Broker Check

Stop the dividends!

| May 21, 2019
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If you have dividends from your investments automatically reinvesting, you might want to consider turning them off.  It’s usually fine in your 401k and Health Savings Accounts etc, but as financial life gets more complex, sometimes this helps simplify things.

For example, I often see people with massive positions in stocks or funds in their after tax accounts. 

They normally would pare the position back to reduce risk, but, at the same time, don’t want to incur unnecessary taxes.  We often encounter this when we are managing custom portfolios for our clients.  Taxes are a huge burden, to which we pay close attention.

However, if you already have too much of something,  why make the situation worse by buying more when it kicks off a dividend or distribution? 

Instead, turn off the dividend reinvestment and have the cash go somewhere else.  You could use it for living expenses, or reinvest it in something you need more of, to balance out your portfolio.  Perhaps you have too many stocks, as the market is at all time highs again; so, adding to your tax free bond holdings might be more prudent.

Reinvesting dividends also complicates cost basis calculations, but fortunately the computers do that for us now.  I remember, when starting out in this business, what a great deal “free” dividend reinvestment options were from the brokerage houses.  This was because commissions to buy and sell were so high.  Flash forward to today, and they are almost non-existent.  So, the friction to pivot and buy something better suited for the portfolio is much lower.

Finally, in taxable accounts, we have certain investments that kick off huge capital gain distributions.  This might be because the fund is doing poorly, and the manager needs to sell stocks that have been held for years to create the cash.  Perhaps there is just a movement away from that style of investing.  If your position is causing you extra cash pain compared to other ones, you probably don’t want to compound it and make it worse, do you?

There are a lot of nuances to this decision, and we are happy to discuss if you would like.

 

Thanks for taking a look!

Tom Gartner, MSAPM, CFP®

 

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

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