The Mystery of Dividend Preference

Discussion in 'Share Investing Strategies, Theories & Education' started by dunno, 7th Apr, 2019.

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  1. Nodrog

    Nodrog Well-Known Member

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    Fee too high at 55 bps. Although it’s been around near 4 years there’s bugger all FUM @ $21 mil. Rumour has it that Vanguard has wondered about whether it’s worth keeping but at this stage it seems they will. If FUM doesn’t improve over the longer term will it survive?

    Might be a wee bit of extra work but holding a few funds / ETFs gives one the choice of adding to / withdrawing from these funds in a more tax effective and controlled manner.
     
  2. Jamesaurus

    Jamesaurus Well-Known Member

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    That sounds like a really good way to do it to get started in a particular scenarios. Thank you for your insights.

    Check my maths here and see if I have the concept correct, but is this particularly the case if you had no other investments and say the bank savings rate is 2%, and the yield of the cash reserve fund is ~2% so minimal if any opportunity cost in holding your cash there (getting the advantage of the Bpay into the VAS/VGS and avoiding brokerage)?

    Further to this, if you had say no PPOR, and had deductible debt on an IP at say the same rate as VAS yield (~4.7%):
    - If you took 100k out of your offset on the IP, you would aim to beat the interest rate of your loan before tax (inc opportunity cost) = 4.7% + OC
    - There would be an opportunity cost of the difference between the rate you pay for your deductible loan and the reserve fund (2.7%) for the portion you haven't allocated to the shares.
    - The yield is the same in this scenario, and you pocket any potential capital growth of the shares portion?

    Then again, if you had a PPOR debt (non deductible debt) at say 4%:
    - If you took 100k out of an offset against this, you would aim to beat the interest rate of your loan after tax = 4/0.7 = 5.7% + OC
    - The opportunity cost would be the difference b/w the rate you pay for your non- deductible loan and the reserve fund (2%) for the portion you haven't allocated to the shares.
    - The shares yield is less than the rate of the goal yield, and you would assume capital growth outperforming the difference?

    * I very well might be getting myself confused here, and also haven't factored in ~85% franking of VAS. Assuming a wage earner, not retired.
     
  3. Zenith Chaos

    Zenith Chaos Well-Known Member

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    You're a logical thinker @dunno and I see your point that generally it makes no difference. In fact, I will probably be forced into a more diversified portfolio with an increased allocation to international and REITs / infrastructure.

    On the other hand the TSR of ASX has an edge for Australians due to dividend imputation. A retiree 100% in AFI would be impacted by Labor's proposed franking policy unless AFI did what you suggested it should and keep the dividend. What if AFI doesn't do that? How does the retiree know?

    Remember old codgers like certainty, and any old codger who has spent their life accumulating wealth and investing so they can fund their retirement is probably a planner who is more in the "I need certainty" spectrum.

    As a middle aged codger planning on retiring (FIRE) and.progeessing to old codger status, I can see their point.
     
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  4. monkeychow

    monkeychow Member

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    Thanks for the thoughts guys.

    I'm always torn on the situation with super, the superior tax treatment is tempting, but I'm in my 40s and have become aware of a number of male friends who were sort of "phased out" of the workforce in their 50s. Basically made redundant and then either left unemployed or under-employed before preservation age. I think it's a tricky period - you don't yet qualify for any senior stuff i society but then the 20 something HR reps treat you like an alien because you remember before mobile phones.

    Anyways, due to this and only limited success overall, i think it's part of what draws me to the concept of a dividend approach...the dividends are sort of tangible evidence of your money working for you and making a practical difference to one's post work life...whereas growth funds in asia and so on are sort of interesting and fun to me...but feel somewhat more esoteric in terms of the SANF when I get worried about worst case scenarios.

    I know that's all in my mind but it helps to account for it on some level hahaha

    Anyways thanks for the input...i must admit I hadn't considered how high that 55 bps can really become when you put all your spare dollars into it.

    I guess i'll see what happens after the election, funds like WDIV have been sitting on my radar as well recently, but they're also not the cheapest alternative...and then even if I go to the darkside and go full boglehead...then i start pondering if the auto rebalancing of VDHG is worth the exta fees compared to a VAS/VGS/VGE type spilt....it's handy for set and forget....but means you have to sell out of everything at once too...

    That's the fascinating thing about this investing stuff it seems, for every benefit there's an equal and opposite worry....but maybe i've had too many apples drop on my head ;)
     
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  5. Nodrog

    Nodrog Well-Known Member

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    I’ve never really looked into resultant tax from VHDG but in theory with its allocation to bonds, global hedging and periodically rebalancing by Vanguard in theory it’s likely to be less tax effective compared to rebalancing by addition to the likes of VAS / VGS / VGE.

    Of course tax concerns will vary depending on the tax environment one is investing in.

    But then the additional tax / fee from investing in VHDG might be worth it if it protects you from yourself!
     
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  6. monkeychow

    monkeychow Member

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    Indeed!

    Rebalancing can be kinda stressful to me - i'm happy to rebalance by adding more...but when the variance requires selling off something it's harder...psychologically I find it challenging to sell a well performing asset to pump it into something that seems to be floundering....academically I know it makes perfect sense...but it takes a couple of deep breaths for me first....that's why i'm always drawn to these automated or buy and hold type products...they provide less opportunities for future me to get creative and stuff it up!
     
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  7. pippen

    pippen Well-Known Member

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    You dont have to sell to rebalance, you can use retained earnings and or savings or adjust inflows to rebalance accordingly.
     
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  8. Redwing

    Redwing Well-Known Member

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    From Ferri also :D

    Three Key Elements:

    Philosophy - embrace the big picture
    Strategy - customize a portfolio that's right for you
    Discipline - stay the course!

    And fuggereditaboutit
     
  9. Redwing

    Redwing Well-Known Member

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    @pippen @SatayKing

    I found this review on "Reading The Market"

    Schreiber and Stroik, All About Dividend Investing

    In a classic dividend story they compare the portfolios of twins who were each given $10,000 in 1944 to invest in companies that made up the Dow Jones Industrial Average. The twin who spent his dividends each year had a portfolio worth $767,000 in 2009; he spent more than $370,000 in dividend income from 1944 through 2009.The conscientious twin reinvested his dividends until he retired in 1984 and needed his dividend income to help support his lifestyle. By the end of 2009 his portfolio was worth more than $4.7 million, and since 1984 he had collected more than $1.7 in dividends. So the first twin realized a little over $1 million from his initial gift; the second, about $6.5 million.

    Dividend stocks are often recommended in down cycles. In the particular cycle the authors picked (or cherry-picked) $100,000 invested in the DJIA Index in 1966 would have declined to $90,275 by 1981. Had a person reinvested dividends, thereby acquiring more shares as prices were falling, the account would have been worth $186,661 in 1981. And had he taken his dividends in cash, he would have received $64,978 over those years; instead of losing $10,000 he would have netted about $50,000.


    cont...
     
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  10. pippen

    pippen Well-Known Member

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    Yep that book resides in the library! Only thing i question is doing this individually is still a form of stock picking! I would instead just let argo management to do it for me and even still vas and capture the market return with no stress of missing out of any up and coming diamonds in the rough! Once again opening up the old school active tilt v passive approach!
     
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  11. Redwing

    Redwing Well-Known Member

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    @dunno

    Economic theory, portfolio theory, historical evidence, tax law, behavioral finance and the wisdom of Warren Buffett aside, I guess receiving $10,000 in dividends feels like you're getting a pay cheque, which is a psychological win, whilst selling $10,000 worth of investments feels like you’re eating into your capital, a psychological loss?
     
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  12. SatayKing

    SatayKing Well-Known Member

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    Most interesting.

    There are, as always, a couple of aspects examples such as these miss.

    The first there is no accounting for income tax impacts. Understandable as it would get way, way too complicated - at least for me.

    Second is it is likely to be an era in which many were yet to be born. You can only invest during a period when blood is pumping through your veins.

    Nevertheless, the value of them is to show the effect of compounding. Excel spreadsheets to the fore!
     
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  13. BPhil

    BPhil Well-Known Member

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    This whole debate is kind of weird. I feel like the FIRE crowd has latched onto capital drawdown because it lowers the target asset pool needed, achieving the RE bit. But if they really do settle for such "lazy" net worth they run the risk of getting wiped out in a crash, whereas someone who waited until they had enough so that dividends alone can supply for their lifestyle, will not.

    For someone with real wealth, an index-ish strategy even in the USA with its low dividends should produce enough cash to live on, so the point is moot (you are forced to take the dividends regardless of preference).

    Anything else is just peasants arguing about how to keep the weevils out of the flour.

    Source: am peasant.

    PS Berkshire is basically the world's longest running Ponzi scheme