I am a retiree with a dividend portfolio. The dividend income has been somewhat steady even during market downturns. It is sort of an annuity. I cannot find anyway to take dividend income into account. Should I set it as an annuity and decrease the return on stock by that amount???
@sandhu681 Dividend income is some portion of the expected return on stocks and, if held in a tax-deferred or a Roth account, there's really nothing else you need to do about it; however, if held in your regular taxable investment account, you need to go to the Financial Assets > Taxation page and specify what portion of the expected return on stocks is associated with dividends so that PRC handles the taxes correctly.
Stuart
Thanks Stuart; For this question I am referring to assets in Taxable account. This table you have referred does address the tax issue However my question was a bit different, due to dividends I do not need to dip into the portfolio. However in the Tabular projection it is showing that I need to take out N dollars each year. The N dollars is less than my dividend amount. Should I just mentally accept that unless N is more than Dividends I am not dipping into portfolio
@sandhu681 Are you aware that on the Financial Assets > Asset Class Taxation page there's an option for you to NOT reinvest the dividends and, instead, deposit them in your cash account where they can be applied against current expenses? If your dividends are greater than your negative cash flow, this will prevent any withdrawals from your taxable account.
Stuart
That is perfect Stuart. What a great product. Thanks
@smatthews51 How would this work if my strategy is to reinvest a minimum of 25% of dividends and spend the balance?
@matthews054 You don't really have a control available that goes to that level of granularity. You could specify on the FA > Asset Class Taxation page that your dividends were not to be reinvested, in which case they would be deposited in your cash account. Any monies not spent covering expenses would accumulate in the cash account until the balance exceeds the specified ceiling and then the excess would be re-deposited into the regular investment account.
Stuart
@smatthews51 as a follow up to this great thread, is there a way to specify different dividend portfolios by different portfolio time periods? For example, I plan to use a 70/30 whole market strategy until I retire. At that point, I will shift into a dividend oriented portfolio.
I see where I can show rates of return for stocks and bonds by time period, but I don't see the ability to specify that on the Growth Taxation tab. Any guidance to capture this portfolio shift?
Just a note here, as there's a resurgence in the dividend strategy and SCHD is the shiny new thing in these uncertain times. As many folks learned during prior recessions, dividends are not guaranteed income nor are they promise. When times are tough, as they're expected to become, companies have and will suspend or cut back dividends, even some that have never done so before. History is not a promise to the future, but it is a place to learn from. Lately, we're seeing big corps put share buybacks and executive compensation ahead of dividend payouts, even aside from the coming economic threat, which is another reason they're not as high on the priority list as they were. Preferred dividend shareholders also come first, but even those are not a promise.
@solowriter The only way to do this is to define different asset classes for another time period, and then you can specify different Taxation parameters for those asset classes.
Stuart
Why would you switch to a dividend portfolio? They've done well recently, but it's been shown in the literature for decades that there is no mathematical advantage to a dividend portfolio. Dividends are not free money, they are just forced distribution of assets from the companies to your pocket that creates a tax liability. You could have gotten the same cash flow at much lower tax cost by using a broad index fund and selling what you need when you need it. That way, some of the cash you spend is not taxed at all as it is your basis and the rest is taxed at the favorable LTCG rates.
The next problem is that the act of changing taxable investments will give you a big tax hit that neither you nor your heirs may otherwise ever have to pay. If you have enough dividends to live on, that is evidence that you would not have had to sell everything during your lifetime. Whatever you don't sell during life gets a step up basis on death so your heirs never pay taxes on it. If you are married, then when the first spouse passes, the other gets either a full or half step up basis (depending on the state), reducing LTCG taxes for the surviving spouse.
The third problem is you may be cash long once RMDs get going. At that point, dividends are a very negative thing to have, they are simply creating unnecessary taxes.
Excellent reply. However, it is difficult to avoid dividends entirely. Asset Allocation is priority before Asset Location and taxes. Most low-cost indexes have dividends, especially international.
@ricke Great points.
I would keep dividend-oriented funds/etfs in pretax and roth for that reason. Taxable would be in broad-based whole market index, as you recommend.
Then I would do a cash-asset swap in the same amount from the taxable account, doing just what you described: selling shares that have a cost basis built in to raise cash, only paying LTCG rate (hopefully at 0%) on growth. Step two would be buying back the same exact shares, simultaneously, in the pretax and roth accounts by deploying accrued dividends there. The thought is to maintain a constant share count across the portfolio over time.
I totally agree and understand that there's no magic in dividends, that they don't "create" extra money. With the caveat that this is only something I'm considering at the moment, I will counter that there is something psychologically appealing to me to taking cash from the portfolio while keeping my share count the same.
