Retirement income generation (RE and Others)

[disneysteve]

In the end, a dividend is no different from the sale of shares. And it is worse in the sense that you cannot control when it happens, and you will pay higher taxes (compared to capital gains).

Interesting. But there is a difference logistically between selling shares and collecting dividends. Dividends are automatic. My mom gets her dividend checks every quarter without fail, and unless the dividend changes, she knows exactly how much she's going to get. She's been collecting those dividends for decades without having to do a thing except cash the checks. And she still has all of the shares originally purchased 30 years ago, which are all worth a lot more than what was paid for them.

If she switched to selling off shares every time she needed money instead, she would have to actively decide which shares to sell. She'd need to put in the sell order, have the proceeds deposited into her brokerage account, and then transferred to her checking account. Eventually, she would sell off all of her shares and no longer have that pool of money or stream of income available. At age 86, that might work for the remainder of her lifespan but had she started doing that at 60 she'd probably be in trouble today.

[feh]

Eventually, she would sell off all of her shares and no longer have that pool of money or stream of income available.

This is incorrect.

As you stated previously, she hasn't been touching principal. Let's say the fund in question gives a 3% annual dividend. Now pretend that instead of paying a dividend all those years, she instead sold 3% of the value of that fund each year for income.

After 20 years, yes, she would have fewer shares than if she collected dividends. But the value of her holdings of the fund would be identical in either case. That's the important thing to understand.

It's the value of the holding that is relevant, not the number of shares held.

[disneysteve]

This is incorrect.

As you stated previously, she hasn't been touching principal. Let's say the fund in question gives a 3% annual dividend. Now pretend that instead of paying a dividend all those years, she instead sold 3% of the value of that fund each year for income.

After 20 years, yes, she would have fewer shares than if she collected dividends. But the value of her holdings of the fund would be identical in either case. That's the important thing to understand.

It's the value of the holding that is relevant, not the number of shares held.

I understand. It's certainly not how we've all come to think of dividends but it makes sense.

Still, I totally understand why people prefer dividends for the simplicity factor. If your point is to have a steady, predictable income that is automatic, the dividends provide that. You don't have to think about it. You don't have to do anything. You don't have to decide which stocks to sell or how many shares you need to liquidate each time. Especially for a retiree who may not be that financially savvy, there's a lot of value to that.

[feh]

I understand. It's certainly not how we've all come to think of dividends but it makes sense.

Still, I totally understand why people prefer dividends for the simplicity factor. If your point is to have a steady, predictable income that is automatic, the dividends provide that. You don't have to think about it. You don't have to do anything. You don't have to decide which stocks to sell or how many shares you need to liquidate each time. Especially for a retiree who may not be that financially savvy, there's a lot of value to that.

Yup, for some people the simplicity is worth it. Personally, I'm willing to do a little work for the extra control and potential tax savings.

[GoodSteward]

Investing is my strongest subject yet, but when you said

It's the value of the holding that is relevant, not the number of shares held.

that seems a bit risky. Wouldn't you loose the volume of dividends available to keep the account value up by removing the shares that produce the dividends? If you live off Dividends, the shares produce the same amount of dividends until you remove shares. IF you live off shares, your rate of return will equal less dollar amounts wouldn't it? That 3% would equal less increase, right? I've not done a lot of math on this sort of thing yet, I'm just basing this off my understanding of shares and dividends.

[kv968]

Correct, although not all dividends are qualified.

True. and not all capital gains are long-term.

However, for what it's worth, a dividend will become qualified earlier than the year it takes a capital gain to become "long-term".

[disneysteve]

Investing is my strongest subject yet, but when you said that seems a bit risky. Wouldn't you loose the volume of dividends available to keep the account value up by removing the shares that produce the dividends? If you live off Dividends, the shares produce the same amount of dividends until you remove shares. IF you live off shares, your rate of return will equal less dollar amounts wouldn't it? That 3% would equal less increase, right?

Start with 1,000 shares of stock worth $20/share so account value is $20,000.
Stock pays a a dividend of $0.60/share so you get $600/year. But when that dividend pays out, the share value drops by $0.60 to $19.40 so your account value is still $20,000 - $19,400 in stock and $600 in cash. You don't have any more money than you started with.

If instead of collecting a dividend, you sold 30 shares to get $600, you would own 970 shares at $20 so you'd have $19,400 in stock and $600 in cash. Same either way.

[feh]

Start with 1,000 shares of stock worth $20/share so account value is $20,000.
Stock pays a a dividend of $0.60/share so you get $600/year. But when that dividend pays out, the share value drops by $0.60 to $19.40 so your account value is still $20,000 - $19,400 in stock and $600 in cash. You don't have any more money than you started with.

If instead of collecting a dividend, you sold 30 shares to get $600, you would own 970 shares at $20 so you'd have $19,400 in stock and $600 in cash. Same either way.

+1

Thanks Steve. I get tired of explaining the same thing repeatedly.

[FLA]

it is confusing, thanks for that example. I plan to study this stuff more in depth when I am closer to retirement age. I should probably do it now, but now is already overwhelming

[LivingAlmostLarge]

But is it easier to time the tax treatment of dividends versus selling off stock for capital gains?

[GoodSteward]

Start with 1,000 shares of stock worth $20/share so account value is $20,000.
Stock pays a a dividend of $0.60/share so you get $600/year. But when that dividend pays out, the share value drops by $0.60 to $19.40 so your account value is still $20,000 - $19,400 in stock and $600 in cash. You don't have any more money than you started with.

If instead of collecting a dividend, you sold 30 shares to get $600, you would own 970 shares at $20 so you'd have $19,400 in stock and $600 in cash. Same either way.

Thank you for the example. I don't pull from anything, so I haven't really had to learn it yet.

+1

Thanks Steve. I get tired of explaining the same thing repeatedly.

Bless your heart. Seems interesting how you tire of this yet frequent a financial forum....

[kv968]

Start with 1,000 shares of stock worth $20/share so account value is $20,000.
Stock pays a a dividend of $0.60/share so you get $600/year. But when that dividend pays out, the share value drops by $0.60 to $19.40 so your account value is still $20,000 - $19,400 in stock and $600 in cash. You don't have any more money than you started with.

If instead of collecting a dividend, you sold 30 shares to get $600, you would own 970 shares at $20 so you'd have $19,400 in stock and $600 in cash. Same either way.

The difference however is with just the dividend payout you STILL have 1000 shares of stocks as opposed to the 970 with selling. Should the stock go back up to even just the price prior to the dividend payout ($20/share) those extra 30 shares would amount to an extra $18 (30 shares * $0.60) of appreciation you couldn't have gotten with the selling method since you've sold them. And that's not counting the dividend that you would CONTINUE to collect on those 30 shares as well.

[feh]

The difference however is with just the dividend payout you STILL have 1000 shares of stocks as opposed to the 970 with selling. Should the stock go back up to even just the price prior to the dividend payout ($20/share) those extra 30 shares would amount to an extra $18 (30 shares * $0.60) of appreciation you couldn't have gotten with the selling method since you've sold them. And that's not counting the dividend that you would CONTINUE to collect on those 30 shares as well.

What you're missing is that if the shares appreciate in price, the shares that did not pay a dividend are starting from a higher price. In your example, the price of a "dividend" share after appreciation is $20, and the price of a "non-dividend" share would be $20.62.

There is no free lunch. The value of dividends is not created out of thin air.

[kv968]

But is it easier to time the tax treatment of dividends versus selling off stock for capital gains?

The qualified dividend timing could be a little tricky but you could typically consider it as "qualified" if you own the stock 60 days before the ex-dividend date. After that all following dividends on that lot will be considered "qualified". There's a 121-day holding period and all that but if you plan on just holding the stock and keep collecting the dividend you wouldn't have to necessarily worry about that once you position is established.

A long-term capital gain would probably be easier because it's basically, "Have you held the stock for a year?"

[Jluke]

What you're missing is that if the shares appreciate in price, the shares that did not pay a dividend are starting from a higher price. In your example, the price of a "dividend" share after appreciation is $20, and the price of a "non-dividend" share would be $20.62.

There is no free lunch. The value of dividends is not created out of thin air.

just when I thought I started to understand "value" of dividends as a way of rewarding stock owners....

At least there are a variety of investments that one can utilize to manage receiving dividends (too many to list) or non-dividend payers (BRK.B).

For now, I like to see extra shares via dividends "making" me money as share price increases..