How to manage large distribution of stock in one company

[LOL!]

Well, it's water under the bridge now, but you just "bought the dividend" and will have to pay more taxes in 2010 than if you had waited a week to purchase some of those ETFs.

Also VNQ is not tax-efficient, so if this is all in a taxable account, it would be better to have just rolled that 6% of VNQ into VBR.

https://personal.vanguard.com/us/insights/article/estimated-yearend-distributions-12082010

Anyways, check the dates, you may still be able to undo some of the damage.

 

[RunningBum]

Awesome news on how it all worked out! I didn't remember the thread and read it from the start like it was new, and was ready to type in my opinion to sell it all (or 90+% of it) as soon as feasible (like waiting for the transfer to a low cost broker). Then I noticed the date and hopped to the end and saw that you got and took that advice. Well done!

 

[Marc1962]

Well, it's water under the bridge now, but you just "bought the dividend" and will have to pay more taxes in 2010 than if you had waited a week to purchase some of those ETFs.

Also VNQ is not tax-efficient, so if this is all in a taxable account, it would be better to have just rolled that 6% of VNQ into VBR.

https://personal.vanguard.com/us/insights/article/estimated-yearend-distributions-12082010

Anyways, check the dates, you may still be able to undo some of the damage.

VNQ is in my IRA, which will grow and cover the whole 6% allocation in three weeks when my 401K rollover arrives, so I did that part right. There's no room for anything else in the IRA, so the rest of it is in a taxable account.

Regarding my error buying the dividend, darn it, I knew it was an issue but overlooked it in the excitement of selling and buying yesterday. I'm having trouble finding the ex-dividend dates - I can find prior ones but not the next one. Perhaps someone can point me to that information?

Also, to avoid the dividend, do I need to sell the day before the date and buy the day after, or can I sell the day of and buy the next morning?

 

[LOL!]

... I'm having trouble finding the ex-dividend dates - I can find prior ones but not the next one. Perhaps someone can point me to that information?

Also, to avoid the dividend, do I need to sell the day before the date and buy the day after, or can I sell the day of and buy the next morning?

Is that link I gave not working?

A quick search also turns up: http://www.vanguardblog.com/2009.12.02/the-record-date-not-a-tune-you-can-dance-to.html (Warning: note this is from one year ago).

 

[LOL!]

I'd sell everything on that list I linked on Monday 12/20 and buy back on the day after ex-Dividend date, but maybe some others would time it differently.

 

[FIRE'd@51]

Also, to avoid the dividend, do I need to sell the day before the date and buy the day after, or can I sell the day of and buy the next morning?

I'd sell everything on that list I linked on Monday 12/20 and buy back on the day after ex-Dividend date, but maybe some others would time it differently.

A few points consider:

If you buy on the ex-dividend date you are not entitled to the dividend (that is why it's called the ex-dividend date), so you don't have to wait until the day after the ex-date to buy it back. The optimal strategy (with the ETF's) would be to sell just before the close on the day before the ex-date and buy back just after the open on the ex-date. This should minimize (but not eliminate) exposure to price changes other than the drop due to going ex-dividend. Of course, you will still experience frictional losses due to bid-ask spreads and commissions.

A portion of the distribution (perhaps a large portion) may be LT gains or qualified dividends which are taxed at a maximum of 15%. I would estimate the tax cost on each of the holdings prior to embarking on this maneuver to see if the tax savings is worth the potential risk.

Also, you will owe taxes on any short-term gains you have should the share prices have gone up since you bought.

Finally, with respect to the mutual funds, there may be a rule against repurchasing the shares you sold within a certain time period.

It may well be that the best thing to do at this point is to treat this as a lesson learned and just pay the tax.

 

[LOL!]

I would put together a spreadsheet this weekend to see how this will cost you. Let me give you an example. Suppose you have a $2 million portfolio, those tax-exempt bond funds are probably OK as is since they are not mentioned in the link of distributions.

However VEU is going to pay about a $1 per share dividend. With VEU at 18% of $2MM, that's a $7500+ dividend going on your Schedule B and it is not 100% qualified. VBR and VWO are gonna pay out similar dividends I think.

Since you bought just yesterday, your short-term gains are gonna be minor, but you should check just before you enter your limit orders on Monday. If you end up selling at a loss, then rebuying the next day, that would be a wash-sale which is not to be feared. Anyways, I think it is worth it to do something otherwise I would not have suggested it.

 

[Marc1962]

Oops, can't believe I overlooked the helpful link you included in your first message. That unsuccessful and unnecessary search is 15 minutes I'll never get back.

Regarding the dates, I found the following at http://www.investopedia.com/terms/e/ex-date.asp:

Investopedia explains Ex-Date
This is the date on which the seller, and not the buyer, of a stock will be entitled to a recently announced dividend. The ex-date is usually two business days before the record date. It is indicated in newspaper listings with an x.

I think that means I can avoid the dividend while minimizing loss of market exposure by selling just before the close of the trading day prior to the ex-date and buying at the opening of the ex-date.

I just crunched the numbers, and the estimated dividends amount to 1.17% of my current positions in VEU, VTI, VWO, and VBR. Assuming that I hold them all for at least a couple of months, I'll pay 15% Federal and 4.4% state/local or 0.23% of the total. The magnitude is modest but meaningful - about 5% of annual living expenses.

Currently after 1.5 trading days the positions are sporting a 0.12% gain, upon which I will have to pay short-term capital gains (32.4%) if I sell. This means that for each position that gains at least 0.70% by the last few minutes of the trading day prior to the ex-date, selling to avoid the dividend is a losing play.

Also, each position that gains more than 0.23% by that point will in hindsight have been worth taking prior to the ex-date because the gain would exceed the tax.

If the positions decline and go negative, the case for selling improves because I can use the losses; however, I also have to buy less desirable substitutes and hold them for at least 30 days to avoid wash sales.

All that said, I'll be in Mexico with my family, parents, in-laws, and aunt next week, so I think my lack of safe, convenient Internet access will be the overriding factor that causes me to retain the shares and accept the tax obligation.

I must confess that I harbor some misgivings about the conventional wisdom. Given the recent positive trending of the market, I like my chances of reaching the 0.23% level that would justify having bought the dividend. Generally, I wonder how many trading days one should be willing to give up in order to avoid a dividend. In this case, I would have given up 3.5 days for VEU, VTI, and VWO, and 6.5 days for VBR.

Thanks for drawing my attention to the error, LOL! - I have learned some things by thinking through the issue this evening.

 

[LOL!]

Remember qualified dividends & LT cap gains are taxed at 15%, but ordinary dividends and short-term cap gains are taxed at your marginal income tax rate, so your calculations are not quite correct. The link broke out dividends into qualified and non-qualified.

Furthermore, for a dividend to be qualified, you have to own the fund for a 60-day period which could be the 60 days after the dividend.

 

[Marc1962]

Thanks for the additional comments, FIRED@51 and LOL!. I do see that I overlooked the issue of non-qualified dividends in my calculations.

I think I would likely address this issue quantitatively if I were not going to be out of country on the trading days of interest. As it is, I'm just going to chalk it up to experience and hope the market rises next week - dumb luck can cover up a multitude of sins!

 

[Helen]

Marc, if it were me, I wouldn't worry about it. There is always going to be tuituion to pay when learning. It's a small amount of money and you now have peace of mind; not only with the diversification but also by having decided on your asset allocation. Enjoy your vacation!

 

[LOL!]

One last thing: Be very careful with the 1099DIV that you will receive in February-March. It is likely that at that time your holding period may not allow some of your dividends to be designated at Qualified. However, if you keep holding the shares, the dividends may become qualified. In that case, you may need to have a corrected 1099DIV issued. Your broker may do this automatically, so I would not file my tax return until this was clearly sorted out one way or the other.

This may all be a red herring, but it is something to watch out for.

 

[Marc1962]

Thanks for the tip regarding the 1099DIV, LOL. I might have overlooked the mistake and overpaid my taxes.

Regarding the overall mistake of buying the dividend, sometimes it's better to be lucky than good. After refining my calculations to include a higher tax rate for the non-qualified portions of each dividend, I see that each of the four ETFs I bought on 12/16 gained more to the close of the day before each ETF's Ex-Date than the tax on its dividend. Collectively the gain was 3.7 times the tax bill.

Regarding the question of selling at the close of the day prior to the Ex-Date and buying at the open of the Ex-Date, my taxes would have been 20% higher if I had done that for all four ETFs. That said, I could have lowered the tax bill by 30% if I had done a sell/buy for VEU and VWO only. That's a theoretical observation -- I was out of the country and not in a position to manage that complication.

At any rate, I feel pretty good about making a mistake, avoiding paying for it, and learning a lot that will be useful in the future. In particular, I see now that each Ex-Date is an opportunity to optimize, and I look forward to managing them in a hands-on fashion going forward.

Many thanks to all for the information, feedback, and support. You guys are great!