Basic Question: Dividends/Interest for ETFs and Index Funds?

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hedgehog
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Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by hedgehog » Tue Sep 02, 2014 1:13 am

Disclaimer: I am European, aiming for a US based Portfolio; no home country bias here. For the sake of simplicity consider I am a US-based investor, but for even more simplicity I can or I want to access only ETFs and index funds.

The basic function of owning shares in a company, for Warren Buffett and others is not that the share price will go up but that it pays dividends. The basic question here is how an ETF or an Index Fund passes on the dividends of the holder of such asset? That is the stocks part of the portfolio.

As I am an out of the US investor, I ask for a similar, ETF or Index Fund solution for the cash/bond parts of the portfolio; the only question here is how do they pass on the interest earned?

I can waive my claim for dividends/interest on the gold part.
Last edited by hedgehog on Tue Sep 02, 2014 10:46 pm, edited 1 time in total.
LazyInvestor
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Re: Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by LazyInvestor » Tue Sep 02, 2014 2:42 am

For non-resident aliens investing in US PP, and assuming no tax treaty between US and your country of residence:

25% stocks: if you own VOO or VTI you will pay 30% on dividends since they are US domiciled ETFs. You will also be hit by estate tax. So for the stock portion make sure you use Ireland-domiciled S&P500 ETFs such as VUSD by Vanguard or the one by iShares. They are both with 0.07 expense ratio. Ireland has tax treaty with US and their ETFs automatically pay only around 15% tax on dividends which is better than 30%

25% long-term treasuries: own them *directly* and not through ETF. This way you will receive interest payments which are taxed at 0%. No estate tax on treasuries.

25% bills: same as treasuries, but make sure you buy the ones longer than 6 months as there is some weird rule for the ones shorter than 6 months (I forgot what it is.) Just buy 1 year long and you get interest with 0% tax. No estate tax.

25% gold: no interest and no dividends. You get only capital gains which are taxed at 0% for non-residents not just for gold but all other components of the portfolio. You cannot buy gold coins in US anyways if you don't live there, so just get them in some european country such as Switzerland or Austria, or own some European gold ETF such as ZGLD (recommended in PP book).

Use a good US broker such as Interactive Brokers or Fidelity or Schwab which allows you to buy at international markets.

So overall it's great having a US PP for a non-resident alien. You pay only 15% on dividends for the stock part of the portfolio with the setup above.
goodasgold
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Re: Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by goodasgold » Tue Sep 02, 2014 7:28 am

A common rule-of-thumb is that people benefit from investing in the currency they will use in retirement. Currency rates can vary tremendously, causing dollar-heavy non-U.S. investors to sail through stormy waters.

I am not an economist, but I do not see how the unfortunate PIGS can ever pay their debts unless they re-establish their own currencies, which they can devalue to make exports and tourism more profitable.

I don't have any easy solutions for Europeans, especially with the fate of the Euro in doubt due to the ongoing crisis. In the long run, a similar crisis will traumatize U.S. investors, since very few of us Yanks are aware of similar storm clouds for the dollar when we finally have to confront paying off the massive unfunded liabilities being piled up by our clueless rulers, Democrat and Republican alike.

For this reason, IMHO, investing in gold makes sense.
hedgehog
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Re: Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by hedgehog » Tue Sep 02, 2014 10:35 pm

Thank you for your answers, which may not answer my question. :(

Could you see my original question again? I think I was quite clear what I asked. I re-read it. That is; I am not asking about taxes for aliens and brokerage recommendations; see the highlighted part.

Thank you.

[Not my main question here ; hence the bracket!

* Why it's the assumption if I earn money in an "emerging market" country it is as safe to invest my nest egg in in it as if I were to invest in a "blue chip" country?

See Malkiel - also on which countries to invest in, but that is totally off and irrelevant to my main question in this topic:
https://www.youtube.com/watch?v=wnCxlIQjT-s

* Why it's the assumption that I also want to spend the money where I have earned it? For example, I can go to Thailand; it's quite cheap with a good lifestyle. But certainly I do not want my nest egg to be tied to that country, just see the bullet point above]
Last edited by hedgehog on Tue Sep 02, 2014 10:42 pm, edited 1 time in total.
hedgehog
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Re: Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by hedgehog » Tue Sep 02, 2014 10:45 pm

hedgehog wrote: Thank you for your answers, which may not answer my question. :(

Could you see my original question again? I think I was quite clear what I asked. I re-read it. That is; I am not asking about taxes for aliens and brokerage recommendations; see the highlighted part.

Thank you.

[Not my main question here ; hence the bracket!

* Why it's the assumption if I earn money in an "emerging market" country it is as safe to invest my nest egg in in it as if I were to invest in a "blue chip" country? Anyways, it was discussed here million times that the PP with its gold part is working with the US economy, since gold is in the right correlation to the US, not some random emerging market country.

See Malkiel - also on which countries to invest in, but that is totally off and irrelevant to my main question in this topic:
https://www.youtube.com/watch?v=wnCxlIQjT-s

* Why it's the assumption that I also want to spend the money where I have earned it? For example, I can go to Thailand; it's quite cheap with a good lifestyle. But certainly I do not want my nest egg to be tied to that country, just see the bullet point above]
LazyInvestor
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Re: Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by LazyInvestor » Wed Sep 03, 2014 12:59 am

I have difficulty understanding your original question. However, we know that Warren buys for dividends... Dotcom millionaires buy for capital gains... all get rich or poor so it all works or doesn't in active investing of all kinds... In PP (and other lazy portfolios) you get dividends, interest, and capital gains that the market as a whole returns... HB was emphasizing that you are owning even long term treasuries not mainly because of the interest that they pay but because of the appreciation during deflationary periods. Also, index funds tend to drop in value when they distribute dividends, so you are not really even profiting from dividends. Thus, PP is manly growing because of capital gains and proper rebalancing.

Assumption that you spend money where you earn it is cultural. Even if you can go Thailand, you'll see that 99.9% retirees sit where they lived their whole lives (unless you're from UK so you're in maybe 2% who retire in Spain).
 
barrett
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Re: Basic Question: Dividends/Interest for ETFs and Index Funds?

Post by barrett » Wed Sep 03, 2014 8:02 am

Hedgehog,

I am not an ETF expert but I will try to answer your question.

I just googled the Vanguard S&P 500 fund VOO. They make dividend payments four time each year. This is done quarterly (fairly standard for these funds) and the payout dates are roughly 3/20, 6/20, 9/20 & 12/20. The current yield on the S&P 500 is about 1.87%, so, if we assume for the sake of clarity that the stock market stays flat for a year AND the yields on these stocks stay the same, you would get total dividend payments of $18.70 for every $1,000 you had invested in that fund. I am primarily with Fidelity (for some reason it was just easier to find the Vanguard numbers) and I just choose to reinvest those dividends. I believe all these index funds also give you the option of not reinvesting, so that the cash is just parked in a money market fund until you decide to do something with it.

Here in the US, bond funds will normally make interest payouts monthly instead of quarterly. Again, you can choose to have those interest payments reinvested or not.

Hope that helps.

Another thing I wanted to mention is that I believe you can't separate out a stock's price appreciation from its dividend and say it's only owned for one reason or the other. Both of those elements are crucial to overall performance. Ditto with LTTs... those coupon payments matter greatly as they make up a significant percentage of the money that is made from holding that asset over time.
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