Pssssst----Wellesley

[DAYDREAMER]

Due to the positive comments on the this forum and my own research, I will be investing a large (to me) sum of money into Wellesley at Vanguard. I do have a few questions:

1. If I invest today, how does vangaurd determine a dividend payout at the end of the year? Is there some kind of pro rated formula based on when you buy during the quarter?

2. At the 4th quarter payout, and you opt to take the dividends $ instead of reinvesting, do you also get paid the long/short term capital gains shown on the distributions of the year?

3. Based on the height of the market, would you dollar cost average in, or just dump the large sum in at once? I know this is my decision, but would appreciate the vast experienced opinions of this forum.

I don't know if this matters for the analysis, but the sum is 600k, which is about 30% of our portfolio. The rest of our portfolio is in an S&P index. It will be highly unlikely ever to touch the principle of the portfolio. We plan to live off the dividends and pensions.

All input would be appreciated.

 

[alaska55]

1. No
2.Yes
3.No

 

[meierlde]

Due to the positive comments on the this forum and my own research, I will be investing a large (to me) sum of money into Wellesley at Vanguard. I do have a few questions:

1. If I invest today, how does vangaurd determine a dividend payout at the end of the year? Is there some kind of pro rated formula based on when you buy during the quarter?

2. At the 4th quarter payout, and you opt to take the dividends $ instead of reinvesting, do you also get paid the long/short term capital gains shown on the distributions of the year?

3. Based on the height of the market, would you dollar cost average in, or just dump the large sum in at once? I know this is my decision, but would appreciate the vast experienced opinions of this forum.

I don't know if this matters for the analysis, but the sum is 600k, which is about 30% of our portfolio. The rest of our portfolio is in an S&P index. It will be highly unlikely ever to touch the principle of the portfolio. We plan to live off the dividends and pensions.

All input would be appreciated.

Re point number 1 for dividends etc it is just the same as a stock. There is an ex dividend date if you own the stock before this date you get the dividend, On the date the price is reduced by the dividend and so if you buy after this you don't get the dividend. Finally of course there is a date that the dividend is actually payed, and in the case of mutual funds there might be a re-invest date that is after or the same as the ex date, but before the payable date.

 

[RunningBum]

I'm not a fan of averaging in for any investment, but I'm not going to repeat my reasons again here. But considering that Wellesley is only 35-40% stocks, if the market drops it shouldn't take too big of a hit. By it's nature you're only dipping partly into stocks, so I don't see a reason for further dribbling in.

 

[gcgang]

If you buy today at $600k, and tomorrow they declare their capital gain and dividend distributions to holders of record as of tomorrow for say 3% of value, you'll end up with $18,000 of currently taxable income, and have an unrealized capital loss of $18,000.

I'd wait until after distributions if taxes are a concern.

 

[coveredbridge]

You select whether to receive or reinvest dividends and cap gains distributions separately.

 

[DAYDREAMER]

Taxes are the lesser concern compared to getting the clock going to make this a long term investment. Both wife and I are retired, and for the next 2 years before pensions kick in, are living off savings, and do not have taxable income. We are also doing roth conversions up to the top of 15% bracket.

 

[Coolius]

With the amount you are investing, do so with the Wellesley Admiral Fund, they have a minimum investment of $50K, and a lower ER than the regular Wellesley Fund.

Symbol of the Admiral Fund is VWIAX.

I own this Fund.

 

[dirt_dobber]

With the amount you are investing, do so with the Wellesley Admiral Fund, they have a minimum investment of $50K, and a lower ER than the regular Wellesley Fund.

Symbol of the Admiral Fund is VWIAX.

I own this Fund.

YES - I own this fund also.
Expense Ratio numbers
VWIAX ~ .15%
VWINX ~ .22%

 

[DAYDREAMER]

You select whether to receive or reinvest dividends and cap gains distributions separately.

This brings me to another question.

4. What are the capital gains distribution coming from? I don't plan on selling any shares after I purchase them.

 

[REWahoo]

4. What are the capital gains distribution coming from?

From the equity portion of the fund, which is ~ 35% stocks and 65% bonds.

 

[REWahoo]

With the amount you are investing, do so with the Wellesley Admiral Fund...

Based on my experience, if you invest $50K or more in Wellesley you will automatically be placed in Admiral shares.

 

[Bryan Barnfellow]

This brings me to another question.

4. What are the capital gains distribution coming from? I don't plan on selling any shares after I purchase them.

Daydreamer,

In addition to your own buy/sell experience you have the group experience when owning a fund. Even if you don't sell any shares of the fund, the fund managers may in fact (and do) sell some of the fund's holdings (stocks for example if they get overvalued from the manager's perspective or to avoid losses in a downdraft). Any realized gain is then also "distributed" to the fund's participants. Tax attentive fund managers try to manage this on your behalf by balancing gains with losses when possible. When I was investing via mutual funds I always looked closely at the percentage of annual portfolio turnover to get a sense of how active the manager(s) are.

-BB

 

[ducky911]

2/3s of my Wellesley is in my IRA. I think I may have been better off with something else in my taxable account. Too late now as I would have a large gain if I tried to switch.

Very happy and rested with my Wellesley fund...29% of my investments

 

[DAYDREAMER]

The above replies are the exact reason I love this forum. Thank you everybody for your insight. As soon as the house sale proceeds check clears the banks, (hopefully tomorrow), I will confidently invest those funds into Wellesley Admiral fund. Looking forward to recieving quarterly dividend income.

 

[jebmke]

Taxes are the lesser concern compared to getting the clock going to make this a long term investment. Both wife and I are retired, and for the next 2 years before pensions kick in, are living off savings, and do not have taxable income. We are also doing roth conversions up to the top of 15% bracket.

All the more reason to not buy the dividend. Every dollar of dividend income reduces the amount you can convert to a ROTH and still remain in the 15% bracket.

 

[DAYDREAMER]

All the more reason to not buy the dividend. Every dollar of dividend income reduces the amount you can convert to a ROTH and still remain in the 15% bracket.

I totally agree with your input and is the prudent thing to do, buuuuuut, there is a side of me that wants to finally have some fun with the fruits of past labor! Going to use the dividend income to travel. It will pay for an awesome trip to Hawaii next February

 

[joylesshusband]

Going to use the dividend income to travel.

However in this case, for 2017, you get no dividend income - what you'd get is a bit of a return _OF_ your share purchase price (more like a discount). Although taxed as income.

Not a good scenario.

Like others did, I suggest buying after the div. distribution (at the "discounted" price).

 

[Winemaker]

Why not deduct the cost of your trip from your proceeds and invest after the ex dividend date. Hence, no taxable event.

 

[jebmke]

I totally agree with your input and is the prudent thing to do, buuuuuut, there is a side of me that wants to finally have some fun with the fruits of past labor! Going to use the dividend income to travel. It will pay for an awesome trip to Hawaii next February

It is all money. In this case, you are buying a tax bill.

 

[Bryan Barnfellow]

Daydreamer,

If you buy just before the dividend is paid, you will get a distribution (which you can use for your travel, yes); BUT, the NAV of the fund will then decrease by the amount of the distribution. So, effectively, you give them money to buy shares, they give some of it back, AND you get taxed as though you somehow made a profit. Empty calories. I'd wait until after they distribute. I was once in a big hurry to just do something and made a sizeable investment in a fund only to have this happen 7 days later. An expensive lesson.

-BB

 

[RunningBum]

It's not that expensive. You're just paying taxes earlier than you need to since the price will drop after the distribution, and eventually when you sell you'll pay a smaller capital gain (or have a larger loss). It's not like your paying taxes and getting nothing at all in return, unless you're paying 15% on dividends now and would pay nothing on cap gains later. I guess if you held them forever, your heirs would get an updated basis, so it might be that way.

 

[DAYDREAMER]

Ok, trying to understand the nuts and bolts of the optimum time to buy. Is this buying now an issue only because we are in the 4th quarter of 2017, and has been a block buster year, but would be an opportune time to buy in 4th quarter if it was a down year?

Please understand my naive questions. I have only been an investor in 401k's in which no money is ever taken out, only put in.

Just out of curiosity, could somebody show the math of how investing today in Wellesley admiral funds is not a good idea, and how this costs me money. Words only confuse me at this point.

 

[RunningBum]

A blockbuster year has little to do with it. The underlying stocks pay dividends, and those come out in the fund near the end of the year. So the end of the year is a bad time to buy any mutual fund that includes a decent number of dividend paying stocks. That said, you're over 2 months away from the dividend date, so I'm not sure it's worth staying out of the market to avoid the dividends. Your call.

Here's the math, based loosely on last years numbers. They are rounded for my convenience, but close to real numbers--non-admiral, I think.

Pre-dividend price is $25. Say you buy 10,000 shares for $250K just before the dividend is paid. For simplicity, and to match your situation, you don't reinvest dividends.

After close on Dec 22, a $0.50/share dividend is paid.

You get $5K (10,000 * 0.50). You are potentially taxed 15% on that, or $750, netting you $4250.

On the open on Dec 23, the share price is adjusted to $24.50, +/- any other after hours activity. Check the daily share prices, and you'll see that happens after a dividend.

You still have 10,000 shares, and they are now worth $245,000. Your basis is still the $250K you paid, so you have an unrealized loss of $5K.

For simplicity, let's imagine unrealistically that it never pays another dividend and does not move in price, and you sell 10 years later, realizing that $5K loss. You get $245,000 in direct proceeds. If tax rates are still the same, you can cancel $5K in cap gains you might have selling other funds, which would have been taxed at 15%, or $750. So you really get $245,750 on the sale. So you get that $750 back that you paid in taxes on the original dividends, but not until years later. You essentially let the US Treasury use that $750 for years.

Now, let's say instead you waited to invest until after the dividend. You buy the same 10,000 shares, but now it only costs you $245,000 because it is post dividend. You set aside $5000 for your vacation (as opposed to the $4250 you were going to net after taxes on the dividends). Years later, when you sell, you get your $245,000 back. $750 less, because you took it upfront. Had their been gains and dividends in a more realistic scenario, the results would be the same because in either case you had 10,000 shares invested.

Or you could only hold back the $4250, and invest that extra $750 which would almost certain grow in the real life case where the fund probably increases in value and keeps earning dividends. If the fund doubles in 10 years including adjustment for dividends, you'd be $750 (less the tax on that) ahead by investing after the dividend.

On the other hand, if the fund increases in value 0.3% between now and the dividend, you'll cover that amount if you are invested in the fund during that time.

Someone can check my numbers. I hope I'm not off by a factor of 10 somewhere.

 

[DAYDREAMER]

Thank you Runningbum for showing the math and taking the time to do that. I now see why it would be benificial to hold off as long as the fund does not increase in value .3% from now until dividend payout. Definitely a strong argument to wait.