How should I be using my dividends?
I have a portfolio containing $800,000. I do not need to take any money out for living expenses. My wife and I have Social Security and pensions of $110,000, plus rental income clearing $35,000 a year. Should I be taking my dividends in cash or should I re-invest?
Looks like you’re in a good financial shape, especially considering your lifetime income is set through social security and pension. However, the AGI is getting awfully close to the $170k, the threshold for the Medicare surcharges for the part B and D.
The question is not about if you should reinvest the dividends or not, as either way (takes dividends or reinvest it) you are taxed annually if the investment is in a taxable account. So, a tax-efficient taxable account should be in a top priority.
On the other hand, if the dividends generated from a tax-deferred account, such as a 401k or IRA, you may dodge the bullet for now, or until you reach 70 ½. When the time comes, you’ll be forced to withdraw in compliance to the RMD requirement, which further boosts your AGI. To minimize that impact, you need to start plan now to see if any Roth conversion would help the possibility. This may require a few consultations with a CFP® or RICP ® professionals to map out a plan with some backup plans as well. Best
Our preference as money mangers is to take the dividends in cash, as the tax impact is the same either way, then use the accumulated dividends over the year to actively mange the ongoing allocation of the portfolio.
One of the primary reasons behind dividend reinvestment programs was to avoid extremely high commision rates prevelant when executing odd lot trades. Today, with commision costs of about $5.00 per trade, that value proposition is diminished.
If your portfolio's average dividend rate is between 2 and 3% per year, you can use that cash flow as a tool to add a meaningful position to your portfolio each year at the price you want, and use that tool to better manage your diversification.
Hope this helps,
I write a lot about purpose of different types of investments. Cash is a type of investment and should be looked at with a purpose to how it can assist your portfolio strategy. Sometimes holding cash can be the better strategy if you are waiting and looking for a great investment opportunity to invest in. You may notice that some of the great investors almost always have a certain amount of cash at any one time. Cash is fast to use and does not require the sale of another investment and settlement requirements to purchase another opportunity. But if that seems to be too much work then re-investing dividends might be the easier route to take.
You state that your income is sufficient to cover your expenses at this time. Therefore, you do not need additonal income from the dividends, it is best to leave them in the account so you can benefit from compound interest!
Your dividends will earn interest along with your portfolio assets.
Based on the information you provided, I like the idea of taking the dividends in cash. With that amount of income you should consider municipl bonds as a source of income. If the dividends are not enough to sustain your needs then I woud pull out an annual sum from your portfolio and rebalance your remainer portfolio at least annually.