I love Dividend Distributions

[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]

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]

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]

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]

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]

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.


Sent from my iPhone using Early Retirement Forum

 

[RunningBum]

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.

Let's say you had $100K worth of a stock that earned $5K in dividends. If you reinvested the dividends you still have $100K worth of stock, because you have more shares but the share prices is lower. If you pocketed the dividends you have $95K worth of stock and $5K in your pocket. Either way your net worth is still $100K. I'm ignoring taxes because some pay 0% on dividends, and if you invest in growth stocks you'll eventually pay cap gains on those.

And really, your posts without spaces between sentences are a headache to read, so I won't be reading or responding to those anymore. I'm not telling you how to post, just telling you what I am doing.

 

[UnrealizedPotential]

Let's say you had $100K worth of a stock that earned $5K in dividends. If you reinvested the dividends you still have $100K worth of stock, because you have more shares but the share prices is lower. If you pocketed the dividends you have $95K worth of stock and $5K in your pocket. Either way your net worth is still $100K. I'm ignoring taxes because some pay 0% on dividends, and if you invest in growth stocks you'll eventually pay cap gains on those.

And really, your posts without spaces between sentences are a headache to read, so I won't be reading or responding to those anymore. I'm not telling you how to post, just telling you what I am doing.

Then we can agree to disagree.Who needs you anyways?

 

[MichaelB]

All right folks, lets disagree without being disagreeable.

 

[bad_LNIP]

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.

That's not how dividends work...especially over the long term, and it ignores the typical price run up in the days prior to the ex div date. You are making a big decision about what happens in a 48 hr period around when a stock pays a dividend vs 10 year periods or longer.

Reinvesting has a compounding effect, although one can debate how efficient it is, but over time dividends are seen as the majority component of total return for stocks. Study after study has confirmed this. Dividends account for 90+% of total return of stocks over the long term, so I'd say the compounding effect is pretty darn dramatic.

The Importance of Dividends: The Critical Role of Dividends in Stocks' Long-Term Total Return

Eagle Asset Management, in a June 2012 white paper tilted "Dividends Deliver," noted: "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks came from reinvesting dividends. Only three percent came from capital gains."

John Bogle, writing on the website IndexUniverse.com, writes the following: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) – an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” In other words, the reinvestment of dividends accounted for almost all of stocks’ long-term total return.

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.

This is not supported by any research. FCF used for buybacks is typically wasted and doesn't create shareholder value. Just ask those poor IBM shareholders where they squandered something like 100B in buybacks over the past several years. Buying companies typically is a losing proposition as well, as few companies see the advertised benefits realized and many companies overpay so much, that even under the best scenario the combined entity can't produce acceptable returns. This is all textbook MBA/corporate finance stuff.

http://dealbook.nytimes.com/2014/10/20/the-truth-hidden-by-ibms-buybacks/?_r=0

 

[pb4uski]

Personally, I like brunettes.

I personally like blonds and redheads, but for some silly reason I married a brunette.

 

[pb4uski]

All right folks, lets disagree without being disagreeable.

Yes, but RunningBum's example makes perfect sense. The payment of a dividend doesn't change your net worth (ignoring taxes, but for many people the tax rate would be 0% and it would be totally true).

 

[mathjak107]

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.

That's not how dividends work...especially over the long term, and it ignores the typical price run up in the days prior to the ex div date. You are making a big decision about what happens in a 48 hr period around when a stock pays a dividend vs 10 year periods or longer.

Reinvesting has a compounding effect, although one can debate how efficient it is, but over time dividends are seen as the majority component of total return for stocks. Study after study has confirmed this. Dividends account for 90+% of total return of stocks over the long term, so I'd say the compounding effect is pretty darn dramatic.

The Importance of Dividends: The Critical Role of Dividends in Stocks' Long-Term Total Return

Eagle Asset Management, in a June 2012 white paper tilted "Dividends Deliver," noted: "From 1871 through 2003, 97 percent of the total after-inflation accumulation from stocks came from reinvesting dividends. Only three percent came from capital gains."

John Bogle, writing on the website IndexUniverse.com, writes the following: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded) – an amazing gap of $32 million. Over the past 81 years, then, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500.” In other words, the reinvestment of dividends accounted for almost all of stocks’ long-term total return.

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.

This is not supported by any research. FCF used for buybacks is typically wasted and doesn't create shareholder value. Just ask those poor IBM shareholders where they squandered something like 100B in buybacks over the past several years. Buying companies typically is a losing proposition as well, as few companies see the advertised benefits realized and many companies overpay so much, that even under the best scenario the combined entity can't produce acceptable returns. This is all textbook MBA/corporate finance stuff.

http://dealbook.nytimes.com/2014/10/20/the-truth-hidden-by-ibms-buybacks/?_r=0

not quite how it works.

each quarter you start out with x-amount of money invested in a stock. that worth is the same before the dividend is payed and after it is payed and reinvested ,as the exchange computers reduce automatically at the open the share price by the same amount .

out of the starting gate each quater your starting value is identical with dividends reinvested as before the adjustment.

where the markets take it over the next quarter is anyones guess .

no matter what the stock appreciates percentage wise each quarter with dividends re-invested the gain would be identical in both cases whether a dividend was payed or not since your gain or lose is based on a percentage of your starting amount assuming identical total returns.


the reinvested dividends are no different than reinvesting a mutual fund distriubution. nothing gained nothing lost. it will still be the same percentage gain or loss applied to the same amount of money out of the gate over the quarter or the year...


reinvesting dividends does not add anything extra to the mix mathamatically had you not received the dividend but got the same total return .

the math does not care if the 9% average return is 9% appreciation or 3% dividends and 6% capital appreciation.

 

[mathjak107]

Let's say you had $100K worth of a stock that earned $5K in dividends. If you reinvested the dividends you still have $100K worth of stock, because you have more shares but the share prices is lower. If you pocketed the dividends you have $95K worth of stock and $5K in your pocket. Either way your net worth is still $100K. I'm ignoring taxes because some pay 0% on dividends, and if you invest in growth stocks you'll eventually pay cap gains on those.

And really, your posts without spaces between sentences are a headache to read, so I won't be reading or responding to those anymore. I'm not telling you how to post, just telling you what I am doing.

this is exactly the case. for some reason folks think reinvesting the dividend is some magical event increasing their compounding.

it is not , it is mathamatically neutral because gains and losses are based on a percentage of a value at a starting point .

there will be a change in value of your investment if you do not reinvest the dividends since if you pocket the dividend you now have less money at the starting gate to apply those percentage gains to.

it is all akin to not reinvesting a mutual fund distribution.


that is not the same thing that happens when you rebalance and buy more shares INCREASING allocations to that stock or to equities. very different situation rebalancing or buying more when markets are down vs reinvesting dividends when markets are lower.


dividends reinvested are a non event , while rebalancing and adding more money increases compounding.

think about it,.

 

[mathjak107]

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?

this is false, coming out of the starting gate each quarter or year with the same dollar amount yields no additional compounding because x-amount is made up of more shares /lower price vs less shares/ higher price but maintaing the same dollar value as a starting point..

just think of the mechanics of a stock split where you start out the next open with a whole lot more shares and a reduced stock price. no matter what you still have the same identical dollar amount you had before to compound over the next quarter or year.

 

[mathjak107]

Then we can agree to disagree.Who needs you anyways?

sorry ,but running bum is correct.

 

[target2019]

Not disputing the excellent analyses of dividend processing.

When the dividend is reinvested the number of shares has increased. Very small dividend, then the effect is less pronounced. But the number of shares being increased has a positive effect on future dividends.

 

[mathjak107]

nope it does not anymore than a stock split does. it is only about the fact you start the quarter or year with x-amount and it goes up x amount in total return.

since dividends are part of the total return the same total return is not compounded more or less by additional shares .

think about it.

a 100k investment spins off 10k in dividends that are reinvested.

the next open that kicks off the quarter you have that 100k made up of 90k in share value and 10k in reinvested dividends at the open .

if the stock is up 10% over the next quarter in total return you will start the very next quarter coming up and compounding at the exact same amount as if that 100k never spun that dividend off.

it has nothing to do with number of shares when the value remains constant at the start of each compounding time frame.


amount x total return x amount x total return always compounds the same if the starting amounts are the same regardless if made up of more shares at a lower price or less shares at a higher price.

 

[audreyh1]

It seems like reinvesting dividends has a compounding effect, as you will be earning the same yield on increasingly more shares.

But reinvesting capital gains distributions has no such effect guaranteed, as that is not a function of yield, but is rather selling one set of securities to buy a different set. If a fund manages to sell high and buy low most of the time, your investment will increase in value over time, but it might have also done if it had simple left the investments alone. Often funds seem to have a bunch of turnover without it being clear that it has increased the fund value.

 

[mathjak107]

try the math on an example. you will see, dividend reinvestment vs not paying a dividend at all in the first place will compound the same if the stock has the same total return.


if a stock goes up 9% in a year ,it only matters what the dollar value you started with is as it is A 9% gain on your starting amount not how many shares vs share price.
the dividends are already FIGURED IN THAT TOTAL RETURN NUMBER.


the markets typically returned 9% with 6% being capital appreciation and 3% being reinvested dividends.


that will compound the same as any other stock that paid no dividend but averaged that same 9%.


Like I said try an example , and follow it through for lets say 3 years.


compare the same starting amount , a total return of 9% and compare no dividend to reinvesting the dividends and compound both at the same rate.


adjust for the dividend just as the exchange does and make that your starting point each year..


the math will be the same regardless .


in fact no matter how much the dividend increases the subtraction off share price will always have you starting out with the same dollars as before the payout adjustment.


you will just have more shares and a lower price but each time you leave the gate you are no better or worse than prior.


like I said try it.



each payout begins the new quarter at the same amount you ended with before the payout regardless of getting that dividend or getting it and reinvesting it.


the same total return will always have the same effect.

 

[retire2020]

I hate dividend distributions because they cause me to pay more taxes. Instead, if needed I would rather sell shares to get the same money because I can offset the capital gains with carryover losses. This drops my AGI and allows me to get more tax credits and do larger Roth conversions.

So if you like to pay taxes, then by all means get more dividends. I think they suck.

+1 I hate them too! I've about 300K CG loss carried over from Y2K days and this dividend distribution forces me to pay more taxes and also pushes my AGI over Roth IRA limit so can not contribute to Roth IRA for my wife.(I'm already using backdoor for myself)