During my last monthly investment update, I hinted that further cuts to high dividend payers were forthcoming. I have now winnowed my DSPP monthly investments to a lean portfolio of just 6 stocks:
I eliminated NVS, GIS, XOM, AFL, and UNP, with dividends ranging from 2.1 to 4.2%. While these stocks are arguably undervalued, I have built significant positions in each with average cost below current price, so I am happy with just maintaining my current positions in them.
The only high ("high" means greater than the average dividend of the total stock market, currently around 1.6%) dividend payers left are YORW and OMC.
I'm keeping YORW because it is offering a 5% discount on dividend reinvestment, one of the very few DSPPs left to do so.
I am keeping OMC for the time being, as the current stock price is still below my average cost, and I plan to continue to average down until the current price is above my average cost.
Overall, I am pretty happy with this DSPP portfolio. I am now contributing $1200 per month at a 1.46% overall yield, which generates $210.24 annual dividend and $31.54 in additional taxes, assuming 15% tax rate.
This is a major improvement from a high of $4000 monthly contribution at 2.32% yield, generating $1114 annual dividend and $167 tax liability.
That's an annual tax savings of $135.46 (81%)!
This money is to be invested in higher growth zero and low dividend yield stocks.
To further reduce my tax drag, I also revamped my M1 Finance Portfolio as follows:
It now consists of 16 stocks, most of which pay zero dividends. My goal to reduce dividends and associated tax liability from my portfolio as much as possible.
BIIB, CERN, WAT, FISV were left unchanged at 8% each. These are all wide moat zero yield stocks for long term growth.
I reduced V, MA, GOOGL, DIS, and NKE to 1% of portfolio each. GOOGL is too pricey and offers fewer growth potential compared to BIDU. The rest are dividend stocks.
The way M1 Finance works is that if a component ("slice") of the portfolio ("pie") is eliminated, it will trigger sale of the entire component.
I have sizable unrealized gains in each of the above five stocks. If I were to sell them, it would generate sizable short term gain tax liabilities. Not good.
By adjusting their slices to just 1% each (down from 8%; 1% is the lowest allocation possible for a slice in a pie), They will be kept in the pie and not sold unless I initiate a withdrawal. Much better.
I did eliminate MCK completely from my pie, because I have a short term capital loss in that slice. MCK is very much undervalued, and I plan to buy it back after 31 days in my other brokerage account.
I wanted to maintain equal weight of about 10 stocks for diversification, so I added six new stocks with LH, DLTR, BRK.B, BIDU, CHKP, and AZO, each at 8%. Together with BIIB, CERN, WAT, FISV these 10 stocks make up 80% of the pie.
The 5 leftover stocks at 1% each make up 5% of the portfolio.
To complete the pie, I adjusted the IJR slice to 15%. IJR yields around 1.08%, lower than the total stock market, and offers high quality small cap exposure. It is probably the best ETF/ fund currently available.
I plan to invest at least $2500 monthly in M1 Finance, plus extra cash flows from time to time.
The current average dividend yield of the pie at 0.2% is quite agreeable and limits tax drag.
While I am now actively trying to reduce dividends from my portfolio, I am not a dividend hater. I believe that dividend income is better than selling stocks to pay for living expenses. Selling stocks involve transaction costs such as bid-ask spreads, and short term gains can be costly.
However, I now have way too much dividends compared to my living expenses. My projected annual dividends is more than $20,000, compared to only about $5,000 annual expenses. The extra dividends I receive above my living expenses only serve to generate more taxes and create a tax drag on my returns. It is better to divert my future investment into companies with a zero or low dividend payout policy and reinvest its retained earnings to fuel organic growth and buy back stocks.
Your comments are welcome! Thanks for reading!
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I eliminated NVS, GIS, XOM, AFL, and UNP, with dividends ranging from 2.1 to 4.2%. While these stocks are arguably undervalued, I have built significant positions in each with average cost below current price, so I am happy with just maintaining my current positions in them.
The only high ("high" means greater than the average dividend of the total stock market, currently around 1.6%) dividend payers left are YORW and OMC.
I'm keeping YORW because it is offering a 5% discount on dividend reinvestment, one of the very few DSPPs left to do so.
I am keeping OMC for the time being, as the current stock price is still below my average cost, and I plan to continue to average down until the current price is above my average cost.
Overall, I am pretty happy with this DSPP portfolio. I am now contributing $1200 per month at a 1.46% overall yield, which generates $210.24 annual dividend and $31.54 in additional taxes, assuming 15% tax rate.
This is a major improvement from a high of $4000 monthly contribution at 2.32% yield, generating $1114 annual dividend and $167 tax liability.
That's an annual tax savings of $135.46 (81%)!
This money is to be invested in higher growth zero and low dividend yield stocks.
To further reduce my tax drag, I also revamped my M1 Finance Portfolio as follows:
BIIB, CERN, WAT, FISV were left unchanged at 8% each. These are all wide moat zero yield stocks for long term growth.
I reduced V, MA, GOOGL, DIS, and NKE to 1% of portfolio each. GOOGL is too pricey and offers fewer growth potential compared to BIDU. The rest are dividend stocks.
The way M1 Finance works is that if a component ("slice") of the portfolio ("pie") is eliminated, it will trigger sale of the entire component.
I have sizable unrealized gains in each of the above five stocks. If I were to sell them, it would generate sizable short term gain tax liabilities. Not good.
By adjusting their slices to just 1% each (down from 8%; 1% is the lowest allocation possible for a slice in a pie), They will be kept in the pie and not sold unless I initiate a withdrawal. Much better.
I did eliminate MCK completely from my pie, because I have a short term capital loss in that slice. MCK is very much undervalued, and I plan to buy it back after 31 days in my other brokerage account.
I wanted to maintain equal weight of about 10 stocks for diversification, so I added six new stocks with LH, DLTR, BRK.B, BIDU, CHKP, and AZO, each at 8%. Together with BIIB, CERN, WAT, FISV these 10 stocks make up 80% of the pie.
The 5 leftover stocks at 1% each make up 5% of the portfolio.
To complete the pie, I adjusted the IJR slice to 15%. IJR yields around 1.08%, lower than the total stock market, and offers high quality small cap exposure. It is probably the best ETF/ fund currently available.
I plan to invest at least $2500 monthly in M1 Finance, plus extra cash flows from time to time.
The current average dividend yield of the pie at 0.2% is quite agreeable and limits tax drag.
While I am now actively trying to reduce dividends from my portfolio, I am not a dividend hater. I believe that dividend income is better than selling stocks to pay for living expenses. Selling stocks involve transaction costs such as bid-ask spreads, and short term gains can be costly.
However, I now have way too much dividends compared to my living expenses. My projected annual dividends is more than $20,000, compared to only about $5,000 annual expenses. The extra dividends I receive above my living expenses only serve to generate more taxes and create a tax drag on my returns. It is better to divert my future investment into companies with a zero or low dividend payout policy and reinvest its retained earnings to fuel organic growth and buy back stocks.
Your comments are welcome! Thanks for reading!
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