Comments on: Conventional Wisdom "Don’t Buy a Distribution" Is Wrong

By: TFB

TFB — Mon, 04 Jan 2010 15:53:45 +0000

Arvind – Read the Vanguard article linked in the first paragraph. Conventional wisdom says if the market does not move at all, you can buy shares at a lower price on or after the ex-dividend date.

By: Arvind

Arvind — Mon, 04 Jan 2010 05:40:08 +0000

I am sorry but I seem tio be missing something here.

What is the negative about getting a dividend? You have to pay tax on it, but you still make money, right? I am sure I am missing something big in this discussion. Any enlightenment will be greatly appreciated!

By: John

John — Fri, 01 Jan 2010 01:56:59 +0000

Heck, all my Vanguard ETF dividends got wiped out in the last half-hour of trading today anyway. Win some, lose some, some get rained out.

Thank goodness for my CDs. Mr. Market can’t wipe out my cash as he can evaporate everything else. Before you pooh-pooh CDs (and I admit rates are pathetic these days), 5 year CDs are nudging up towards 4% again. They are lagging the marked increase in the ten-year Treasury over the past month (whoh, nelly, a 65 basis point increase), but they’ll catch up (I hope).

Ladder, ladder, ladder.

4% is sort of my personal Maginot line, at least in my ladder. I had to settle for a renewal of a State Farm CD at 3.17% a few months back and I almost barfed. Since then, it’s gone down. While the ten-year has gone ballistic. Go figure.

This truly was the decade of fixed-income. With that, I can agree with Bill Gross of Pimco. I made so much money on my CDs I could almost puke.

By: Steve

Steve — Thu, 31 Dec 2009 13:32:47 +0000

This is a good point to be made aware of, illustrated well with an example, but more should be said on how long before ex-dividend or what threshold of dividend yield matters. More often than not, you are doing a disservice to yourself buying before distribution and paying tax on the payout because typically the payout leads to a lower cost basis. The higher the dividend and closer to ex-dividend, the more likely the conventional wisdom is to be correct.

By: TFB

TFB — Wed, 30 Dec 2009 05:29:56 +0000

At the very least there should be a big warning that goes with this conventional wisdom: the benefit is really small while there’s a substantial risk you may miss a gain several times the size of your expected tax savings. If Ella had understood she could’ve given up $182 in order to defer $10, at least she would be making an informed decision. The Vanguard article and the Bogleheads forum participants did not warn her about this risk.

By: simplesimon

simplesimon — Wed, 30 Dec 2009 02:25:45 +0000

I’m inclined to agree with waiting until an ex-dividend date. It’s a prudent strategy to reduce known costs (taxes, in this case).

But I also agree that the impact is probably pretty small. It would take a person to invest huge chunks of cash right before the dividend every year for thirty years to have any significant impact (I don’t know for sure, I didn’t do the math).

By: Warren

Warren — Tue, 29 Dec 2009 06:34:24 +0000

@TFB – Yes that is true, assuming a longer time frame. I agree, waiting 6 months to buy ex-dividend is not a good idea, because as you say, over the long haul the market tends to go up. On the other hand, waiting “a few days” to buy ex-dividend is not timing the market, it’s just good tax practice. Over a very short period (day-to-day) the market is quite “random” or unpredictable.

By: TFB

TFB — Tue, 29 Dec 2009 06:09:18 +0000

Over the long term, the market volatility will not cancel itself out because the market tends to go up more often than not. Waiting is timing the market.

By: Warren

Warren — Tue, 29 Dec 2009 05:05:04 +0000

The last paragraph is self-contradictory, isn’t it? I agree we should not try to time the market. Since the day to day volatility could go either way, the effect of waiting could be positive or negative, and is not predictable.. However the effect of “buying the dividend” is always negative. Over the long term, the market volatility will cancel itself out but the tax drain on the dividend favors waiting till the x-dividend date.