Dividends as income

[free4now]

As someone just starting to live off my stash instead of a paycheck, I'm looking into whether I should take my dividends as income.

I've heard many of the wise folks here say that dividends make up a significant part of their income. While I was in my accumulation phase I set the dividends to be reinvested and never gave it much thought.

I can't see any tax advantages to spending versus reinvesting dividends... you get the lower tax rate on the dividends no matter what you do with them.

I suppose spending dividends rather than reinvesting them would make bookkeeping simpler... the cost basis for a stock wouldn't break out into zillions of little DivRe buys. That might prevent some inadvertent wash sale issues.

And by spending the dividends you avoid the transaction costs of selling shares.

Is that it... are there any other reasons for spending rather then reinvesting dividends?

 

[cute fuzzy bunny]

Those are my reasons.

I'm already paying the tax.

I dont have to account for cost basis.

I dont have to sell shares unless I need more than the dividends pay out.

I dont get stuck with wash sales problems, like when I was using my short term bond fund as a money market and had to do about 20 of the dang things in turbotax.

Perhaps theres a good reason to reinvest and sell shares to make your bill payments...but I cant think of any.

 

[grumpy]

Unless you have time (and the inclination) to watch the share prices as you near the dividend distribution date, you may be buying shares at high prices by reinvesting. In other words, unless a stock is priced such that you would consider it a good buy, why would you purchase more shares via reinvestment? I think it should be an independent decision as to whether a company is a buy at a given price, not simply letting the dividends be reinvested. This is the approach I use now that I am FIRE'd. When I was in the accumulation phase I didn't have the time to follow things that closely and I used a broker that did free dividend reinvestments so I just let the dividends reinvest.

Grumpy

 

[SteveR]

I think it all comes down to your needs for income and your tax situation. I don't know your sources of income so there is no way to give much advice other than to say that dividends provide an income stream that is taxed at a lower (usually) rate than other forms of income from investments. Interest is taxed at regular income rates and is not "discounted" like dividends. DRIPs are a pain to track when you do sell them and that is one reason I don't do them anymore. Just taking the cash and then spending it or buying into another asset would still seem to be an easier and more tax effective way to go.

 

[Nords]

Unless you have time (and the inclination) to watch the share prices as you near the dividend distribution date, you may be buying shares at high prices by reinvesting.  In other words, unless a stock is priced such that you would consider it a good buy, why would you purchase more shares via reinvestment?  I think it should be an independent decision as to whether a company is a buy at a given price, not simply letting the dividends be reinvested.  This is the approach I use now that I am FIRE'd.

Maybe that's a good idea for individual stocks, but otherwise Siegel says we're a bunch of dirty market timers.

If we'd just stop screwing around with the valuation discussions and buy the darn indexes, then over the long run (two decades) almost every one of our buy decisions would be good decisions.

In our case it makes rebalancing sense to reinvest dividends. We're trying to spend down the Tweedy, Browne taxable account. At the rate we're going it'll take us 5-10 years, at which point we'll probably shift over to Berkshire Hathaway and start rebalancing spending that down. While we're trying to make that money go away (Hey, TH: "A-oo-gah") our reinvested dividends will be bulking up our allocations to the S&P600 small-cap value and the DOW dividends ETFs. By the time we get rid of what's currently about 43% of our portfolio, the rest should have compounded nicely to fill in the gaping chasm.

Otherwise we'd end up sitting on a pile of cash and I'd be looking over Spanky's shoulder at the pink sheets...

 

[cute fuzzy bunny]

Just take 'em and buy your wife a lexus. That'll teach her.

 

[Cut-Throat]

Those are my reasons.

I'm already paying the tax.

I dont have to account for cost basis.

I dont have to sell shares unless I need more than the dividends pay out.

I dont get stuck with wash sales problems, like when I was using my short term bond fund as a money market and had to do about 20 of the dang things in turbotax.

Perhaps theres a good reason to reinvest and sell shares to make your bill payments...but I cant think of any.

I thought all of us gigalos were re-investing the dividends and living off the wife's Paycheck!

 

[cute fuzzy bunny]

You are cuz your wife makes a lot of money...

Wine guzzling, trout catching, photoshop requesting SOB!

 

[Nords]

I thought all of us gigalos were re-investing the dividends and living off the wife's Paycheck!

My spouse is enjoying the Naval Navy Reserve so much this year that she decided to work for free. Well, free retirement points, anyway, but no paycheck.

Remember when we used to say "All this and a paycheck too!"? Now it's just all "this". Or at least an anagrammatic version.

 

[ESRBob]

Nords,
Are you saying your wife is working for free now and just getting points toward retirement or other benefits? Intriguing.

I like the anagram reference. Its the reason I ERd. No more scatalogical excavation operations for me!

 

[samclem]

Nords,

She's been working for USNR retirement points only? Wow, she's either a real patriot or you aren't much fun to be around.

 

[renferme]

I was really into dividends, until I took a part time job with the Pirates and Steelers.
Now, I don't spend the dividends; just let them accumulate and re-invest.
.
My theory might be changing or evolving. Dividends, whether I spend them or not, are taxable. If I buy non-dividend stocks, there is no tax until I sell.
I will keep my current dividend stocks, some REITs, MO, GE, XOM, some banks, etc., but will look hard at non-dividend companies for future investments (just bought SBUX for example).

 

[grumpy]

bennevis,

I do not agree. When it comes to stock returns I believe in "show me the money". A dividend is real money. It can't be paid out of accounting fraud, manipulation of the company books or hype. Back in the 90's when many of my coworkers were touting their investments in go-go growth stocks, I was plodding along with boring DRIP stocks that paid nice dividends. They are all still working and I am FIRE'd and happily collecting those dividends to augment my pension. I belive it is smarter to take the tax hit now on dividends (15%) than to bet that the capital gains rate will be that low at some unknown future date when you want to sell those growth stocks.

Grumpy

 

[Rich_by_the_Bay]

A dividend is real money. It can't be paid out of accounting fraud, manipulation of the company books or hype.

How are the amount and timing of dividends determined?

 

[renferme]

I do not agree. When it comes to stock returns I believe in "show me the money". A dividend is real money. It can't be paid out of accounting fraud, manipulation of the company books or hype. Back in the 90's when many of my coworkers were touting their investments in go-go growth stocks, I was plodding along with boring DRIP stocks that paid nice dividends. They are all still working and I am FIRE'd and happily collecting those dividends to augment my pension. I belive it is smarter to take the tax hit now on dividends (15%) than to bet that the capital gains rate will be that low at some unknown future date when you want to sell those growth stocks.

Grumpy

Not sure where we disagree; I still have the bulk of my equities in dividend paying stocks. Actually, right now, Starbucks is my only non-dividend stock.
While initially I used dividends to augment my pension, just like you, I am now
not spending that money. I'm just thinking that to avoid paying taxes on the dividends, I might go a bit into growth stocks that do not pay dividends and hope for some stock price appreciation.
I bought Starbucks with some dividend money + some bad stocks that I sold.
So, now that I'm in retirement, buying stocks will be a slow process as I don't have the "big" paycheck coming in every month. IOW, there will be no mass exodus from div. stocks to growth stocks.

btw grumpy, I notice we're both age 59 and from opposite ends of the state:
you from Philly, me from the Pgh. area.

 

[grumpy]

The amount of the dividend is set by the company's board of directors. Boards are very reluctant to cut the dividend amount as this can cause a drastic drop in the stock price. They are also reluctant to raise the dividend too much as a very high dividend payout ratio (the ratio of dividends paid to profits earned) is also considered a negative for the stock. There is a schedule of quarterly dividend dates that is specific to each company. I look for companies with a history of raising their dividends on a regular basis and whose dividend payout ratio is in line with other companies in their industry.

Grumpy

 

[Nords]

Are you saying your wife is working for free now and just getting points toward retirement or other benefits?

She's been working for USNR retirement points only? Wow, she's either a real patriot or you aren't much fun to be around.

Yup. What can I say, she doesn't surf either. I tease her that I must not be setting a good example because she just can't quite turn it off. It certainly keeps me from waxing maudling about the good ol' Navy days.

I don't know how the other services do it, but the Navy Reserve makes O-5s & above compete for their pay billets. There are a lot of deadwood senior officers who've reached retirement eligibility but who find the Reserves pretty tolerable for a weekend a month/two weeks a year.

The billets are pretty competitive, however, with only one out of four getting a billet and with a somewhat narrower range of choices in Hawaii. At least she elected not to spend her own money traveling to Norfolk or SD for a pay billet.

Reservists losing their pay billet go to the "Volunteer Training Unit" until next year's billet competition. They drill weekends for retirement points (same # points as when in a pay billet) and still have to do two weeks' duty (same # points but no paycheck) to be eligible for a "good year" toward retirement. The issue is getting up early on a Saturday or taking time off from work for two weeks' duty and realizing that it's being done for free. Add in the possibility of being mobilized (just about every Navy Reserve officer in the Supply Corps plus all the doctors & dentists have been mobilized in the last two months to give their Army counterparts a break), and the VTU is what forces many to make a decision to go inactive or even retire.

Spouse still works her PACOM contacts for an occasional gig with the planning of Thailand's "COBRA GOLD" exercise, which substitutes for that two weeks' duty and some of the weekends. She's also been able to get her expenses paid for a May trip to Bangkok, so that's propping up her morale. (Unfortunately Grandma & Grandpa are vacationing on the Mainland and the kid's in school so I'll be holding down the home front.) However that's still two months away and the funding see-saw will continue to drag her through the knothole until I drop her off at the airport.

This is her first year in the VTU and she's applying for a coveted Hawaii Navy billet with the state Civil Defense & Army planners. (Funny thing, all her potential competition keeps getting hurt or deciding to retire...) She could stick with this until 2013 and there's still a slim chance that DoD might try to prune the ranks with the age 55 Reserve retirement, so she claims she has no reason to hang it up.

But by the third workday in a row the whining gets pretty fierce. At least I won't be able to hear it while she's shopping in Bangkok. And she'll bring home new tae kwon do gear & DVDs for everyone...

 

[ESRBob]

BenNevis-
I think the real gem in your post is the 'part time work for Steelers/Pirates --
Is this the ushering at games or is it a different gig?
Sounds like a dream (even if the retirement bennies aren't as golden as Mrs. Nords')

I know this thread was about dividends but it seems the real bottom line is income to cover expenses during retirement and if that can be earned in a fun way, then you might just have your cake and eat it itoo.

 

[renferme]

ERSBob, check your inbox,
Bennevis.