Gyroscopic Investing

I am planning on selling all my TLT and buying long term treasurys directly.

So just a bit of a technical question: Would it be smarter to sell TLT right before its monthly dividend payment around the 1st, or should I wait until after that payment?

Interest is taxed more than capital gains, correct?

It's dividends I think since TLT is an ETF, but yes you are correct in either case.

economicsjunkie wrote: It's dividends I think since TLT is an ETF, but yes you are correct in either case.

TLT monthly distributions are taxed as ordinary income, not the special dividend tax rates. I'd sell before.

iwealth wrote:

economicsjunkie wrote: It's dividends I think since TLT is an ETF, but yes you are correct in either case.

TLT monthly distributions are taxed as ordinary income, not the special dividend tax rates. I'd sell before.

Got it, thanks!

Another idea... before the dividend is paid out, DONATE the shares to a charitable organization that is capable of accepting them in a brokerage account, if you give to charity anyway. This will nullify any capital gains problems totally. They just go away. Then, with the cash you were going to give to the charity anyway, pay yourself back and buy the new position.

If this is not possible, sell before the dividend is paid if you have long-term capital gains. These are taxed at a lower rate for most people.

ochotona wrote: Another idea... before the dividend is paid out, DONATE the shares to a charitable organization that is capable of accepting them in a brokerage account, if you give to charity anyway. This will nullify any capital gains problems totally. They just go away. Then, with the cash you were going to give to the charity anyway, pay yourself back and buy the new position.

If this is not possible, sell before the dividend is paid if you have long-term capital gains. These are taxed at a lower rate for most people.

Good idea, will keep that in mind.

ochotona wrote: Another idea... before the dividend is paid out, DONATE the shares to a charitable organization that is capable of accepting them in a brokerage account, if you give to charity anyway. This will nullify any capital gains problems totally. They just go away. Then, with the cash you were going to give to the charity anyway, pay yourself back and buy the new position.

If this is not possible, sell before the dividend is paid if you have long-term capital gains. These are taxed at a lower rate for most people.

the answer is it  makes no difference at all  .  the monthly dividends paid out are interest and as such are taxed at ordinary rates . you just get what you accrued sooner . only distributions that involve capital gains may get special tax treatment .

selling prior to being paid out  does not help as you get paid the accrued interest  and it gets taxed at regular rates .


as far as capital gains whether you sell before or after the results are the same .

you can't magically turn interest payments in to capital gains and selling before or after really make no difference . .

fidelity:.
Tax on income
The interest generated by bond funds is typically calculated daily, but paid out to investors monthly. How that income is taxed depends on the underlying investments that are generating that income. The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes. Interest income generated by municipal bond funds is generally not subject to federal taxes, and may also be exempt from state and local taxes if the bonds held by the fund were issued by the state in which you live. Before buying a fund, read its prospectus to determine whether interest from the fund is expected to be subject to federal, state, or local taxes.

Tax on capital gains
There are two ways investors could owe capital gains tax on a bond fund investment. First, there are the capital gains (and losses) generated by the fund manager, as he or she buys and sells securities. Whether the profit from the sale of a bond in the fund is taxed at ordinary income tax rates or is eligible for a reduced capital gains rate is dependent on the same factors as explained above. These gains or losses are generally distributed to investors once or twice a year. The fund company will account for how your total gain or loss is generated and will tell you which portion is attributable to long-term capital gains, short-term capital gains, and interest income—all of which will affect the amount of tax you owe.

OK, thanks, good to know!

folks get this confused a lot .

interest no matter how it is accrued always remains interest .

as far as capital gains distributions you neither add or subtract any advantage by waiting to get it or not if you are selling . .

Yeah, it's a little confusing because of how TLT reports the interest.  It shows up on your tax forms as a dividend.  But it's always a non-qualified dividend which has the same tax treatment as interest.

folks get stock dividends confused as well. they think the paying of a dividend is adding some value because they reinvest it.

the fact is they are no better or worse with the paying of that dividend.

the reason is that all compounding at the opening bell of each quarter takes place on the dollar value that you have invested . if you had 10k invested and the stock pays a 5% dividend you have 500 bucks in your pocket as a dividend and only 9500 left compounding at the opening bell.

by finra  rules all open orders must be reduced at the open by the amount payed out .

it you reinvest those dividends you have the full 10k back invested and the market action will compound on that amount all quarter.

in a nut shell it is a wash .

5330. Adjustment of Orders

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01 "


there are advantages and disadvantages to dividend paying stocks but the mechanics of the dividend itself are zero sum .

dividend paying stocks who grow dividends are proudly proclaiming look how healthy we are , we can give away money we don't even need .

so investors like that many times and historically they tended to out perform.

but according to david silverblatt at s&p those dividends have been coming at a price  and dividend payers have  not been compounding growth on investor money more recently .

out of all the ways to grow investor money :

buying new company's

buying market share

new product development

share buy backs , etc , the paying of dividends has now turned out to be the least efficient way to try to compound returns on investor money .

mid-caps , small caps and large caps that don't pay dividends have beaten the larger dividend payers by 5 to 6%  over most years since the recovery .

mathjak107 wrote: the reason is that all compounding at the opening bell of each quarter takes place on the dollar value that you have invested . if you had 10k invested and the stock pays a 5% dividend you have 500 bucks in your pocket as a dividend and only 9500 left compounding at the opening bell.

by finra  rules all open orders must be reduced at the open by the amount payed out .

it you reinvest those dividends you have the full 10k back invested and the market action will compound on that amount all quarter.

in a nut shell it is a wash .

I should really know this already but how does this work, say, with an S&P 500 fund?

the same . the fund collects all the dividends , holds them and takes a share price dip when they pay them out quarterly .

one important thing to remember is there is no such thing with dividends as getting payed to wait. as you saw above there is no advantage to reinvesting dividends when markets are down since your dollar value in the investment is identical both before the div and after  . it is the dollar value of your investment that market forces compound up or down.

that is quite different than rebalancing  when things are down. rebalancing changes the actual dollars in vested in an asset . when you rebalance whether good or bad you are reducving the money available for compounding in one investment and increasing it in another.

rebalancing  during a good up run can hurt you by decreasing  the dollars of what is going up .  in a down market it  can help you .

there is no general rule that rebalancing will help or hurt you it has to do only with the time frame you are doing this . it is in that regard like dollar cost averaging and the exact time frame is key.

over the majority of time frames you will find both dca and rebalancing reduced performance since typically we go up more than down . but it will be time frame sensitive.


so do not buy in to the saying dividends pay you to wait out bear markets . this is not true one bit . they are neutral and do nothing you couldn't draw on your own just like retirees do  to get income . they can  pull equally from all assets in good and bad times and duplicate any dividend payment .