Do you spend dividends in taxable accounts or reinvest

[mathjak107]

Not really. Just think of a mutual fund . Your new cost basis is the reduced price plus the dividend. Each transaction through the year is the same thing .
reinvesting dividends do not really lower your cost basis.

Just think of having 10k in a stock. You get a 200 dollar dividend and reinvest it ,exchange rules have the stock open at an offset price.

If i bought 10k worth of stock at the open and missed the dividend i would have the same amount of shares and value as you who reinvested the dividend.

If the stock goes up 6% we are identical in value,and cost basis

 

[explanade]

Those of you not doing DRIP, are you letting the dividends and cap distributions accumulate before rebalancing or withdrawing or rebalancing quarterly as they're distributed?

Whatever cash accounts VG has that you can put them in can't be paying much in interest.

 

[pb4uski]

In my case Vanguard sends the dividends directly to my checking account for my taxable account. for my tax-deferred account they go into a low paying MM until I reinvest them, but the drag isn't very much because I don't keep much in there (0-3% of the total on average).

 

[audreyh1]

Those of you not doing DRIP, are you letting the dividends and cap distributions accumulate before rebalancing or withdrawing or rebalancing quarterly as they're distributed?

Whatever cash accounts VG has that you can put them in can't be paying much in interest.

80+% of my distributions are paid in late Nov and Dec, so we aren't talking much time delay before the Jan 2 withdrawal.

Earlier dividends I sweep into a high yield savings account.

 

[starry night]

Not really. Just think of a mutual fund .

Excerpt from:
The Virtues of Dollar-Cost Averaging
Consistency Pays
by Virginia B. Morris, But I don't find a date on this column:
......
"More Than a DRIP in the Bucket

The simplest and most cost-effective way to buy stock using dollar-cost averaging is to enroll in the dividend reinvestment plan of a holding in your portfolio."
.......
Although:
"Keeping Track Over Time

One potential headache with dollar-cost averaging is calculating the capital gains taxes you might owe when you sell the investment. To figure the tax liability, you’ll need the cost basis of shares you purchased in small increments over time."

 

[pb4uski]

The dividends do nothing for dollar cost averaging...

+1 Math is hard.

 

[mathjak107]

It is not really hard to see it has nothing to do with reducing share costs. But the problem is it sounds like it should so you see it mis quoted all the time.

Dollar cost averaging has you adding new money and new shares at a lower price.

You are increasing dollars in the investment.

A dividend is the same money changing pockets and just being redistributed .Your share price cost basis will always be the share price plus the dividend which equals just what the share price was the night before.

If you have 3 dollars in your left pocket and change it to 2 dollars and 100 penny's in the other pocket nothing has
changed except how the same 3 dollars in value is made up.

Rebalancing is buying new shares with new money being added. You are adding more dollars to something so that effects cost basis but not just reinvesting what already existed the night before .

Share price plus dividend equal old share price

 

[RunningBum]

Those of you not doing DRIP, are you letting the dividends and cap distributions accumulate before rebalancing or withdrawing or rebalancing quarterly as they're distributed?

Whatever cash accounts VG has that you can put them in can't be paying much in interest.

Since I'm retired (like the OP) I transfer them to my bank account almost immediately. I don't have a set amount I keep in cash, but I do like to keep enough for a few months or even a year, so that I'm not constantly selling throughout the year. I suppose that wouldn't be a terrible thing considering that I generally like to stay fully invested, but some Vanguard funds have frequent trading restrictions. Maybe those restrictions are just for repurchasing after selling, but if I want to put some back in a fund to rebalance I may not be able to right away. I look at rebalancing whenever I have an event where I'm moving a lot of money. After December distributions is always one of those times, though if I'm traveling I may not get to it until early January. It's possible I'll move some of that cash back into investments, but it's only been sitting out a couple weeks at most.

 

[starry night]

It is not really hard to see it has nothing to do with reducing share costs. But the problem is it sounds like it should so you see it mis quoted all the time.

To mathjak107

So, you don't think this illustrates DCA in adding new shares to a fund or account at varying costs over time, thereby easing the effect of price fluctuations?

A DRIP from my statement:
Shrs purchd. Share price
06/19/2015 Dividend Received 28.897 $33.29 $961.99
03/24/2015 Dividend Received 28.587 $32.78 $937.08
12/19/2014 Dividend Received 28.888 $33.07 $955.33

 

[RunningBum]

A dividend is a neutral event. If I have 100 shares of a $100 stock, I have $10,000 in that stock. If it declares a 5% dividend, the stock price will drop to $95, and my 100 shares is worth $9500. If I'm reinvesting I am buying $500 worth of stock or $500/95 per share, but I'm really just keeping my $10,000 investment. Any notion of DCAing new shares is offset by the stock price falling 5% for no reason other than the dividend thrown. If I don't reinvest, I've taken $500 out of that investment, rather than keeping the investment intact.

It's a lot like a stock split. If that same stock split, I now have 200 shares at $50 each, but it's still just a $10K investment. I didn't just DCA another 100 shares.

 

[GTFan]

A stock split is exactly the way to look at it when reinvesting, not a DCA into new shares.

 

[bingybear]

A dividend is a neutral event.

Not really. In taxable accounts you may be paying taxes on it (depends on type of dividend and income level. It could be worse than neutral.
edit--- I guess it is neutral since you pay the tax either way.

At least one person noted they reinvested dividends and re-balances periodically (yearly I think). At that time they take the next years spending in cash out of the market. One could nit pick that taking dividends in cash would leave more in the market longer since you are not removing a large chunk for the year, but taking the money closer to when it is needed.

For me the main reason is tax time. For those who reinvest dividends, do you make sure you don't create a wash sale due to any of your accounts or spouse's accounts? A dividend reinvestment even in a IRA could cause a wash sale.
I try to track wash sale even when not caught by my brokerage (I use multiple custodians).
The next part of tax time is recording 1099-B items when using DR, I got tired of filling line after line after line for a single transaction.

DR has some advantages I see, usually you don't pay trading fees for the new shares and it keeps your investment in the same investment.

 

[starry night]

I agree that the dividend event is neutral. Let's say that we each hold 100 shares when dividend is declared....you receive div in cash; I receive 4 additional shares through DRIP. So you have 100 shares + your div, and I have 104 shares of equal value, and of same cost basis. But when that stock price changes over time, (rises or falls), my portfolio value changes in a different way than yours -- mine is price x 104, yours is price x 100. When next quarter div is declared, I get a greater div payout than you do, mine on 104 shares to your 100. When we sell this position, my capital gain/loss will differ from yours, as well as my AVERAGE cost basis. I maintain that this is effectively DCA in that I am adding shares over time at a varying share price which mitigates my average cost per share.

 

[RunningBum]

Not really. In taxable accounts you may be paying taxes on it (depends on type of dividend and income level. It could be worse than neutral.
edit--- I guess it is neutral since you pay the tax either way.

You were right the first time. By declaring a dividend, the company is forcing you into a taxable event, whether you reinvest or not, and your cost basis is increased. I meant to include a "ignoring taxes" disclaimer, especially since many retirees pay 0% for qualified dividends and LTCGs, plus eventually it's probably a wash even if you do pay those taxes because you pay less LTCGs.

 

[mathjak107]

I agree that the dividend event is neutral. Let's say that we each hold 100 shares when dividend is declared....you receive div in cash; I receive 4 additional shares through DRIP. So you have 100 shares + your div, and I have 104 shares of equal value, and of same cost basis. But when that stock price changes over time, (rises or falls), my portfolio value changes in a different way than yours -- mine is price x 104, yours is price x 100. When next quarter div is declared, I get a greater div payout than you do, mine on 104 shares to your 100. When we sell this position, my capital gain/loss will differ from yours, as well as my AVERAGE cost basis. I maintain that this is effectively DCA in that I am adding shares over time at a varying share price which mitigates my average cost per share.

you are confused . stop thinking in terms of number of shares .

by reinvesting the dividend you are merely staying even with the dollars you had invested prior the night before the dividend , all total returns are on that value not number of shares .

if i take the money instead i reduced my investment , that is the difference.

the investment is repriced at the open less that dividend so compounding is on a smaller amount if i don't reinvest . .

a 6% total return does not care if your are reinvesting your 2% dividend and seeing 4% compounding or just 6% appreciation .number of shares that make up that value do not matter .

all you need to know is if you reinvest the dividend you are or will be no different then you were had the dividend not happened and your share price was 2% higher .

 

[starry night]

you are confused . stop thinking in terms of number of shares .

all you need to know is if you reinvest the dividend you are or will be no different then you were had the dividend not happened and your share price was 2% higher .

......
And what will be my condition when the next dividend is paid? I will receive a greater dividend payout then I would have if I had not reinvested. -- div on the new shares added at reinv. That feels to me as though "thinking in terms of number of shares" does, in fact, make a diff to me in the long run, and that I am "different then you were had the dividend not happened."

 

[RunningBum]

I agree that the dividend event is neutral. Let's say that we each hold 100 shares when dividend is declared....you receive div in cash; I receive 4 additional shares through DRIP. So you have 100 shares + your div, and I have 104 shares of equal value, and of same cost basis. But when that stock price changes over time, (rises or falls), my portfolio value changes in a different way than yours -- mine is price x 104, yours is price x 100. When next quarter div is declared, I get a greater div payout than you do, mine on 104 shares to your 100. When we sell this position, my capital gain/loss will differ from yours, as well as my AVERAGE cost basis. I maintain that this is effectively DCA in that I am adding shares over time at a varying share price which mitigates my average cost per share.

I don't think it is. If I take the dividend and don't reinvest it, I am essentially selling a few shares, because now I hold $9500 of the investment instead of $10,000. You could say I am partially DCA'ing out of the position by not reinvesting, but one does not DCA in by reinvesting. There is zero argument that when someone does not reinvest that future changes are different from someone who does, but it's because of the dollar amount still invested, not # of shares.

And yes, your average cost basis was affected by the DCA, but that is offset by the dividend being taxed now. The dividend is essentially taking part of a capital gain early, and the cost basis of the reinvestment adjusted to reflect that.

At this point, I don't really care. If someone still wants to call it DCA, I can't stop them. It won't affect what I do, and probably won't affect what they do.

 

[mathjak107]

......
And what will be my condition when the next dividend is paid? I will receive a greater dividend payout then I would have if I had not reinvested. -- div on the new shares added at reinv. That feels to me as though "thinking in terms of number of shares" does, in fact, make a diff to me in the long run, and that I am "different then you were had the dividend not happened."

nope , you would have the same value invested in the stock with the additional shares as you would have had if the portfio never paid the dividend and had a share price that was that much higher .

spending the dividend is no different then you selling the same amount yourself so not reinvesting is as if you sold a piece of the portfolio.

in fact lets suppose your stocks threw off a 2% dividend .

you could reinvest the dividend and just pull the 2% from the portfolio .

or if there was no dividend payed your stock's price would be 2% higher so you could sell off 2% worth .

every dividend you get will always have the share adjusted downward so it is nothing gained nothing lost . you may have more shares but at a lower price to offset .

no different then a split . you can have lots more shares but at a lower value , they all can spin off dividends but at the end of the day everything is adjusted for a zero change in value .

your 10k investment could have way more shares from reinvested dividends but with each pay out the price is adjusted lower and lower .

all that counts is the dollars compounding not shares .


.

 

[Mulligan]

nope , you would have the same value invested in the stock with the additional shares as you would have had if the portfio never paid the dividend and had a share price that was that much higher .

spending the dividend is no different then you selling the same amount yourself so not reinvesting is as if you sold a piece of the portfolio

That is true...But only in the theoretical sense. Dividend and non paying dividend stocks do not always trade in lockstep with each other. Investors attitudes and fears all will spill into actual values. And try to buy a preferred stock at opening bell following dividend extraction at exact price sans the dividend. It isn't going to happen. Thats why "capturing the dividend" is an effective strategy when done in right situation. Not every situation mind you.



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[mathjak107]

in this case we are not really comparing dividend payers to non payers and their returns .

this is just a simple concept . if you do not reinvest the dividends you are in effect removing a piece of your investment that was present before the dividend . whatever the total returns are on those remaining dollars will grow that much less then had you reinvested them and kept the dollars the same pre dividend .

going forward whatever dividends you get and capital appreciation is going to be on the dollars you start off with .

hypothetically if your stock never paid a dividend but got the same total return, it would be at the same value as you would be with all your reinvested dividends along the way

 

[Mulligan]

in this case we are not really comparing dividend payers to non payers and their returns .

this is just a simple concept . if you do not reinvest the dividends you are in effect removing a piece of your investment that was present before the dividend and whatever the total returns are acting on those remaining dollars will grow that much less then had you reinvested them .

Mathjack, I know this concept is a passion of yours based on your often postings on this and another forum. And I will give you 100% credit on your civility, patience and consistency in your statement which is 100% true. And I am not disputing that, but the trouble is many people (not including the ones who just plain do not understand the mechanics, and need the understanding) cannot agree with you because they will not or cannot separate the theory from the actual reality that occurs while this mechanical transaction is occurring.


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[mathjak107]

i agree , there will always be a slight difference , but the premise stays the same and i think it is important to understand just what is going on in their investments when they make statement that are just not correct .

whether they choose to believe it or not is up to them .

as they say you can lead a horse to water but you can't make him drink .

there is no such thing as reinvesting dividends and having a lower cost then you had prior . your share price plus dividend will pretty much equal what you had , there is no such thing as getting paid to wait in a down market either .

dividends are what they are , a return of a piece of your share price after the share price either appreciated or went down .

it is one of the mis-understood concepts on any investing forum .

 

[RunningBum]

That is true...But only in the theoretical sense. Dividend and non paying dividend stocks do not always trade in lockstep with each other. Investors attitudes and fears all will spill into actual values. And try to buy a preferred stock at opening bell following dividend extraction at exact price sans the dividend. It isn't going to happen. Thats why "capturing the dividend" is an effective strategy when done in right situation. Not every situation mind you.

Different slant so I'd like to respond. I don't try this myself but I can see that it might not be completely neutral. But for the long term investor, doesn't it correct itself to be neutral? The stock is going to be priced based on its fundamentals and outlook, and not be affected by the distribution in some of it's cash, right?

 

[mathjak107]

correct . but what is important is the amount of dollars compounding at the ring of the bell and that is what this is about .

not reinvesting starts you out of the gate with less money invested then you had the night before .

reinvesting it just gives you back what you had the night before at the ring of the bell .

that is the entire point and it has nothing to do with anything after that point . whatever happens is either going to do it on the same amount you had or less invested if you don't reinvest .

 

[jimnjana]

Reinvesting the vanguard funds distributions and spending the individual stock and closed end fund dividends/distributions.