I love Dividend Distributions

[eta2020]

I am talking about mutual fund distributions, but I'm not talking about index funds.

That is very different from 100% qualified dividends. The thread is about "loving dividend distribution"......

Those are tax free up to about 85k for married couple. Lot of people here will happily retire with inflation protected tax free income of 85k a year.

Mutual fund distribution can be ton of bond yield and short term capital gains distribution. I think of bond fund as paying "income" and not dividend. And it will be taxed as income.....

 

[audreyh1]

My comment was in response to the posts about capital gains distributions and reducing capital gains distributions.

 

[photoguy]

Buffett does not like dividend because he does not want his shareholders (especially himself) to have their net worth cut by double taxation.

Buffett makes three arguments in his annual letter against dividends -- taxation is only the third. His primary argument is that the math of reinvesting favours no dividend payouts (people who need cash can sell appreciated shares instead).

You and me can have tax free dividends all the way to about 84k a year. You do not have Buffet's problems since you will need about 3.5 million in equities just to generate that kind of dividend income.

I've never had tax free dividends in my entire life. While working, I was always in too high a bracket. However even in FIRE I'll have to pay state tax. I'd always prefer to keep control over taxes by not receiving a dividend (unless the company absolutely has no reinvestment prospects).

It remains that he buys companies that pay and grow dividends.....

All else being held equal I'd prefer not to have dividends. But that's not always the case and dividends often come with companies that I want to own for other reasons (e.g. value)

I don't know any index funds that pay 4 % dividend. Very few companies do...those would certainly not make bulk of somebodies portfolio.

So you must be talking about something else than dividends.

AudreyH1 clarified that she was discussing capital gains but there are some indexes popular with slice & dicers that are approaching 4%. E.g. international/value funds such as EFV (msci value), DLS (wisdomtree int small cap), VEA (vanguard ftse developed).

 

[LitGal]

Come on down to the 15% tax bracket with the rest of us and you'll like dividends a lot more.... they are wonderful tax-free income.

Did I mention that they are tax-free?

I enjoy watching them grow my IRA. The longer it sits there and grows, the more $ will be there when I need it.

Works well for me....but most of our cash is in IRA's.

 

[Sunset]

One of the reasons I love our Berkshire-Hathaway stock is that it doesn't pay dividends and generates a capital gain only when it's sold. Of course, it's gonna be a big-azz capital gain. In the beginning I'd bought it in the IRA because that's where I had the funds to buy it (this was when they had only A and B shares). I realized what a bad idea that was and as I added new money to the after-tax funds, I bought B-H in the after-tax account and sold it in the IRA.

+1

I like to think of BRK stock as a way to defer taxes, a person could if they had 2MM in cash, buy BRKA/BRKB stock and that 2MM would not generate any payable tax until sold even as it gained 15% a yr.
Unlike crazy mutual funds that you pay tax upon, yet they don't even send you a check for the amount.
Same amount in a mutual fund at 15% profit in a year would generate $300K in reportable capital gains.

 

[eta2020]

I've never had tax free dividends in my entire life. While working, I was always in too high a bracket. However even in FIRE I'll have to pay state tax. I'd always prefer to keep control over taxes by not receiving a dividend (unless the company absolutely has no reinvestment prospects).

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Yes saying that it is tax free is kinda "misleading" on my side. But if you had ONLY 90k of qualified dividends (no other income) and lived in Texas or Florida you would pay 0% income tax.

While staying within 90k range the more is generated by qualified dividends the lower taxes one pays.

But if your retirement income is 200k...you are loosing this benefit. Unless 110k of that is generated by municipal bonds. But even at 200k you pay way less from 200k in dividends then 200k in short term capital gains.

And those tax advantages are the reason I like income generated by qualified dividends. If I had to chose single best income stream it would be it. BTW Long Term Capital gains also have this tax advantage.....The calculator is fun tool to play with

http://www.nuveen.com/Home/Documents/Viewer.aspx?fileId=49963
But the fact that companies that GROW earnings and dividends most of the time outperform non dividend payers makes me prefer growing dividend over long term capital gains.

 

[pb4uski]

....But if your retirement income is 200k...you are loosing this benefit. Unless 110k of that is generated by municipal bonds. But even at 200k you pay way less from 200k in dividends then 200k in short term capital gains......

How many people or even couples will have 200k of retirement income?

 

[LOL!]

+1

I like to think of BRK stock as a way to defer taxes, a person could if they had 2MM in cash, buy BRKA/BRKB stock and that 2MM would not generate any payable tax until sold even as it gained 15% a yr.
Unlike crazy mutual funds that you pay tax upon, yet they don't even send you a check for the amount.
Same amount in a [crazy] mutual fund at 15% profit in a year [that stupidly cashed in that profit every year] would generate $300K in reportable capital gains.

Typical index funds are tax-efficient and do not stupidly realize all their unrealized gains each and every year. The tax drag on a decent index fund is something like 0.2% to 0.3% of value a year.

I am pretty sure that folks can easily avoid crazy mutual funds and taxes on them.

 

[Amethyst]

Those of us with pensions, pay taxes on every dollar of dividends. Sounds like it is much better to retire just on investments alone!

T

Those are tax free up to about 85k for married couple. Lot of people here will happily retire with inflation protected tax free income of 85k a year.

.

 

[eta2020]

Those of us with pensions, pay taxes on every dollar of dividends. Sounds like it is much better to retire just on investments alone!

Lets say 20k of your income were qualified dividends.

Try computing taxes while having those 20k as Bond yield instead of qualified dividends. I would be extremely surprised if you end up with identical tax bill.

Yea it is better That is why Mitt Romney pays less then 14% taxes on tens of millions of annual income.

 

[UnrealizedPotential]

About 5800k of the over 7k is qualified dividends that I will get as distributions.Most of the 5800k is long term capital gain.Paying taxes on distributions has never been a problem for me.As the years pass and the amounts get higher maybe that will change.I do not know.But for now it is a good thing.

 

[Amethyst]

You sound like you have an intrinsically sensible attitude toward money, which is part of your personality and will not change!

Amethyst

About 5800k of the over 7k is qualified dividends that I will get as distributions.Most of the 5800k is long term capital gain.Paying taxes on distributions has never been a problem for me.As the years pass and the amounts get higher maybe that will change.I do not know.But for now it is a good thing.

 

[W2R]

Last year's spending (beyond my pension) came to $97 less than my dividends, only about half of which were qualified. I re-invested all my capital gains distributions. I could probably be a lot smarter about my tax planning.

But gosh, my dividends + capital gains distributions came to many, many times my total (federal and state) tax bill for all my income, including pension and more. In retirement, my taxes have been so much lower than they were while working that honestly they are pathetic. So, I can still be pretty happy about my dividends even though my tax planning does need some work.

I know, I know, it doesn't take much to make me happy these days. Seeing money appear out of thin air does it for me, though.

 

[Alan]

Since retiring I have been aggressively doing IRA to ROTH conversions (although still not quite as aggressive as i-ORP recommends). The ROTH is now very substantial and comprised of Wellesley & Wellington which kick out lots of tax free dividends.

 

[eta2020]

Since retiring I have been aggressively doing IRA to ROTH conversions (although still not quite as aggressive as i-ORP recommends). The ROTH is now very substantial and comprised of Wellesley & Wellington which kick out lots of tax free dividends.

That is another smart technique to minimize taxes.

Optimally one has equities and Municipal Bonds in taxable account generating qualified dividends and Bonds and REITs in Roth accounts .

One could construct very nice and sizable tax free income stream by combining both techniques.

 

[bad_LNIP]

Those are tax free up to about 85k for married couple

I am just thinking here, for a married couple overseas claiming qualified dividend income and FEIE, couldn't you skip out on up to 85k in qualified dividends plus 198k from the FEIE?

 

[pb4uski]

I suspect you are right (you would have to model it in TT to confirm) and the same principle would apply to other forms of tax exempt income like muni bond interest. Just note that both FEIE and muni bond interest would ned to be added back in looking at income for ACA subsidies.

 

[GTFan]

Those of us with pensions, pay taxes on every dollar of dividends. Sounds like it is much better to retire just on investments alone!

I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

 

[eta2020]

I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

Tax Calculator - Estimate Your Income Tax for 2014 - Free!

Please examine diagram/calculator on this web page. If you have for example 400k regular income...notice how additional 100k in Qualified Dividends is taxed only at 15%.

It is no longer free. It is pushed up in Adjusted Gross Income diagram and is taxed at low 15%.

So she does get taxed on Dividends but at discounted rate

 

[dtbach]

I believe owning good solid companies that pay dividends that go up year after year, is better than owning bonds that never raise the dividend rate and don't go up much in price either over the years. My dear old 91 year mother became a millionaire by owning just such companies, I rather doubt the same could be said if she had only held bonds or cash.

 

[Rustward]

I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

Me, too, Buzz, but I kinda think Amethyst is joking. But if she is not, I suppose there is a way to forfeit the pension if that will make it any better.

This reminds me of a post some time ago in a different thread in which somebody was complaining about paying more in federal taxes than some people gross in a year. I bet those "some people" would swap places in a heartbeat and be really glad to pay the taxes.

We were in that position for several years and it felt pretty good -- big tax payments and all.

 

[Amethyst]

Not looking for empathy or sympathy, that's for sure. But I give up well over 30% of my pension to Federal, State, local, and AMT, so it's certainly not the same as having the equivalent dollar amount in investment gains.

Edit: I should say "our" pensions, since we each earned one.

A.

I'm not following how having pensions less than $85k a year mean that you pay tax on every dollar of dividends. And if you have pensions at that level, sorry but I'm not feeling any empathy here.

 

[mathjak107]

i too have never been a seeker of dividends . to have a piece of my share price liquidated and handed back to me is no longer the best way to compound investor returns.

reinvesting the dividend only sets your net worth right back to where it was before the payment only now i have a tax bill.

in days of old folks wanted to pull their share of profits out of companies as these companies were still growing by leaps and bounds compounding investor money just fine.

but today paying out dividends is the least efficiant way to compound money.

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

what is interesting is dividends have increased to the highest levels since 1998 .

all dow stocks pay dividends and 84% of the s&p 500 does too.

but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up..

a good part of that capital from free cash flow is gone forever and no longer available for compounding.

mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns..

in fact one of the least efficiant ways to grow investor money now is paying it out as a dividend.

as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money.

midcaps and small caps have compounded the last 5 years at rate of 5-6% higher then their dividend paying cousins. this year the s&p 500 was the center of focus and did okay but perhaps they would have done better had they not lost the ability to compound what they did.

 

[mathjak107]

LOL! is right, in that avoiding unsolicited distributions is a better tax strategy.

If our retirement fund yields around 4% in distributions, that is about right for withdrawal and rebalancing, so tax-wise it's a wash.

But when distributions start creeping up above that 4% level, like they are this year, then we really do feel the tax bite! ouch!

but the caution with indexinng and etf's is you could be building up a tax torpedo. decades of pent up taxes could make adjustments down the road to the portfolio either a long drawn out process or a very painful tax .

sometimes paying some taxes on distributions as in managed funds may play out better depending on your own plan down the road.

i know i made some major changes pre-retirement and changed much of my portfolio . i was glad i paid some tax along the way.

 

[pb4uski]

+1 on managing tax torpedos. I cannot believe that I am "voluntarily" paying taxes today by doing discretionary roth conversions to the top of the 15% tax bracket in the hope of avoiding the IRA/401k tax torpedo. However, I know in my heart I am coming out way ahead because the incremental tax on the conversion amounts are much less than the tax I woudl have paid had I not deferred the income.