I love Dividend Distributions

[bad_LNIP]

Those are tax free up to about 85k for married couple

I am just thinking here, for a married couple overseas claiming qualified dividend income and FEIE, couldn't you skip out on up to 85k in qualified dividends plus 198k from the FEIE?

[pb4uski]

I suspect you are right (you would have to model it in TT to confirm) and the same principle would apply to other forms of tax exempt income like muni bond interest. Just note that both FEIE and muni bond interest would ned to be added back in looking at income for ACA subsidies.

[GTFan]

Quote:

Originally Posted by Amethyst Those of us with pensions, pay taxes on every dollar of dividends. Sounds like it is much better to retire just on investments alone!

I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

[eta2020]

Quote:

Originally Posted by GTFan I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

Tax Calculator - Estimate Your Income Tax for 2014 - Free!

Please examine diagram/calculator on this web page. If you have for example 400k regular income...notice how additional 100k in Qualified Dividends is taxed only at 15%.

It is no longer free. It is pushed up in Adjusted Gross Income diagram and is taxed at low 15%.

So she does get taxed on Dividends but at discounted rate

[dtbach]

I believe owning good solid companies that pay dividends that go up year after year, is better than owning bonds that never raise the dividend rate and don't go up much in price either over the years. My dear old 91 year mother became a millionaire by owning just such companies, I rather doubt the same could be said if she had only held bonds or cash.

[Rustward]

Quote:

Originally Posted by GTFan I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

Me, too, Buzz, but I kinda think Amethyst is joking. But if she is not, I suppose there is a way to forfeit the pension if that will make it any better.

This reminds me of a post some time ago in a different thread in which somebody was complaining about paying more in federal taxes than some people gross in a year. I bet those "some people" would swap places in a heartbeat and be really glad to pay the taxes.

We were in that position for several years and it felt pretty good -- big tax payments and all.

[Amethyst]

Not looking for empathy or sympathy, that's for sure. But I give up well over 30% of my pension to Federal, State, local, and AMT, so it's certainly not the same as having the equivalent dollar amount in investment gains.

Edit: I should say "our" pensions, since we each earned one.

A.

Quote:

Originally Posted by GTFan I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

[mathjak107]

i too have never been a seeker of dividends . to have a piece of my share price liquidated and handed back to me is no longer the best way to compound investor returns.

reinvesting the dividend only sets your net worth right back to where it was before the payment only now i have a tax bill.

in days of old folks wanted to pull their share of profits out of companies as these companies were still growing by leaps and bounds compounding investor money just fine.

but today paying out dividends is the least efficiant way to compound money.

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

what is interesting is dividends have increased to the highest levels since 1998 .

all dow stocks pay dividends and 84% of the s&p 500 does too.

but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up..

a good part of that capital from free cash flow is gone forever and no longer available for compounding.

mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns..

in fact one of the least efficiant ways to grow investor money now is paying it out as a dividend.

as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money.

midcaps and small caps have compounded the last 5 years at rate of 5-6% higher then their dividend paying cousins. this year the s&p 500 was the center of focus and did okay but perhaps they would have done better had they not lost the ability to compound what they did.

[mathjak107]

Quote:

Originally Posted by audreyh1 LOL! is right, in that avoiding unsolicited distributions is a better tax strategy. If our retirement fund yields around 4% in distributions, that is about right for withdrawal and rebalancing, so tax-wise it's a wash. But when distributions start creeping up above that 4% level, like they are this year, then we really do feel the tax bite! ouch!

but the caution with indexinng and etf's is you could be building up a tax torpedo. decades of pent up taxes could make adjustments down the road to the portfolio either a long drawn out process or a very painful tax .

sometimes paying some taxes on distributions as in managed funds may play out better depending on your own plan down the road.

i know i made some major changes pre-retirement and changed much of my portfolio . i was glad i paid some tax along the way.

[pb4uski]

+1 on managing tax torpedos. I cannot believe that I am "voluntarily" paying taxes today by doing discretionary roth conversions to the top of the 15% tax bracket in the hope of avoiding the IRA/401k tax torpedo. However, I know in my heart I am coming out way ahead because the incremental tax on the conversion amounts are much less than the tax I woudl have paid had I not deferred the income.

[mathjak107]

it could be better to defer or maybe not depending on the size of that gain.

if it throws you in the amt tax range , wipes away any health insurance subsidy , gets your ss taxed or gets you hit with the medicare surcharge tax than you shot yourself in the foot possibly deferring all that tax.

it is a situation by situation thing and isn't just about a small bracket jump.

[audreyh1]

Quote:

Originally Posted by mathjak107 but the caution with indexinng and etf's is you could be building up a tax torpedo. decades of pent up taxes could make adjustments down the road to the portfolio either a long drawn out process or a very painful tax . sometimes paying some taxes on distributions as in managed funds may play out better depending on your own plan down the road. I know I made some major changes pre-retirement and changed much of my portfolio . i was glad i paid some tax along the way.

Sure, for us retired and living off our portfolio, having distributions paid out as capital gains and qualified dividends is fine, as it is money we would would be withdrawing anyway and using to rebalance. UNTIL the pay out rate exceeds 4%. Then it's usually paying out more than I need for withdrawal and rebalance, and all I'm doing with the excess is paying taxes, and at least raising my basis.

I have tracked the % paid out in distributions and it tends to increase each year as a bull market extends. And then finally a nasty bear market wipes it out, and the % payout drops precipitously - almost no cap gains for a little while. I think it got up to 7% in 2007, but back then interest rates were much higher so bonds and cash were paying out a lot more than they are today.

[UnrealizedPotential]

Quote:

Originally Posted by mathjak107 i too have never been a seeker of dividends . to have a piece of my share price liquidated and handed back to me is no longer the best way to compound investor returns. reinvesting the dividend only sets your net worth right back to where it was before the payment only now i have a tax bill. in days of old folks wanted to pull their share of profits out of companies as these companies were still growing by leaps and bounds compounding investor money just fine. but today paying out dividends is the least efficiant way to compound money. a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding. what is interesting is dividends have increased to the highest levels since 1998 . all dow stocks pay dividends and 84% of the s&p 500 does too. but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up.. a good part of that capital from free cash flow is gone forever and no longer available for compounding. mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns.. in fact one of the least efficiant ways to grow investor money now is paying it out as a dividend. as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound. many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money. midcaps and small caps have compounded the last 5 years at rate of 5-6% higher then their dividend paying cousins. this year the s&p 500 was the center of focus and did okay but perhaps they would have done better had they not lost the ability to compound what they did.

It's not really true to say reinvesting dividends only sets your net worth back to where it was.You are not accounting for the extra shares you have working for you now.That is huge.As the price per share rises one makes money faster because you have more shares working for you.Otherwise what would be the point of reinvesting anything at all?

[redduck]

Quote:

Originally Posted by mathjak107 i too have never been a seeker of dividends... a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding...

I would like to get in on this deal. I got in touch with PenFed and Fidelity, but they don't offer this particular penny compounding thing. Any suggestions?

[Zathras]

This re compounding is only true if the company is doing something with the funds that would otherwise be paid back to investors.

Comparing large cap, well established companies with smaller, growth focused companies really doesn't tell you anything about the affect of dividends.

What you should compare are large, well established companies that pay dividends to large, well established companies that don't.

Companies can reinvest profit, and should. During their growth period, much, if not all of their profit goes into growing the company.
Larger, well established value companies don't.

Look at Apple. They have tens of Billions of dollars in their war chest. Do you honestly feel that rather than returning some of their profit to shareholders is worse than increasing their cash on hand?

[eta2020]

I prefer to get dividend and then I decide where to compound my money

[gomo]

Put me in the love camp for qualified dividends. While working I paid my 15% Fed tax each year, actually est quarterly payments, which was a good chunk of change. But now that I ER'd a couple of years ago, living the Fed tax free life.

Still paying the state quarterly payments though. Small price to pay in my book.

[RunningBum]

Quote:

Originally Posted by UnrealizedPotential It's not really true to say reinvesting dividends only sets your net worth back to where it was.You are not accounting for the extra shares you have working for you now.That is huge.As the price per share rises one makes money faster because you have more shares working for you.Otherwise what would be the point of reinvesting anything at all?

No, it is true. On the ex-dividend date for a stock, the price is adjusted down by the amount of the dividend. If a $1 dividend/share is to be paid, the price drops $1, +/- any trading fluctuation for that day.

As I said before, the dividend isn't just a freebie on top of a (hopefully) rising stock price. There are plenty of good reasons to invest in stocks that pay a dividend. They are generally well-established corporations that will be more stable than companies that don't pay a dividend.

In bad times they tend to drop less, especially if the dividend holds because the yield on the dividend rises as the stock drops. But look out if they cut the dividend!

In good times, growth stocks often (not always) do better because the company can get a better return on the money reinvesting in their own business than you would get from a dividend yield.

[UnrealizedPotential]

Quote:

Originally Posted by RunningBum No, it is true. On the ex-dividend date for a stock, the price is adjusted down by the amount of the dividend. If a $1 dividend/share is to be paid, the price drops $1, +/- any trading fluctuation for that day. As I said before, the dividend isn't just a freebie on top of a (hopefully) rising stock price. There are plenty of good reasons to invest in stocks that pay a dividend. They are generally well-established corporations that will be more stable than companies that don't pay a dividend. In bad times they tend to drop less, especially if the dividend holds because the yield on the dividend rises as the stock drops. But look out if they cut the dividend! In good times, growth stocks often (not always) do better because the company can get a better return on the money reinvesting in their own business than you would get from a dividend yield.

I realize that the price per share adjusts down to compensate for the dividend payment.Let us say the dividend payment is $5000.The price per share adjusts down.If the net worth is the same,where is my $5000?How are you accounting for that?I also realize dividend payments are not free.I pay 15%.It is not hard.It maybe for others,it's not for me.

[dallas27]

Dividends are not better or worse, by themselves.

This is simply a choice on our personal preference curve. No different than the preference we have to either spend a dollar today or to invest it for the future. It depends on our preferences and some externalities.

For some of us, dividends are strongly preferred and the right choice. For other, equally strong facts ands preferences make them the wrong choice.

Personally, I like brunettes.


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