Help me with stock dividends

[Quantum Sufficit]

Wondering if the forum can help me. My portfolio is 60/40 total stock and total bond. Most of my money is not in qualified plans. How many take their dividends in cash? I am retired and living on about 48k per year. If the stocks are down in the portfolio do you reinvest the dividends? It seems as though i ahould not take divs in a down market as I would effectively be selling low right?

Thanks

 

[DrRoy]

Dividends are not capital gains. Taxes on dividends are the same whether you take them in cash or reinvest them. While I have been accumulating wealth I have always reinvested, but I RE soon and will be switching to cash for spending as part of my WR.

 

[bingybear]

I am retired and living on about 48k per year. If the stocks are down in the portfolio do you reinvest the dividends? It seems as though i ahould not take divs in a down market as I would effectively be selling low right?

Not really. Dividends are paid out of some stocks as interest is paid from bonds.
If you need the dividends to support your spending, then it would be ok to take them in cash. But remember that you should re-balance your portfolio... this will tend to take care of the buying when things are low.

I tend to take my dividends in cash and use them to add to areas of the portfolio I think need increased.

 

[Katiek]

I'm still working, so I mostly reinvest the dividends automatically (except for one stock that I've always taken the dividends for no particular reason).

When I do RE, I'd calculate the amount of withdrawals I want to make from the accounts each year and then use the dividends as part of that process.

 

[MRG]

Not really. Dividends are paid out of some stocks as interest is paid from bonds.
If you need the dividends to support your spending, then it would be ok to take them in cash. But remember that you should re-balance your portfolio... this will tend to take care of the buying when things are low.

I tend to take my dividends in cash and use them to add to areas of the portfolio I think need increased.

+1
What he said.

By not reinvesting dividends you're not selling anything. You're not participating in an opportunity to reinvest dividends, but that's not selling. It's just not buying more.

 

[respond2u]

Wondering if the forum can help me. My portfolio is 60/40 total stock and total bond. Most of my money is not in qualified plans. How many take their dividends in cash? I am retired and living on about 48k per year. If the stocks are down in the portfolio do you reinvest the dividends? It seems as though i ahould not take divs in a down market as I would effectively be selling low right?

Thanks

That's a good thought, though you're not exactly selling low. It's more like you're deciding to buy low (since you get the dividend and then it gets reinvested or not, even if that's hidden from you).

Of course, that's a form of market timing that can bite us; however, the studies I've seen on market timing assume that there's plenty of income to buy and the question is to decide when to put that surplus to use in the market. That's a far different question than trying to decide when to tighten the belt and buy to take advantage of a fire sale.

 

[pb4uski]

Wondering if the forum can help me. My portfolio is 60/40 total stock and total bond. Most of my money is not in qualified plans. How many take their dividends in cash? I am retired and living on about 48k per year. If the stocks are down in the portfolio do you reinvest the dividends? It seems as though i ahould not take divs in a down market as I would effectively be selling low right?

Thanks

.

Many of us in retirement take dividends from our taxable portfolios in cash. I do... we are in part living off our taxable accounts and taking dividends in cash is more convenient for me than reinvesting them and selling shares later when I need cash for living expenses. When I was working I reinvested.

 

[Totoro]

Beyond the tax implications: Stock dividends usually work out to be a bit higher than cash dividends, and you save on broker costs if you were planning on buying anyway.

So if you are happy to increase your holdings and don't need the dividends to live on, it's an easy way to do it.

By default I choose for stock dividends for those two reasons. If I plan to divest, I switch to cash for that specific company.

 

[MRG]

Beyond the tax implications: Stock dividends usually work out to be a bit higher than cash dividends, and you save on broker costs if you were planning on buying anyway.
.

Please explain? I understand the lack of brokerage fees but the distribution doesn't care about how you take the amount. Maybe I am missing something?

 

[Totoro]

If you issue a stock dividend, you typically do it by issuing new shares and rights. I.e. 30 shares gives you the right to 1 new share.

The exchange rate is usually determined in such a way (by fiddling around with dates and measure moments) that a small premium exists if you opt for the stock instead of the cash dividend.

Companies do this because it reduces that cash payout somewhat.

We're not talking big deviations. One company I own had a 3% higher payout in stocks than cash last year, I think 5% the year before that. As in: if cash you got 100, the stock issued would be valued at 103 (or 105) or so at the rights date.

 

[Danmar]

Cash dividends represent more than half of my spending. All from taxable accounts with a market yield of about 3.5%. Pension the rest. Retired 10 years and now plan on liquidating smallish amounts on top of the divs as my portfolio has almost doubled since retirement.

 

[scrabbler1]

In my first 5 years of ER, I was reinvesting my stock fund quarterly dividends because the monthly dividends from my main bond fund were enough to cover my expenses while maintaining a decent cushion. But starting in 2014, after the bond fund's monthly dividends kept dropping a little bit every year, and my expenses kept rising slowly most years, I decided to take those quarterly stock fund dividends in cash to stabilize my cash inflows and outflows while continuing to maintain the cushion. I had always foreseen this as a possibility when I first ERed. I still reinvest the cap gain distributions from the stock fund.

 

[Quantum Sufficit]

Scrabbler1 as I recall you are living mainly off bond dividends right?

 

[MRG]

If you issue a stock dividend, you typically do it by issuing new shares and rights. I.e. 30 shares gives you the right to 1 new share.

The exchange rate is usually determined in such a way (by fiddling around with dates and measure moments) that a small premium exists if you opt for the stock instead of the cash dividend.

Companies do this because it reduces that cash payout somewhat.

We're not talking big deviations. One company I own had a 3% higher payout in stocks than cash last year, I think 5% the year before that. As in: if cash you got 100, the stock issued would be valued at 103 (or 105) or so at the rights date.

I'll tell you what I know.

Distributions do not alter the issues(cusips) share counts! They can't, otherwise the value of existing accounts would be diluted. During the distribution cycle shares that are purchased via reinvesting simply come out of the unissued share count in the issue master record.

The system I worked on didn't care how you took the distribution, cash or reinvesting, you received the exact same value in dollars or distribution price times share count. The value of your distribution was calculated and there was an "if" statement where you either produced a check or reinvested the value in shares at the current price*.

*IIRC the current price was the close minus the distribution amount. This might explain why you perceive an additional amount is given for a reinvested distribution. Of course I could be wrong, my knowledge is based on code I developed a long time ago.
If you have any documents describing the difference I'd love to see them.

 

[scrabbler1]

Scrabbler1 as I recall you are living mainly off bond dividends right?

That is correct. About 80% of my dividend income is from bond funds.

 

[W2R]

Wondering if the forum can help me. My portfolio is 60/40 total stock and total bond. Most of my money is not in qualified plans. How many take their dividends in cash? I am retired and living on about 48k per year. If the stocks are down in the portfolio do you reinvest the dividends? It seems as though i ahould not take divs in a down market as I would effectively be selling low right?

Thanks

When I was in the accumulation phase, I always reinvested dividends.

Now that I am retired, I take the dividends in my taxable accounts in cash. I generally spend very slightly less than my dividends (plus pension & SS), and the small excess is reinvested when I rebalance.

 

[kcowan]

Yes I take them in cash and then invest any excess according to our IPS at rebalance time.

I do not leave anything on automatic (except payments).

 

[Quantum Sufficit]

Thank you all! This board is very helpful. One other question. When a stock fund like vanguard total stock index distributes a quarterly dividend does the cash dividend DECREASE YOUR SHARE COUNT IF YOU DONT REINVEST? EG: You have 10 shares of fund a at 1.00 per share. A 10 cent dividend is declared. I take the dollar as cash. When all is said and done how many shares remain ex dividend?

 

[RobLJ]

+1
What he said.

By not reinvesting dividends you're not selling anything. You're not participating in an opportunity to reinvest dividends, but that's not selling. It's just not buying more.

My plan is to generally take dividends as cash for withdrawal.
However, if a fund has gone particularly low quickly, I would consider reinvesting dividends and drawing gains from other funds that have gone vertical although the difference would have to be striking (using PE and other measures). These would need to be highly uncorrelated and, in fact, you could consider this part of rebalancing. Given correlations, I think this would be rare.
In general, though withdrawing dividends makes sense; that's what they're for.

(I'm still working part-time online and DW is working FT, so right now I'm reinvesting all dividends and capital gains since we're still saving despite moving to Reno and halving our salaries. It has been a good test of the model for costs after full retirement. I call myself semi-retired.)

 

[jebmke]

Thank you all! This board is very helpful. One other question. When a stock fund like vanguard total stock index distributes a quarterly dividend does the cash dividend DECREASE YOUR SHARE COUNT IF YOU DONT REINVEST? EG: You have 10 shares of fund a at 1.00 per share. A 10 cent dividend is declared. I take the dollar as cash. When all is said and done how many shares remain ex dividend?

Same number of shares. They will just be worth 10 cents less per share after the dividend. The dividend doesn't create any value.

 

[Quantum Sufficit]

Ok. So i would not technically be selling low taking it in cash. Since the # of shares remain preserved. I would lose the ability to invest in more shares at a lower price. Do I have it right?

 

[MRG]

Ok. So i would not technically be selling low taking it in cash. Since the # of shares remain preserved. I would lose the ability to invest in more shares at a lower price. Do I have it right?

+1
That is the answer I think is generally true. I think you have to be careful not to buy dividend producers that can't sustain their dividends. As long as you are in equities that have historically paid and increased dividends over the long haul with free cash, I believe it makes sense.

 

[target2019]

Ok. So i would not technically be selling low taking it in cash. Since the # of shares remain preserved. I would lose the ability to invest in more shares at a lower price. Do I have it right?

Yes, that is right. Receiving a dividend is not selling or buying. You receive the dividend, and choose to keep it, or reinvest by buying more shares automatically.

You could accumulate cash from these Dividends for a time, and buy some other investment, too.

Last night I was explaining these concepts to one child who holds stock, paying some dividend. She was disappointed that taxes were due on this. Now on her own, she did not follow advice to increase contributions to 403b and look at possible tax advantages in her IRA.

 

[Totoro]

IIRC the current price was the close minus the distribution amount. This might explain why you perceive an additional amount is given for a reinvested distribution.

Fiddling with this is the trick I've seen. Latest cycle said company took the average stock price of the 14 (roughly) trading days, because it resulted in a small premium vs. the closing stock price of the dividend award date (which is what your code did). The year before that they chose another window.

Doing that is not my perception so much as a stated policy and communication to shareholders to do this consistently, to encourage opting for stock dividends. For this company at least, have seen it elsewhere as well since.

It surprised me the first time I read it, didn't think it would be legal. Apparently, it is. Likely within boundaries which is why the difference is so small.

 

[pb4uski]

Ok. So i would not technically be selling low taking it in cash. Since the # of shares remain preserved. I would lose the ability to invest in more shares at a lower price. Do I have it right?

You have the ability to invest in more shares at the market price any day you chose and any dividends reinvested are reinvested at the market price.

IOW, even if you set things up to take the $1 dividend in cash, you can always make a choice to take that $1 and then invest it at the $1 market price.

If you reinvest the dividend you end the day with 1.1 shares. If you take the dividend in cash and make a decision to use that cash to by shares you end the day with 1.1 shares. A distinction without a difference.