A Different Kind of Year-End Problem

[marko]

Hi Folks! Been away for a while. I've been busy with several personal issues including selling the 150 year old family homestead (a quality of life issue, not a financial one) and building a new home...all stories for another day (but if your do-good neighbor proudly announces that he's converted his rental house next to you to create "low income housing"...run!)

My predicament: I'm at a bit of a loss and come here for some context and/or perspective.

Background: RE'd 15 years ago and since then we've lived quite nicely on 1) MF dividends and cap gains and recently 2) SS. Have never had to sell a share.
Most dividends and CG's are within my IRA at TRPrice. No individual stocks; various MFs representing a 60/40 mix; reallocate as needed. We average about 7.5% total return with typically 2.1% of that in dividends and 2.7% in CG's and the rest organic growth. About 70% of that income arrives at year end.

We are "don't touch the principal" types and find that dividends and cap gains fill the gaps nicely and have been fairly consistent over the years, representing about 80% of our income stream.

Let's not get into "dividends and cap gains ARE part of the principal", ok?...I get that. Admittedly, a bit of mental gymnastics but fundamentally, we take comfort in having the same amount of shares at year's end as what we started with and allowing those shares to grow organically over time while delivering an income.

Here's my dilemma: This year's year-end dividends have come in at about half of historic levels (even lower than '08/'09); somewhat expected considering the Covid economy. Year-end cap gains came in higher than normal levels and between the two have essentially given us the same income as usual.

I'd hate to 'reach for yield' as I view that as bad as market timing but wonder if it's time to review my overall strategy and radically adjust or just sit tight and see how things evolve over the next few months.

Having said that:Strategically, I'm thinking of temporarily moving a certain amount of money from one fund into another to gain a nice chunk of the Year-End dividend/Cap Gain piece and then, after wash-sale time, moving it back to the original fund (which has better growth).

Any insight appreciated.

 

[OldShooter]

... Let's not get into "dividends and cap gains ARE part of the principal", ok?...I get that. ...

Having said that:Strategically, I'm thinking of temporarily moving a certain amount of money from one fund into another to gain a nice chunk of the Year-End dividend/Cap Gain piece and then, after wash-sale time, moving it back to the original fund (which has better growth). ...

If you "get that" then why would you ask your question? The newly-purchased fund will drop by the amount of the gains on the day it goes ex-dividend. That fact may be obscured by price noise, but it's as inevitable as 100 - 2 = 98.

 

[njhowie]

Let's not get into "dividends and cap gains ARE part of the principal", ok?...I get that. Admittedly, a bit of mental gymnastics but fundamentally, we take comfort in having the same amount of shares at year's end as what we started with and allowing those shares to grow organically over time while delivering an income.

Here's my dilemma: This year's year-end dividends have come in at about half of historic levels (even lower than '08/'09); somewhat expected considering the Covid economy. Year-end cap gains came in higher than normal levels and between the two have essentially given us the same income as usual.

I'd hate to 'reach for yield' as I view that as bad as market timing but wonder if it's time to review my overall strategy and radically adjust or just sit tight and see how things evolve over the next few months.

Having said that:Strategically, I'm thinking of temporarily moving a certain amount of money from one fund into another to gain a nice chunk of the Year-End dividend/Cap Gain piece and then, after wash-sale time, moving it back to the original fund (which has better growth).

Any insight appreciated.

You are contradicting yourself left and right and by taking the action you are contemplating.

 

[marko]

If you "get that" then why would you ask your question? .

I ask because every once in a while, the collective wisdom here surprises me with something I hadn't considered.

 

[qwerty3656]

If you have high quality dividend paying stocks then my personal view is any drop in dividend this year should be a temporary phenomenon. I don't think the strategy needs to be overhauled, but obviously the Dividend quality needs to be monitored (maybe something like simplysafedivdends)

 

[38Chevy454]

Is your question ultimately a money is fungible issue? That's what I am interpreting. In the end it doesn't matter where you get the money, result is a net amount in the end that is the same (or nearly the same).


There are many who like the dividend approach because it makes it easy to receive the money and no selling is involved. But as you are finding out this year, dividends are not constant and assured.


Maybe you need to evaluate your "don't touch principle" philosophy. That's a personal choice, but does have consequences on your investment strategy and allocation. Right now you state that year end money is about the same, so I don't see a problem sticking with what you have, just accept that the source of the money percentages are different.

 

[Lsbcal]

...
I'd hate to 'reach for yield' as I view that as bad as market timing but wonder if it's time to review my overall strategy and radically adjust or just sit tight and see how things evolve over the next few months.

Having said that:Strategically, I'm thinking of temporarily moving a certain amount of money from one fund into another to gain a nice chunk of the Year-End dividend/Cap Gain piece and then, after wash-sale time, moving it back to the original fund (which has better growth).

Any insight appreciated.

I regularly adjust my strategy and do not consult folks here for whether I should or should not. For me I hate to get into this with well meaning folks. Investing sometimes brings out the egos in all of us.

The SP500 dividend yield is not much different from last year at about 1.8%. So I don't know what you are holding that is impacted.

FWIW, recently I revised the AA to about 65/35 from 60/40. I did this by exchanging the investment grade bond funds (retirement accounts so no tax consequences) for intermediate treasuries. So the extra risk was taken in stocks and not in bonds. Data from the last 30 years has shown this to give superior returns in up/down bond markets.

Personally I would not hesitate to sell stock if I had a sufficient stash to project a good outcome over the years in really bad markets. The VPW tool does a good job on this.

 

[marko]

I regularly adjust my strategy and do not consult folks here for whether I should or should not. For me I hate to get into this with well meaning folks. Investing sometimes brings out the egos in all of us.

The SP500 dividend yield is not much different from last year at about 1.8%. So I don't know what you are holding that is impacted.

.

Oddly, the fund that has disappointed is my "Equity Income" fund which was out of whack on dividends and, more notably CGs.

I did expect a drop in dividends due to the nature of the economy (companies cutting back on divs) but the historically high CGs were much lower.

 

[audreyh1]

Having said that:Strategically, I'm thinking of temporarily moving a certain amount of money from one fund into another to gain a nice chunk of the Year-End dividend/Cap Gain piece and then, after wash-sale time, moving it back to the original fund (which has better growth).

Any insight appreciated.

No, don’t do that.

Are you realizing a loss? Otherwise wash sale rules wouldn’t apply.

The money is going to come from somewhere. Buying another fund to buy the distribution then selling a post distribution lesser amount to buy back into the original fund - you’ve effectively reduced your shares anyway. Just take out the money you need.

 

[Lsbcal]

Oddly, the fund that has disappointed is my "Equity Income" fund which was out of whack on dividends and, more notably CGs.

I did expect a drop in dividends due to the nature of the economy (companies cutting back on divs) but the historically high CGs were much lower.

And was the drop in CGs due to the fact they were invested more in value stocks? If so value stocks may be coming back as parts of the economy come back next year. In the last 3 months value has been beating growth.

 

[marko]

No, don’t do that.

Are you realizing a loss? Otherwise wash sale rules wouldn’t apply.

The money is going to come from somewhere. Buying another fund to buy the distribution then selling a post distribution lesser amount to buy back into the original fund - you’ve effectively reduced your shares anyway. Just take out the money you need.

audreyh1, you always come through! Thanks.

As we've discussed in the past, math (and sometimes logic) is not my strong suit and that is what I was trying to wrap my head around.

 

[Animorph]

No, don’t do that.

Are you realizing a loss? Otherwise wash sale rules wouldn’t apply.

The money is going to come from somewhere. Buying another fund to buy the distribution then selling a post distribution lesser amount to buy back into the original fund - you’ve effectively reduced your shares anyway. Just take out the money you need.

+1

In particular, exchanging into a new fund with high distributions and then exchanging back into the original funds will definitely drop your number of shares.

I'd be keeping an eye on your portfolio value. If it is dropping I'd be concerned. Ideally it is growing at at least the rate of inflation. If you are doing OK, just sell a few shares if it is required to maintain your normal spending. Otherwise, reducing your spending to match your dividend (or distribution) income is part of the not spending principal program. Either way, no need for the mental gymnastics to justify spending some principal.

 

[marko]

+1

In particular, exchanging into a new fund with high distributions and then exchanging back into the original funds will definitely drop your number of shares.

I'd be keeping an eye on your portfolio value. If it is dropping I'd be concerned. Ideally it is growing at at least the rate of inflation. If you are doing OK, just sell a few shares if it is required to maintain your normal spending. Otherwise, reducing your spending to match your dividend (or distribution) income is part of the not spending principal program. Either way, no need for the mental gymnastics to justify spending some principal.

Thanks. Your comment of 'exchanging back...drop number of shares' was my blind spot.

The portfolio's value continues to climb well above inflation so I'm not worried there. As I get closer to 70 y.o. my principle of cutting some principal loose is less worrysome (but thankful my grand dad isn't here to see me do so!)