By: Revanche

Reaping Dividends: December 2017 report

December 13, 2017

Reaping Dividends: The much delayed October 2017This was supposed to be the October report but stuff happened. Lots of stuff, but you’ve read all about it by now, right? Time for real money talk – let’s dive in!

My current portfolio lives at Ally now, they bought out Tradeking a while back. At $4.95 per trade, and as a relatively low level investor, that suited my needs but I started wondering how much I could reduce my costs by moving to Vanguard where my retirement and 529 portfolios live. It’s not that I trade often, but when are savings bad? In case you’re thinking the same, these are their service tiers and the assets you need to qualify for each:

PERSONAL INVESTOR – Less than $50,000.
VOYAGER® – Starting at $50,000.
VOYAGER SELECT® – Starting at $500,000.
FLAGSHIP® – Starting at $1 million.

Unfortunately, the highest tier I would qualify for is the Voyager tier with the following fees:

VANGUARD ETFs: Free
STOCKS AND NON-VANGUARD ETFs
Online. All trades: $7
By phone. All trades: $25 (not that I ever trade by phone)

Voyager Select and their $2 trades are unfortunately a long way off so that idea is shelved for now. But I can cut costs right now by adding money to my account to qualify for Ally Invest SELECT which saves me a dollar per trade. Hey, it’s a dollar. I like my dollars and I like them to stay with me. It’s a far lower bar to get into that club – $100,000 daily balance vs Vanguard’s $500,000.

Observations this quarter

  • Dividends income this past quarter (July through October): $621.40. But there were dividends paid in last two months of the year, too: $189.00
  • Dividends income year to date: $2,081.70. I previously predicted we’d see a total of $2600 in dividend income this year but that was off by a few hundred.
  • GE is my (first ever) loser. I bought it on a whim and it’s tanked this year, losing 40% of its value ($3,691.95). Normally I’d just ride it out but I’m a little doubtful that it’s going to come back any time soon, and they also slashed the dividend so I’m curious whether it’s time to do my first tax loss harvesting. Since I bought it in January, this would be a short term loss and I could only deduct a maximum of $3,000 this year, then carryover the rest of the loss to next year.

Questions!

Reader-friend asked me: How do stocks factor into income and why? Is it better to pay the taxes during tax season outright or sell some stocks to pay the taxes associated with them?

A: I’m no expert but this is my understanding and approach with stocks. There are two kinds of stocks – those that pay dividends and those that don’t.

I only own one stock that doesn’t pay dividends, my first ever stock, BRK-B. Warren Buffett doesn’t believe in paying dividends but I just wanted to buy a stock that I knew for sure would appreciate. You can’t say that about most stocks but BRK-B was pretty much a sure bet and has increased 125% in value since I bought it. That doesn’t mean anything for my income right now though, because it’s not real until I sell those stocks and actually realize those gains. At that time, I’ll finally owe taxes on the profit (aka capital gains). If I made it a habit to buy and sell stocks, I would typically hold the stocks for at least a year to ensure that I only paid the long term capital gains tax which is much lower than the short term capital gains.

At the moment, if you’re in the 25 to 35% tax brackets, the long term cap gains tax is 15%. If you’re in the 39.6% income tax bracket, the long term capital gains rate is still only 20%. Short-term gains are taxed at your top marginal tax rate, AKA your normal tax rate, and for most of that, it’s going to be higher than the long term tax rate.

I’ve held my BRK-B stocks far longer than the minimum needed to qualify for the long term cap gains, so I could sell at any time but I’m sentimental and not ready to sell yet. I would take into consideration whether I had any other stocks that were long term losers first, like GE (above) to offset the taxes.

Dividend stocks are the majority of my brokerage portfolio (not my retirement portfolio) because I want regular income when we get around to retiring (early, whenever I figure out the plan for that). The problem with this approach, of course, is that the dividends are considered regular income so we pay regular income tax on it. It’s not awesome but neither is my health so I’m accepting the taxes as part of the ongoing costs of managing my health long-term.

I’m obviously not any expert here but I’m happy to share my thinking if you’ve got questions.

Income Replacement

For perspective, I like to think of the dividends investing project in terms of how much of our income it can replace, or how much of our fixed expenses it can cover.

At a whopping $2165.70, this year’s dividends can pay 67% of one mortgage payment.

Since I started dabbling in dividends investing (and I do mean dabbling!) 6 years ago, I’ve made a grand total of $3,598.20. This is more than double last year’s annual dividends of $1,432.50.

:: Would you sell the GE loser this year? Do you have any other losers to sell off?

7 Responses to “Reaping Dividends: December 2017 report”

  1. I’m not selling my PG&E stock which is seeing the same problem (though I haven’t noticed the dividend being cut– I guess I’ll see if it has next quarter). I’ve been with it when it was bankrupt (and had to pay taxes on it on a graduate student stipend without getting any of the dividends or being able to sell it, which was when I decided my father was no longer to be allowed near my finances) and it’s gone from 0 dividend to $900+/quarter. So I guess with utilities I’m taking the long view? It’s possibly not such a great idea since the government is no longer rewarding movement into renewables which is bad for future investment. I dunno. It’s my only intentionally dividend stock (I DRIP all the indexes/etfs that have dividends) and I think my only remaining single stock.

    In theory I prefer non-dividend stocks now (because of taxes) and then switching over to dividend stocks closer to retirement. In practice, I just use target-date funds and very broad indexes and I DRIP what comes out and will likely Un-DRIP later if we need the cash.
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    • Revanche says:

      I keep waffling. I usually take the long view too but we had to sell some stocks this year to pay for things and I thought maybe I’d mitigate the tax hit there. Maybe I’ll be better off just selling some of them and keeping the rest for later.

  2. elisa p says:

    Not all dividends are taxed at fullincome rate. Many are taxed at the lower cap gains rates if they are “ qualified” .

  3. GYM says:

    I have a few shares of the BRK.A (just kidding, I WISH!)

    I bought BRK.B a few years ago just so that I could get a pass for the Berkshire AGM. I only bought one share and it’s up 33%. He is a brilliant man, and BRK.B is brilliant too, his brands are everywhere, including See’s when I saw it in Hawaii.

    Great job with the dividends! Sorry to hear about GE, it’s always difficult with dividend investing picking good companies to invest with.

    • Revanche says:

      I sure do wish I’d picked up BRK.A first! Ah, hindsight 🙂

      Here’s hoping I can keep doing a good job with our investments.

  4. The only dividend producing stock I have is Nike (the one stock my parents bought for me when I was young, and I’ve just left it alone). It’s paid out a whopping $28.50 this year.

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