How bad is it (tax-wise) to hold dividend payers in a taxable acct?

[soupcxan]

I have some extra money that I'd like to put into VG's equity income fund, VEIPX. However, I don't have any more room in my Roth, and a dividend-focused fund isn't offered in my 401k. Should I bite the bullet and hold it in a taxable account?

My research indicates that holding a large-cap, dividend focused fund in a taxable account is not as bad as holding a small cap fund (or worse, an internationa equity or taxable bond fund). But is this right?

 

[grumpy]

That is certainly true of a taxable bond fund. The interest earned in a bond fund is taxed at your marginal tax rate. Dividend distributions from equity funds are taxed at max. 15%. I have no qualms about paying 15% tax now rather than an unknown rate at some future date when I withdraw from a tax deferred account. I hold a large slug of dividend paying stocks in a taxable account originally acquired thru DRIPs with savings that exceeded the maxed out contributions to tax deferred vehicles.

Grumpy

 

[d]

I have no qualms about paying 15% tax now rather than an unknown rate at some future date when I withdraw from a tax deferred account.

ditto

 

[brewer12345]

What is the yield on the fund? Maybe 3%? So you might pay 15% of 3% of your investment in taxes? Under 1/2% a year doesn't sound too bad to me.

I generally don't have any qualms about getting qualified dividends in taxable accounts.

 

[maddythebeagle]

My research indicates that holding a large-cap, dividend focused fund in a taxable account is not as bad as holding a small cap fund (or worse, an internationa equity or taxable bond fund). But is this right?

Are you figuring less turnover on a large cap div. fund? where is CFB? on vacation? He would know more on this since he sounds to have a major wad in taxable index fund accounts. I know that he moved away from taxable bond funds.

 

[soupcxan]

Looking at the distributions per share for VEIPX over the last year:

Dividends: $0.71
ST cap gains: $0.113
LT cap gains: $0.941

And from this page at VG's site:

http://flagship3.vanguard.com/VGApp/hnw/content/PlanEdu/TaxCenter/PEdQDIfinalContent.jsp

it looks like 100% of the dividends from the fund in 2005 were "qualified" so they would be taxed at the 15% rate. The LT capital gains would also be at 15%. So the only portion of distributions from the fund that would be taxed at my full marginal rate is the $0.113 of ST capital gains, correct?

The next question...is it foolish to only hold dividend focused stocks as the equity portion of your portfolio? Obviously this goes against MPt and the conventional wisdom, and I'll miss out on mid-, small-, and international stocks...but I just don't like investments that don't produce current income. Reminds me too much of the "greater fool" theory.

 

[brewer12345]

The next question...is it foolish to only hold dividend focused stocks as the equity portion of your portfolio? Obviously this goes against MPt and the conventional wisdom, and I'll miss out on mid-, small-, and international stocks...but I just don't like investments that don't produce current income. Reminds me too much of the "greater fool" theory.

Is this meant to be an investment koan (what is the sound of one equity risk premium clapping)?

You have to decide what you believe and act accordingly. I am sufficiently convinced that there are sizable holes in MPT, but I still think that a diversified, low cost portfolio is best for a core portfolio. I don't "do" tech.

What do you believe? If you are not comfy with investments that don't produce income, then don't buy them. Just be aware of the implications of your choices. For example, dividend funds often have very disproportionate weights devoted to banks, insurers, and utilities because these industries tend to have high payouts. Is that a bet you want to make? I've no idea f it is a good one or not, but make sure you are aware of it when you make your choices.

 

[fire5soon]

Soup,
I enjoy your posts and their replies, because you and I have similar goals and risk tolerance.

My only concern with this strategy is if tax rates go up (which many believe is almost a certainty) then taxes will eat up any advantages you might gain. The qualified dividend rate of 15% is a recent advantage that investors may not enjoy for very long.

-Jay

 

[mathjak107]

i agree 15% now is better than rolling the dice later..