↑Sat Apr 17, 2021 3:48 pm
I have not often seen the members of this forum tell people to reduce the amount of bonds because of the drag on returns. Most people here actually recommend holding some bonds. When it comes to dividends, all of a sudden the tax on a 1% to 2% higher payout is worth 5 pages of discussions.
Dividends are relatively stable (https://www.simplysafedividends.com/int ... ar-markets), if they help you sleep at night you should buy some.
I would say that unless your asset allocation is equal to or more aggressive than the pro-dividend forum member, you shouldn't complain about the tax drag as the total return will likely be higher.
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Re: What’s the problem with dividends?
Dividend funds have not provided a meaningful reduction in volatility or max drawdown of a portfolio. Bonds have. Will they in the future? There are no guarantees. But the volatility of a 100% stock portfolio is not appropriate for most people who are in a season of life to want dividends in the first place (i.e. retirees). If someone in that phase is concerned about inflation or rising interest rates, they could still reduce their portfolio risk by using shorter duration and even inflation-protected bonds.ipdiddly wrote: ↑Sun Apr 18, 2021 6:03 pm I agree with you. I see no advantage to bonds vs dividends. Dividends are taxed at lower rates and most solid companies increase them yearly. I just got a 10% pay raise on my PG dividends. When do bonds increase their payout? (Hint: never.) Bonds are also subject to interest rate risk. The 20 year bull market in bonds as a result of declining to stable interest rates is probably at an end. Bond holders are not going to like seeing their principal erode as interest rates start to climb. I simply don't understand the animosity toward holding dividend stocks. But then again, if you don't like them, don't buy them. For those that like seeing those quarterly payments, go for it. I know that when I see those dividends paid into my account, my reaction is not: "Damn! I'm going to have to pay tax on that!"
If dividend funds still somehow help you stay the course, that's fine for you, but enough people around here want to make sure everyone is aware of these truths about dividends. The total return of a stock fund is what matters.
As for the "animosity". Perhaps you haven't read through this entire thread, but many of us are in a stage of life where the tax implications of dividends are meaningful. You say "don't buy them", but the boglehead way is to own the entire market, so we would have to compromise on that (or do what has been suggested in the recent posts about slicing things up between our taxable and tax sheltered accounts, which may not always be possible and adds complexity). To me, this is frustrating because companies could use buybacks instead of dividends and accomplish the same thing while allowing investors to act according to their individual needs in a tax-efficient way.
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Re: What’s the problem with dividends?
I don't like them because the mutual fund goes down the same amount the day they are paid so it was not real income to me. That is what bugs me the most about them. I don't like dividends because then I have to take less capital gains to remain in the same tax bracket. I can keep my income lower for the ACA with less dividends. But they are not the worst thing in the world.
Re: What’s the problem with dividends?
so let me get this straight...you want to avoid paying taxes so you can enjoy a govt subsidy?iamblessed wrote: ↑Mon Apr 19, 2021 7:20 am I don't like them because the mutual fund goes down the same amount the day they are paid so it was not real income to me. That is what bugs me the most about them. I don't like dividends because then I have to take less capital gains to remain in the same tax bracket. I can keep my income lower for the ACA with less dividends. But they are not the worst thing in the world.
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Re: What’s the problem with dividends?
Riprap wrote: ↑Mon Apr 19, 2021 7:50 amso let me get this straight...you want to avoid paying taxes so you can enjoy a govt subsidy?iamblessed wrote: ↑Mon Apr 19, 2021 7:20 am I don't like them because the mutual fund goes down the same amount the day they are paid so it was not real income to me. That is what bugs me the most about them. I don't like dividends because then I have to take less capital gains to remain in the same tax bracket. I can keep my income lower for the ACA with less dividends. But they are not the worst thing in the world.
At least we all have to concur that there is no shortage of conviction in this thread.
CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel |
"Pick a bushel, save a peck!" - Grandpa
Re: What’s the problem with dividends?
Managing ones income to minimize taxes is a perfectly reasonable behavior. Many on bogleheads pursue this in a variety of ways. Generally not a good thing to judge such in the forums IMO.Riprap wrote: ↑Mon Apr 19, 2021 7:50 amso let me get this straight...you want to avoid paying taxes so you can enjoy a govt subsidy?iamblessed wrote: ↑Mon Apr 19, 2021 7:20 am I don't like them because the mutual fund goes down the same amount the day they are paid so it was not real income to me. That is what bugs me the most about them. I don't like dividends because then I have to take less capital gains to remain in the same tax bracket. I can keep my income lower for the ACA with less dividends. But they are not the worst thing in the world.
Re: What’s the problem with dividends?
Indeed. I think sometimes people have trouble processing that dividends are not additional income, but are actually forced liquidations of your positions.iamblessed wrote: ↑Mon Apr 19, 2021 7:20 am I don't like them because the mutual fund goes down the same amount the day they are paid so it was not real income to me. That is what bugs me the most about them. I don't like dividends because then I have to take less capital gains to remain in the same tax bracket. I can keep my income lower for the ACA with less dividends. But they are not the worst thing in the world.
Re: What’s the problem with dividends?
Here, let me fix that for you. "but are actually return of owner's equity"
Seems like a forced liquidation of a position would be a reduction in shares.
Re: What’s the problem with dividends?
Suppose it were instead the following:
1) company is doing a buyback
2) EVERYONE is forced by some mechanism to sell shares in proportion to their holdings
It would be what hi_there said. And it has the same net effect (your fractional ownership of the company remains the same, as presumably does the cash you are given). Though the shares you are selling them have an implicit cost basis of 0 if they are to be taxed like a dividend, which is unfortunate.
Sure it isn't exactly the same thing, but it is perhaps a bit more logically similar than you are suggesting.
Re: What’s the problem with dividends?
Furthermore, a forced liquidation depends on the share price. A dividend payment is independent of the share price, it only depends on how much profit management decided to pay out.
Re: What’s the problem with dividends?
I guess it's because I've participated as shareholder/director/management in smaller, non publicly traded corporations before LLCs and limited partnerships became dominant business structures. Dividends are how the owners of the corporation got "paid." Even LLCs and partnerships require so called "forced" taxation even if no cash is distributed. That's part of doing business in good ole USA.
My perception is that a lot of investors lose sight of the business aspect of a corporations existence to begin with.
After all, what point would there be in making a profit if that profit isn't enjoyed in one way or another?
Re: What’s the problem with dividends?
Company does a dividend for $x, shareholders get $x cash.Schlabba wrote: ↑Mon Apr 19, 2021 8:48 amFurthermore, a forced liquidation depends on the share price. A dividend payment is independent of the share price, it only depends on how much profit management decided to pay out.
Company does a buyback for $x, shareholders get $x cash.
There are some differences, but they are not as stark as you seem to think IMO.
Re: What’s the problem with dividends?
Which means that dividends force you to convert the value of your shares into cash at a given moment even if you'd not consider it to be the right one, based on the share price.
If the shares are undervalued you'd be motivated to put more money into the investment, not removing it. With dividends you don't have that choice.
In the very best case scenario you manage to dodge the taxes with some strange legal maneuver -as someone pointed out in this thread- and reinvest those money, which of course is less practical than just leaving the money there in the first place.
Re: What’s the problem with dividends?
Buybacks (and being acquired) are other ways that shareholders can be paid. I'm confused that you don't seem to want to acknowledge that. And again, I'm not anti-dividend, just fine them somewhat regrettable in my taxable account. I'm totally fine with them in my Roth, though they are kinda moot there in that I just reinvest them.Riprap wrote: ↑Mon Apr 19, 2021 8:50 amI guess it's because I've participated as shareholder/director/management in smaller, non publicly traded corporations before LLCs and limited partnerships became dominant business structures. Dividends are how the owners of the corporation got "paid." Even LLCs and partnerships require so called "forced" taxation even if no cash is distributed. That's part of doing business in good ole USA.
My perception is that a lot of investors lose sight of the business aspect of a corporations existence to begin with.
After all, what point would there be in making a profit if that profit isn't enjoyed in one way or another?
Note that if you look at figure 5 in this doc https://www.yardeni.com/pub/buybackdiv.pdf for the S&P 500 Buybacks have been significantly higher than dividends for some time (I'm assuming their data is correct). I've seen arguments about buybacks providing bad incentives for management, and that may well be true in some cases. But I'd be happy if they were used in place of planned dividends (rather than timed when the stock is "cheap") in terms of the tax burden.
Re: What’s the problem with dividends?
I have acknowledged buybacks are an option. I also stated that paying too much for stock in a buyback is dumb. You like paying $1 for $.50? I don't. Why does Berkshire only buy back their stock when it is trading for less than the intrinsic value? Why don't Warren and Charlie buy back their stock at any old time willy nilly?Da5id wrote: ↑Mon Apr 19, 2021 8:59 amBuybacks (and being acquired) are other ways that shareholders can be paid. I'm confused that you don't seem to want to acknowledge that. And again, I'm not anti-dividend, just fine them somewhat regrettable in my taxable account. I'm totally fine with them in my Roth, though they are kinda moot there in that I just reinvest them.
Note that if you look at figure 5 in this doc https://www.yardeni.com/pub/buybackdiv.pdf for the S&P 500 Buybacks have been significantly higher than dividends for some time (I'm assuming their data is correct). I've seen arguments about buybacks providing bad incentives for management, and that may well be true in some cases. But I'd be happy if they were used in place of planned dividends (rather than timed when the stock is "cheap") in terms of the tax burden.
I'm confused why you won't acknowledge there are a whole lot of people that want cash out of their business without having to give up any ownership of it.
We're at a standoff. You're espousing an idealized, business school model while I have participated in real world business where things are messy, ugly, and ruthless. Each colors our perspective here. Sometimes your model works, I acknowledge that. In smaller, non public companies, much of what you suggest isn't practical or desirable.
In summary:
I like profits and spending cash as I see fit. You like profits and letting someone decide how those profits are used to avoid taxes.
Re: What’s the problem with dividends?
I believe that if you retain ownership of a stock, you are asserting implicitly that it is fairly priced. So why the notion of "paying too much"? If you believe the stock is overpriced, well, you clearly should sell it. If you think management knows it is overpriced and you don't, well, sure that is a problem. However if 100% of companies issued periodic buybacks rather than dividends I think we'd all be better off. It would leave control in the hands of the shareholders/owners to make decisions about how much cash they want when. If they don't want cash now, they need not incur a taxable event. I think the control for that decision is better placed in shareholders hands.Riprap wrote: ↑Mon Apr 19, 2021 9:13 amI have acknowledged buybacks are an option. I also stated that paying too much for stock in a buyback is dumb. You like paying $1 for $.50? I don't. Why does Berkshire only buy back their stock when it is trading for less than the intrinsic value? Why don't Warren and Charlie buy back their stock at any old time willy nilly?Da5id wrote: ↑Mon Apr 19, 2021 8:59 amBuybacks (and being acquired) are other ways that shareholders can be paid. I'm confused that you don't seem to want to acknowledge that. And again, I'm not anti-dividend, just fine them somewhat regrettable in my taxable account. I'm totally fine with them in my Roth, though they are kinda moot there in that I just reinvest them.
Note that if you look at figure 5 in this doc https://www.yardeni.com/pub/buybackdiv.pdf for the S&P 500 Buybacks have been significantly higher than dividends for some time (I'm assuming their data is correct). I've seen arguments about buybacks providing bad incentives for management, and that may well be true in some cases. But I'd be happy if they were used in place of planned dividends (rather than timed when the stock is "cheap") in terms of the tax burden.
I'm confused why you won't acknowledge there are a whole lot of people that want cash out of their business without having to give up any ownership of it.
We're at a standoff. You're espousing an idealized, business school model while I have participated in real world business where things are messy, ugly, and ruthless. Each colors our perspective here. Sometimes your model works, I acknowledge that. In smaller, non public companies, much of what you suggest isn't practical or desirable.
In summary:
I like profits and spending cash as I see fit. You like profits and letting someone decide how those profits are used to avoid taxes.
And I agree we are unlike to persuade one another. And I don't actually hate or even dislike dividends, I just think they are less than optimal tax-wise, and think that some of the fondness for them is a behavioral error.
Re: What’s the problem with dividends?
Dividends are a bank transfer. No share price involved.Astones wrote: ↑Mon Apr 19, 2021 8:59 amWhich means that dividends force you to convert the value of your shares into cash at a given moment even if you'd not consider it to be the right one, based on the share price.
If the shares are undervalued you'd be motivated to put more money into the investment, not removing it. With dividends you don't have that choice.
In the very best case scenario you manage to dodge the taxes with some strange legal maneuver -as someone pointed out in this thread- and reinvest those money, which of course is less practical than just leaving the money there in the first place.
Re: What’s the problem with dividends?
First, I'm not sure anyone is suggesting a 100% equity portfolio, although I personally tend to 90% equity. But that's me.CuriousTacos wrote: ↑Sun Apr 18, 2021 10:17 pmDividend funds have not provided a meaningful reduction in volatility or max drawdown of a portfolio. Bonds have. Will they in the future? There are no guarantees. But the volatility of a 100% stock portfolio is not appropriate for most people who are in a season of life to want dividends in the first place (i.e. retirees).ipdiddly wrote: ↑Sun Apr 18, 2021 6:03 pm . . . I see no advantage to bonds vs dividends. Dividends are taxed at lower rates and most solid companies increase them yearly. I just got a 10% pay raise on my PG dividends. When do bonds increase their payout? (Hint: never.) Bonds are also subject to interest rate risk. The 20 year bull market in bonds as a result of declining to stable interest rates is probably at an end. Bond holders are not going to like seeing their principal erode as interest rates start to climb. I simply don't understand the animosity toward holding dividend stocks. But then again, if you don't like them, don't buy them. For those that like seeing those quarterly payments, go for it. I know that when I see those dividends paid into my account, my reaction is not: "Damn! I'm going to have to pay tax on that!"
. . . many of us are in a stage of life where the tax implications of dividends are meaningful.
Second, I see the key word, repeated over and over is "volatility." So BHers don't like volatility. But what about total return? Owning bonds will most likely reduce total return for the sake of gaining reduced volatility. That's fine with me so long as it is clear that's what you are doing.
Third, BHers are also strong advocates for "rebalancing." That means selling equities when they rise and adding more bonds. Sounds like a forced sale to me and, therefor, a forced taxable event. How is that different than simply collecting a dividend? Plus the bonds are paying interest, another forced taxable event, only at ordinary income tax rates.
Fourth, yes tax implications are meaningful to all of us. I hate paying taxes. But the alternative is no income. So if, as you say, you are at that stage of life where tax implications are meaningful, what exactly is your plan? Is the plan, simply allow your equities to grow until you die? At some point, I assume you want to spend some of your wealth and that will necessitate taking income and paying the tax on that income.
Fifth, going back to volatility, which apparently scares BHers. Learn to live with it. There's been volatility throughout time. The market always recovers. (Please, let's not bring up the Great Depression, again.) The fact is that if you have sufficient dividend income, this frees you to ignore volatility. I may freak out when I see my equity balance drop 35%, but I can regain calm when I realize my dividend income remains intact. I understand there are no guarantees. But I also understand the dividend aristocrats have many decades of maintaining and increasing those dividends.
Re: What’s the problem with dividends?
I used PortfolioVisualizer to track performance of a $500K investment divided among 10 conservative, boring dividend stocks from Jan 2000 to Dec 2020. The stocks were PG, JNJ, MMM, PEP, WMT, MCD, KMB, CINF, CVX, and LOW and allocated 10% to each. I compared the performance of this 10 stock portfolio versus the same investment in VTSMX (total stock market) and VFINX (S&P 500). All dividends are kept as income (i.e., not reinvested) and the portfolio is not rebalanced (i.e., the winners continue to run as is).
Value of each portfolio at the end of 20 years (without dividend reinvestment):
Value of 10 stock portfolio: $1.95 MM
Value of VTSMX: $1.43 MM
Value of VFINX: $1.28 MM
Annual dividends paid in 2001; 2010; and 2020:
10 stock portfolio: $7798; $21,935; $47,785 (that's real money in your pocket)
-------------VTSMX: $4470; $7977; $18,964
-------------VFINX: $4711; $7264; $18,515
The point of the example is to demonstrate that one need not own high flying growth stocks to have a successful portfolio. You can have a portfolio of boring stocks and sleep well at night, collecting some very nice dividends along the way.
Value of each portfolio at the end of 20 years (without dividend reinvestment):
Value of 10 stock portfolio: $1.95 MM
Value of VTSMX: $1.43 MM
Value of VFINX: $1.28 MM
Annual dividends paid in 2001; 2010; and 2020:
10 stock portfolio: $7798; $21,935; $47,785 (that's real money in your pocket)
-------------VTSMX: $4470; $7977; $18,964
-------------VFINX: $4711; $7264; $18,515
The point of the example is to demonstrate that one need not own high flying growth stocks to have a successful portfolio. You can have a portfolio of boring stocks and sleep well at night, collecting some very nice dividends along the way.
Re: What’s the problem with dividends?
The US equity market has always recovered, based on the data we have. There's no guarantee it will do so in the future, especially within a time frame that's relevant to an individual investor. We certainly don't have all that many independent multi-decade data points with which to judge, especially ones with starting conditions that might reasonably be considered comparable to today. Even with the paucity of data, you want to throw out one data point.
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Re: What’s the problem with dividends?
Now that's funny.Astones wrote: ↑Mon Apr 19, 2021 8:59 amWhich means that dividends force you to convert the value of your shares into cash at a given moment even if you'd not consider it to be the right one, based on the share price.
If the shares are undervalued you'd be motivated to put more money into the investment, not removing it. With dividends you don't have that choice.
z
In the very best case scenario you manage to dodge the taxes with some strange legal maneuver -as someone pointed out in this thread- and reinvest those money, which of course is less practical than just leaving the money there in the first place.
•I've never heard of DRIP investing being called "some strange legal maneuver".... .
•I also have never heard of locating dividend paying assets in a Roth IRA being called "some strange legal maneuver".... .
•I've never heard of maxing out a 401k with pre-tax money and using the standard deduction so that one's taxable income is low enough for 0% taxes on qualified dividends and LTCGs in a taxable account being called "some strange legal maneuver"....
•I've also never heard of receiving income for one's human capital that equals an amount where qualified dividends are not taxed being called "some strange legal maneuver".... .
Anyway, I did point out earlier in the thread that there are those that do have a choice to reinvest the dividends without it being any sort of taxable event, just as they do have a choice to spend the dividends without it being a taxable event.
viewtopic.php?p=5946199#p5946199
Here's the IRS 2020 data for "some strange legal maneuver"...
Anybody know where I can get a cool looking t-shirt that says "I pay 0% tax on my VTI dividends due to some strange legal maneuver!"
CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel |
"Pick a bushel, save a peck!" - Grandpa
Re: What’s the problem with dividends?
Calm down. It wasn't meant as a critique.CyclingDuo wrote: ↑Mon Apr 19, 2021 10:34 am
Now that's funny.
•I've never heard of DRIP investing being called "some strange legal maneuver".... .
•I also have never heard of locating dividend paying assets in a Roth IRA being called "some strange legal maneuver".... .
•I've never heard of maxing out a 401k with pre-tax money and using the standard deduction so that one's taxable income is low enough for 0% taxes on qualified dividends and LTCGs in a taxable account being called "some strange legal maneuver"....
•I've also never heard of receiving income for one's human capital that equals an amount where qualified dividends are not taxed being called "some strange legal maneuver".... .
Anyway, I did point out earlier in the thread that there are those that do have a choice to reinvest the dividends without it being any sort of taxable event, just as they do have a choice to spend the dividends without it being a taxable event.
viewtopic.php?p=5946199#p5946199
Here's the IRS 2020 data for "some strange legal maneuver"...
Anybody know where I can get a cool looking t-shirt that says "I pay 0% tax on my VTI dividends due to some strange legal maneuver!"
CyclingDuo
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Re: What’s the problem with dividends?
lol - just some randomly selected companies there.ipdiddly wrote: ↑Mon Apr 19, 2021 10:31 am I used PortfolioVisualizer to track performance of a $500K investment divided among 10 conservative, boring dividend stocks from Jan 2000 to Dec 2020. The stocks were PG, JNJ, MMM, PEP, WMT, MCD, KMB, CINF, CVX, and LOW and allocated 10% to each. I compared the performance of this 10 stock portfolio versus the same investment in VTSMX (total stock market) and VFINX (S&P 500). All dividends are kept as income (i.e., not reinvested) and the portfolio is not rebalanced (i.e., the winners continue to run as is).
Value of each portfolio at the end of 20 years (without dividend reinvestment):
Value of 10 stock portfolio: $1.95 MM
Value of VTSMX: $1.43 MM
Value of VFINX: $1.28 MM
Annual dividends paid in 2001; 2010; and 2020:
10 stock portfolio: $7798; $21,935; $47,785 (that's real money in your pocket)
-------------VTSMX: $4470; $7977; $18,964
-------------VFINX: $4711; $7264; $18,515
The point of the example is to demonstrate that one need not own high flying growth stocks to have a successful portfolio. You can have a portfolio of boring stocks and sleep well at night, collecting some very nice dividends along the way.
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- Location: St. Louis
Re: What’s the problem with dividends?
Many Bogleheads manage their incomes for taxes and the ACA. It is very common. I should add that I am retired.Riprap wrote: ↑Mon Apr 19, 2021 7:50 amso let me get this straight...you want to avoid paying taxes so you can enjoy a govt subsidy?iamblessed wrote: ↑Mon Apr 19, 2021 7:20 am I don't like them because the mutual fund goes down the same amount the day they are paid so it was not real income to me. That is what bugs me the most about them. I don't like dividends because then I have to take less capital gains to remain in the same tax bracket. I can keep my income lower for the ACA with less dividends. But they are not the worst thing in the world.
- CyclingDuo
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- Joined: Fri Jan 06, 2017 8:07 am
Re: What’s the problem with dividends?
"Save like a pessimist, invest like an optimist." - Morgan Housel |
"Pick a bushel, save a peck!" - Grandpa