Spend dividends or reinvest?

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Did
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Spend dividends or reinvest?

Post by Did »

Pre FI. Accumulation phase. Spend or reinvest dividends?

Reinvest you say, fool.

But assuming your investment levels are the same, has anyone spent the dividends for encouragement and to see how investment income is working against bills?

It could be fun. Knock bills off one at a time each year.

When they are all getting knocked off you’re sitting pretty.

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Slevin
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Re: Spend dividends or reinvest?

Post by Slevin »

Erm… I don’t get it?

If I pay my bills with the investment dividends, then I’m just investing the same amount back in via savings. Unless you are increasing spending to match the dividend returns? In which case you will work forever, as spending will keep increasing every year to match returns? What am I missing here?

In terms of dividend investing and seeing the dividend returns, and seeing what part of the bills you can cover with them, sure that’s awesome. But I would find “actually spending the dividend interest to cover bills” a weirdly contrived thing in the larger approach (getting dividend income to cover bills), when you are still in the accumulation phase, as it shouldn’t really matter which account you are reinvesting versus spending out of? Just the virtual (I could be paying off x% of my bills with the income right now) bit is the important part which should make you feel good and feel like you are making progress.

Western Red Cedar
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Re: Spend dividends or reinvest?

Post by Western Red Cedar »

@Did - I'm not sure how dividends are taxed in Australia, but I think this would be less than optimal from a tax perspective in the US. You may be taxed on the dividends based on your income during your highest earning years. Probably suboptimal from a compounding perspective as well, unless you are basically playing the shell game with savings and dividends that @Slevin mentions above.

Did
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Re: Spend dividends or reinvest?

Post by Did »

Dividends are taxed as income here so it doesn’t matter if I use that income or any other to pay the bills. Grown would be the same as I regularly invest the difference between income and expenses.

It was more a fun idea to divert dividends even in the accumulation phase to expenses to focus the mind on making the two of them meet. Hence the misc posting rather than investment.

jacob
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Re: Spend dividends or reinvest?

Post by jacob »

The approach supports the "assets as income"-paradigm, which is also how I tend to think about it: "I'm buying a income streams". Compare to the total return "assets as fortune"-paradigm which is dominant under Modern Portfolio Theory: "Saving using the magic of compound interest."

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C40
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Re: Spend dividends or reinvest?

Post by C40 »

A lot of people on the forum have kept track of that kind of thing.. At times noting that they now had enough to pay rent... and then to pay for food.. and so on. Exactly where the dividend dollars go is irrelevant IMO. I could see it being important symbolically for some people.

Personally I never liked *automatic* dividend reinvestment because it made tracking of my stocks and dividends far more complicated. And because after the prices of the stocks I own increase a lot, or their business does not do well, it wouldn't make sense to buy more of the stock at the current price. I always prefer to make intentional buying decisions

jacob
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Re: Spend dividends or reinvest?

Post by jacob »

C40 wrote:
Tue Dec 27, 2022 8:35 pm
Personally I never liked *automatic* dividend reinvestment because it made tracking of my stocks and dividends far more complicated.
This has been some alleviated by (US) brokers now keeping track of the basis for you. Of course this requires using that basis for the capital gains/losses tax calculation and not something like FIFO.

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Seppia
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Re: Spend dividends or reinvest?

Post by Seppia »

jacob wrote:
Tue Dec 27, 2022 7:39 pm
The approach supports the "assets as income"-paradigm, which is also how I tend to think about it
Same here.

I see dividends as just another form of money flowing my way.
But at times it may be the smart thing to do: in Italy some brokers will reinvest the full gross amount of the dividends, and load the shares purchased at 0 value.
Essentially a form of deferring taxes.

In the US, I usually shut automated DRIP off, especially now that most brokers offer zero trading costs it doesn't really provide a practical benefit

Salathor
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Re: Spend dividends or reinvest?

Post by Salathor »

All else being equal, it's probably more 'fun' to pull them out and pay for stuff so that you can see the progress you're making. Just make sure you then are using that opportunity to save more of your regular income rather than just increasing spending.

M
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Re: Spend dividends or reinvest?

Post by M »

I view dividends the same as any other income.

If there is something I want to spend it on, I spend it...anything extra I don't need at the end of the month / quarter gets invested or saved by default.

The trades are free so...

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Re: Spend dividends or reinvest?

Post by jacob »

Yesterday, I learned a new word. An old world term for someone living off the income from their capital is called a rentier, which I knew, but apparently someone living by drawing down their capital is called a particulier. As far as dictionaries go, particulier is an archaic term for "private citizen", but given that citizenship used to mean something else than I does today, maybe it used to have a different meaning. Can anyone confirm?

loutfard
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Re: Spend dividends or reinvest?

Post by loutfard »

In my native Belgium, it's an easy decision for fiscal reasons:
- Dividends are taxed at 30%, plus at least 15% for foreign dividends.
- Most capital gains on the other hand are tax free. Buy the right accumulating etf's, and Bob's your uncle.

sky
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Re: Spend dividends or reinvest?

Post by sky »

jacob wrote:
Fri Jan 27, 2023 8:46 am
Yesterday, I learned a new word. An old world term for someone living off the income from their capital is called a rentier, which I knew, but apparently someone living by drawing down their capital is called a particulier. As far as dictionaries go, particulier is an archaic term for "private citizen", but given that citizenship used to mean something else than I does today, maybe it used to have a different meaning. Can anyone confirm?
In Dutch, particulier means something like "private sector", or as an adjective "private" (something: business, person, school, etc.).

WFJ
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Re: Spend dividends or reinvest?

Post by WFJ »

I reinvest all dividends except one stock. Use income and interest to fund lifestyle. Don't have records, but don't remember ever selling or stopping dividend reinvest to cover expenses. Reinvest eliminates one more decision one has to make with capital.

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