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Living off dividends only.

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  • #46


    Plus you have the greatest capital allocator in history working for you.
    Click to expand...


    Buffett will be 87 next month, and his ability to earn returns for you is hindered by Berkshire's size (a handicap he mentions frequently).

    Berkshire may do well, but you aren't getting the young Buffett with a smaller pile of capital in the 1950s and 1960s.
    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

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    • #47
      I agree Buffett is not the same and the size is a hinderance, but I do like that no dividends are paid to me making it more tax efficient and I do think the company is relatively undervalued to the market as a whole. To me if I can get the return to be similar to the total S&P return including dividends, that would be fine.

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      • #48
        A high dividend strategy is essentially a highly undiversified, large cap position.

        It is moving money from one pocket to another with a taxable event. Dividends go to your AGI, whether you want them or not.

        Cap gains can be offset by capital losses, dividends cannot.

        Cap gains receive a step up basis at death and can be gifted. Cap losses can be booked over your lifetime and be deducted ($3000) from other forms of income.

        The tax favored status is lost in tax deferred accounts.

         

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        • #49
          Isn't a relative advantage of this approach that qualified dividends are taxed at top rate of 20% vs. 39.6% for earned income?

          This may be an incorrect supposition but in theory if your annual dividends are in excess of 450K, isn't your tax bill half what it would otherwise be?

          450K in retirement with no earned income. There is the problem of RMD in 15 years on tax deferred and SS taxation but if there's less than 250K on those two

          I would think we could dodge top tax bracket.

          In reply to your question, I have sold some dogs through the years but I believe tax loss harvesting is limited to 3K/year in perpetuity......

          Dual approach to 8Figures, we live relatively frugally to our income saving/investing x> 50% of combined gross income after maxing out 2 PSPs, 2 Traditional,

          2 kid accounts (max gift is 28K/year/kid).

          I genuinely enjoy reading about different equities in depth and keep a buy list refreshing it almost daily. Only buy companies where I thoroughly +/- understand their product and valuation #s i.e. DOW, MCD KO JNJ DUK etc.

          I also like preferred shares for DY and P2P lending yield avg. 10%

          I recognized early that placing these in after tax brokerage acts. is incredibly tax inefficient but top tier was previously 35% under Bush 2.

           

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          • #50
            PhotonsRGR8:  Lets say you invest $100k each year in your taxable account (after maxing out all tax-advantaged space available to you).  You invest it 50/50 VTSAX/VTIAX.  VTSAX has a dividend yield of 1.9% and VTIAX has a dividend yield of 2.6%, for an average yield in your 50/50 taxable account of 2.25% (VTIAX isn't quite all qualified dividends, and there is a foreign tax credit, but lets forget that for now).

            Each year's savings will result in $100k * 2.25% = $2250 of dividends.  The tax for these dividends (in the highest bracket) will be 20% (tax rate) + 3.8% (obamacare net investment income tax) + 5% (plug in your individual state tax rate here) = total of about 28.8% on qualified dividends (higher of course for non-qualified dividends which are taxed at your ordinary income tax rate).  This means that each year you will pay taxes for each $100k in your taxable account of ($100k * 2.25% * 28.8%) = $648 (aka your annual "tax drag" is 0.648%).

            If you choose high-dividend stocks, your annual tax drag will be more, if you choose no-dividend or low dividend stocks, your tax drag will be less.  I would encourage you to calculate the dividend yield for you portfolio of 52 dividend producing stocks (which of course does not include google, amazon, facebook, netflix, etc).  Once you know the dividend yield, calculate the tax drag.  Once you know the tax drag, figure out how much more you would have if your portfolio wasn't losing 0.648% per year for your 22 year working career.  I hope this exercise is at least entertaining for you, if not instructive.  It will probably be nice to have all those dividends when you are retired (lower tax bracket), but you have paid a lot of taxes during your prime working years building your dividend-tilted portfolio.

            If your 52 stocks are all in tax-advantaged accounts than the taxation issue is less, but still why would you settle for less total return?

            If you were able to harvest $3k of losses during the year, and you marginal tax rate is 39.6% + 5% (or whatever your state tax rate is) = 44.6%, you would save $3k * 44.6% = $1338.  Saving $1338 per year for 22 years is a meaningful sum to most people, whether or not it is worth the effort to you is your decision.

             

             

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            • #51




              PhotonsRGR8:  Lets say you invest $100k each year in your taxable account (after maxing out all tax-advantaged space available to you).  You invest it 50/50 VTSAX/VTIAX.  VTSAX has a dividend yield of 1.9% and VTIAX has a dividend yield of 2.6%, for an average yield in your 50/50 taxable account of 2.25% (VTIAX isn’t quite all qualified dividends, and there is a foreign tax credit, but lets forget that for now).

              Each year’s savings will result in $100k * 2.25% = $2250 of dividends.  The tax for these dividends (in the highest bracket) will be 20% (tax rate) + 3.8% (obamacare net investment income tax) + 5% (plug in your individual state tax rate here) = total of about 28.8% on qualified dividends (higher of course for non-qualified dividends which are taxed at your ordinary income tax rate).  This means that each year you will pay taxes for each $100k in your taxable account of ($100k * 2.25% * 28.8%) = $648 (aka your annual “tax drag” is 0.648%).

              If you choose high-dividend stocks, your annual tax drag will be more, if you choose no-dividend or low dividend stocks, your tax drag will be less.  I would encourage you to calculate the dividend yield for you portfolio of 52 dividend producing stocks (which of course does not include google, amazon, facebook, netflix, etc).  Once you know the dividend yield, calculate the tax drag.  Once you know the tax drag, figure out how much more you would have if your portfolio wasn’t losing 0.648% per year for your 22 year working career.  I hope this exercise is at least entertaining for you, if not instructive.  It will probably be nice to have all those dividends when you are retired (lower tax bracket), but you have paid a lot of taxes during your prime working years building your dividend-tilted portfolio.

              If your 52 stocks are all in tax-advantaged accounts than the taxation issue is less, but still why would you settle for less total return?

              If you were able to harvest $3k of losses during the year, and you marginal tax rate is 39.6% + 5% (or whatever your state tax rate is) = 44.6%, you would save $3k * 44.6% = $1338.  Saving $1338 per year for 22 years is a meaningful sum to most people, whether or not it is worth the effort to you is your decision.

               

               
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              Your portfolio isn't losing 0.648% a year.  The $648 is a negative cash flow to the next year, not a reduced rate of return during the year since, presumably, you're not paying your tax out of dividends or stock sales into escrow and are reinvesting the dividends along the way.  Subtle point, but an important one.  The internal returns are independent of the tax amount owed, assuming reinvestment.

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              • #52


                Your portfolio isn’t losing 0.648% a year.  The $648 is a negative cash flow to the next year, not a reduced rate of return during the year since, presumably, you’re not paying your tax out of dividends or stock sales into escrow and are reinvesting the dividends along the way.  Subtle point, but an important one.
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                I'm not sure I agree this is an important point.  You point out something which is neither easy to understand, nor particularly accurate.  0.648% tax drag is easy to understand.  If you want to be hyper-accurate in your modeling you should use quarterly estimated taxes.  Also, the dividends aren't paid out 25%/quarter - for VTSAX it is more like Q1 22%, Q2 21%, Q3 24%, Q4 33% - or for VTIAX Q1 11%, Q2 40%, Q3 20%, Q4 29% (2016 numbers).  It is much more important to understand that there is a 0.648% loss (somewhere in there) than it is to model that loss (or the dividends for that matter) at exactly the right point in time.


                The internal returns are independent of the tax amount owed, assuming reinvestment.
                Click to expand...


                If you click on the "Price & Performance" tab for Vanguard funds, it will show you the hypothetical growth of a $10k investment over several years.  Unless it is in a Roth IRA that's all it is - hypothetical.  In any other account (in the real world) taxes matter.  If you track the XIRR of your taxable account and don't take into account the taxes you pay, you are deliberately being less accurate.

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                • #53
                  I'm not sure how you can conclude that my original statement wasn't particularly accurate or easy to understand.  It's quite easy to understand, actually.  Taxes are a negative cash flow, and they should be accounted for when paid.  What becomes difficult is the actual rate of return calculation given the various cash flows at different points in time.  I'm not suggesting that anyone ignore the effect of the taxes on the investment returns, just that it is more accurate to do so by a negative cash flow.  Your point about quarterly taxes is a fair one, but quarterly taxes may not be paid on dividends because you either know you won't end up owing a penalty at year-end or because you perceive it better to not pay quarterly taxes on them because the penalty is less of a hit than taking money out of the market for months.  Also, those quarterly taxes hit the marginal investment at the time as a negative cash flow, not the original investment.  Your modeling also inaccurately assumes a constant dividend growth that keeps up with the returns (in order to maintain the ~2% yield off of which you calculate the drag).  Share buy-backs have become more favored over dividends, making yields in the major indicies drop, aside from the reason that things are overbought right now.

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                  • #54


                    What becomes difficult is the actual rate of return calculation given the various cash flows at different points in time.  I’m not suggesting that anyone ignore the effect of the taxes on the investment returns, just that it is more accurate to do so by a negative cash flow.
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                    You are making my point for me, it does become difficult (for some).  Using annual dividend yield * qualified dividend tax rate is an excellent way of estimating annual tax drag.  Is it exactly right - no.  Is it very close - yes.

                    I'm a spreadsheet guy, I follow what you are talking about.  I am glad you and I can calculate an internal rate of return for a series of cash flows.  It is however, entirely unnecessary to understand the point I am making which is that taxes on dividends have a meaningful detrimental effect on the returns of a taxable account, especially over decades.  That is the point I hope anyone thinks about who is considering a dividend-oriented investment approach.

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                    • #55
                      My portfolio is kind of similar.600K in stocks. 150 k in etf and index. another 250k in 401 k. its all large value stocks paying dividend. The downside I have seen recently is it has little of growth stocks. but in a bear market - i think i dont have to worry because , still getting paid dividend. once a year need to do tax loss harvesting. looks like mine is the opposite of you very little of etf and index fund

                       

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                      • #56
                        I totally get where you're coming from and don't disagree with much of what you stated as it applies to high income individuals.  The tax drag issue, however, is highly variable depending on an individual's given investments, when tax is paid (or if), their taxable income, state of residence, tax loss harvesting, etc.  I can envision several scenarios of income, residence, etc. where there is not only zero tax drag on dividend-producing investments but a positive marginal cash flow compared to retirement accounts because of TLH.  One can be upper-middle class and pull this off (covering the vast majority of Americans).  So I wouldn't make a broad claim that dividends in a taxable account have a detrimental effect on returns.

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                        • #57
                          A strong upward bias in the S&P500, especially in the past couple years, has made all dividend investors look smart.

                          Don't confuse genius with a Bull Market.

                          I don't give a fig about corporate governance. I can do absolutely nothing about how these entities spend their money. If it sends their Stock price up, I am OK with that.

                          It is hard to beat a zero % tax rate.

                          A high dividend strategy is really a Value play.

                          I will take Capital Gains over a dividend any day.

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                          • #58




                            My portfolio is kind of similar.600K in stocks. 150 k in etf and index. another 250k in 401 k. its all large value stocks paying dividend. The downside I have seen recently is it has little of growth stocks. but in a bear market – i think i dont have to worry because , still getting paid dividend. once a year need to do tax loss harvesting. looks like mine is the opposite of you very little of etf and index fund

                             
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                            I'm not sure it is correct to say that dividend stocks protect you from a bear market. First, dividend stocks can drop in value the same as any other shares. Additionally, companies can reduce or eliminate dividends and often do so during a down turn.

                             

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                            • #59
                              WisdomTree

                              I can't believe nobody has mentioned WisdomTree in a discussion about dividend investing.

                              WisdomTree has series of ETFs which are based on a series of WT Dividend Indices.  They have over a dozen dividend ETFs for both domestic and international equities.

                              The design of these index funds is not to 'chase' high yield.  The funds merely only own stocks who pay a dividend, regardless if it is a high yield or a low yield.  The big difference in their indices compared to most index funds, is that the portfolio is NOT market cap weighted.  The positions are weighted based on the total gross amount of dividends a company pays relative to the universe of stocks in the index.

                              These funds will have both growth and value companies as constituents in the index.  This blended style portfolio helps these funds have a high correlation to broad stock indices.  I have seen the 50 year backtested data from WisdomTree on these dividend indices and they comfortably beat the broad market indices.  Most significant was their outperformance of Mid and Small cap broad indices.

                              A diversified basket of various WisdomTree ETFs currently has an average dividend yield of approximately 3.25%.

                              Thus, withdrawing 4% a year is not a problem.  This means the portfolio only needs to generate .75% annually in capital appreciation to prevent erosion of original principal.  I have been invested in these funds for over 10 years and have been very pleased.  Sometimes the best ideas are the simplest concepts.

                               

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                              • #60
                                Yes, good point.  That is a viable option for sure.

                                I haven't looked up their costs in awhile.  How much fees do you pay?  Do you  know?  Is that worth it?

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