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Bogle 3 Fund Majesty of Simplicity vs evils of dividends
Old 07-09-2014, 08:36 AM   #1
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Bogle 3 Fund Majesty of Simplicity vs evils of dividends

Been reading about the Boglehead lazy 3 fund AA and the 'majesty of simplicity', but am concerned about the evils of dividends.

In the 3 fund AA - I understand that bonds should be in tax deferred and equities (domestic and int'l) should then be for any tax free (Roth) or after tax.

But my wife for example has a Vanguard 500 index etf and it throws off a lot of ordinary dividends.

Wouldn't any "total" domestic or international index eth throw off dividends?

So isn't this conflicting goals: simplicity but generating dividends in after tax?

[oops - Mods - could you please move this to FIRE and Money? Thanks/sorry]
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Old 07-09-2014, 10:22 AM   #2
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Depends on your POV, I guess. We like dividends and don't consider them a complication, even though we pay IRS and state taxes on them. Better to make money and pay taxes, than not to make money.

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Originally Posted by BBQ-Nut View Post
Been reading about the Boglehead lazy 3 fund AA and the 'majesty of simplicity', but am concerned about the evils of dividends.

In the 3 fund AA - I understand that bonds should be in tax deferred and equities (domestic and int'l) should then be for any tax free (Roth) or after tax.

But my wife for example has a Vanguard 500 index etf and it throws off a lot of ordinary dividends.

Wouldn't any "total" domestic or international index eth throw off dividends?

So isn't this conflicting goals: simplicity but generating dividends in after tax?

[oops - Mods - could you please move this to FIRE and Money? Thanks/sorry]
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Old 07-09-2014, 10:31 AM   #3
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What's wrong with dividends? As long as the share price increase exceeds inflation, I am happy with getting dividends as well.

In retirement, my dividends (from both taxable and tax-sheltered accounts) provide me with the money that I live on.

Part of my portfolio is total bond index, total stock index, and international stock index, so that would be your lazy portfolio. I also have Wellesley and the TSP "G Fund". Pretty simple portfolio. My state and federal taxes combined are around 9.5% to 10% of my AGI.
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Old 07-09-2014, 10:34 AM   #4
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... concerned about the evils of dividends.
Money is evil? Or is it tax that's evil?

One easy way to avoid the latter is to stop working. No more income, no more tax.
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Old 07-09-2014, 10:39 AM   #5
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I guess I am not sure what you are asking. Any dividend profits in the after tax account would be taxable. So would any increase in value (capital gains) once they are sold. You might avoid the yearly dividend tax exposure by focusing on growth of the asset value vs yearly dividend, but you will pay the tax in the end.
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Old 07-09-2014, 10:40 AM   #6
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I like ETFs with raising dividends IE: VIG, SCHD
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Old 07-09-2014, 10:46 AM   #7
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I guess I am not sure what you are asking. Any dividend profits in the after tax account would be taxable. So would any increase in value (capital gains) once they are sold. You might avoid the yearly dividend tax exposure by focusing on growth of the asset value vs yearly dividend, but you will pay the tax in the end.
I'm thinking the OP is referring to dividends in the accumulation phase, when one is generally in a high-ish tax bracket and must pay taxes on them when the dividends are paid. Investing in growth (non-dividend-paying) stocks allows one to defer paying taxes on the capital gains until the stock is sold, possibly when one has ERd and can pay 0 tax on capital gains.
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Old 07-09-2014, 10:53 AM   #8
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I'm thinking the OP is referring to dividends in the accumulation phase, when one is generally in a high-ish tax bracket and must pay taxes on them when the dividends are paid. Investing in growth (non-dividend-paying) stocks allows one to defer paying taxes on the capital gains until the stock is sold, possibly when one has ERd and can pay 0 tax on capital gains.
But high quality companies with raising dividends and wide moat are best long term investments. So getting dividend is good thing. (though yes you have to pay taxes on it)

Raising dividend is usually caused by growth of earnings and that sooner or later will result in higher stock price.
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Old 07-09-2014, 11:00 AM   #9
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But high quality companies with raising dividends and wide moat are best long term investments. So getting dividend is good thing. (though yes you have to pay taxes on it)
This is a somewhat contentious statement -- I think many believe (myself included) that dividends are irrelevant (you get your return as capital gains if not as dividends) and don't influence total return once other factors are held constant.

If you hold this view, dividends are a bad thing because you can't control your tax burden.
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Old 07-09-2014, 11:19 AM   #10
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https://assetmanagement.gs.com/conte...-dividends.pdf
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Old 07-09-2014, 12:18 PM   #11
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I never met a dividend I didn't like....
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Old 07-09-2014, 12:24 PM   #12
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Umm... Those high dividends from financial companies did not last too long once the housing bubble popped.
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Old 07-09-2014, 12:39 PM   #13
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Umm... Those high dividends from financial companies did not last too long once the housing bubble popped.
I said high quality companies with wide moat and with raising dividends.
Not companies with LARGE dividends.

Look at VIG dividend yield and what happened to it during market crash.
Looks to me index went from 147 companies to 140 and yield dropped down from 1.026 to 0.979 dollars per year. And then in 2010 again it resumed going up.
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Old 07-09-2014, 12:45 PM   #14
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I said high quality companies with wide moat and with raising dividends.
Not companies with LARGE dividends...
Sure. But "quality" of a company changes with time.

My point is "diversify, diversify". I do not hold VIG, but that might work.

I was teasing Marko about him liking all dividends.
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Old 07-09-2014, 12:48 PM   #15
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Replying to the OP: For the US market, you can use ETFs that track the large-cap growth segment. These generally have lower yields. FWIW, I have am putting new investments into VUG (yield 1.19%), the Vanguard Growth ETF.

This is lower than the yield for the 500 index, which is close to 2%.
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Old 07-09-2014, 12:49 PM   #16
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This is a somewhat contentious statement -- I think many believe (myself included) that dividends are irrelevant (you get your return as capital gains if not as dividends) and don't influence total return once other factors are held constant.

If you hold this view, dividends are a bad thing because you can't control your tax burden.
Some also believe (myself to some extent) that dividends are given when the company doesn't have better prospects for the money. A good growth company often does better by reinvesting the money to continue growing and increasing its value greater than the dividend rate would be.
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Old 07-09-2014, 12:54 PM   #17
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Bond dividends are taxed at your marginal income tax rate unless they are tax-exempt from tax-exempt muni bond funds.

The dividends from those broad market index funds are predominantly qualified ordinary dividends which are taxed at a special low rate --- as low as 0%. This is why these funds are tax-efficient and can be in a taxable account. Furthermore, the foreign taxes paid on the international fund dividends can be credited to your US taxes if the int'l fund is held in your taxable account, but not if your int'l fund is held in a IRA or 401(k).

Nothing wrong with those qualified dividends from those "total" stock funds. It is practically impossible to avoid them. Fortunately, they get taxed in a special low way.
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Old 07-09-2014, 01:00 PM   #18
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Dividends are subject to preferential tax rates compared to interest and that is why they are carried in taxable accounts. We are retired and pay 0% federal tax on our dividends and get a nice tax credit for international equities in our taxable accounts.
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Old 07-09-2014, 01:04 PM   #19
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Dividends are subject to preferential tax rates compared to interest and that is why they are carried in taxable accounts. We are retired and pay 0% federal tax on our dividends and get a nice tax credit for international equities in our taxable accounts.
I have learned something here.... I did not realize benefit of international equities in Taxable account.
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Old 07-09-2014, 01:13 PM   #20
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While minimizing taxable events in your taxable accounts is nice, it is not something you need to avoid 100%. Choose your AA, then do the best placement of shares that you can. You can spreadsheet a few scenarios if you are unsure about that. You don't want to fill your IRA/Roth accounts with a bunch of low total return stuff just to avoid minor taxes on dividends.
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