Remove ads

Introducing the LemonFools Personal Finance Calculators

income or accumulation?

Index tracking funds and ETFs
umeca74
Posts: 33
Joined: February 15th, 2017, 10:27 am
Has thanked: 4 times

income or accumulation?

#117785

Postby umeca74 » February 13th, 2018, 8:01 am

most ETFs come in 2 varieties, dividend paying or just growing. But is the difference important? Instead of drawing a regular monthly income from a dividend paying ETF, I could sell the equivalent "growth" stock and have the same money (assuming that they follow the same market and grow similarly)

what's the main decision factor when going income vs accumulation?
if it is just a tax concern, in Cyprus where I live there is no CGT on stocks but there is a defense tax on dividends, so I guess I should go for accumulation?

nmdhqbc
2 Lemon pips
Posts: 192
Joined: March 22nd, 2017, 10:17 am
Has thanked: 18 times
Been thanked: 42 times

Re: income or accumulation?

#117788

Postby nmdhqbc » February 13th, 2018, 8:20 am

Not sure how it works in Cyprus but in the UK you still get taxed on the dividends in Acc units. I find holding Acc units an added complication working that all out so I always go for Inc units. I'm sure I could have worked it all out but I figured why bother when the inc units are so much simpler. Plus I could re-balance the portfolio using dividends before I retired and now retired I spend the dividends anyway.

JohnB
Lemon Slice
Posts: 275
Joined: January 15th, 2017, 9:20 am
Has thanked: 7 times
Been thanked: 57 times

Re: income or accumulation?

#117804

Postby JohnB » February 13th, 2018, 9:04 am

I used to think ACC units were easier as the rollup avoided the bother of reinvestment, but then I had to extract dividend information from them, and do CGT calculations, both of which are much harder to do.

So I'd go for INC outside SIPP/ISA tax shelters, and ACC within them if you don't rebalance, otherwise INC everywhere.

umeca74
Posts: 33
Joined: February 15th, 2017, 10:27 am
Has thanked: 4 times

Re: income or accumulation?

#117828

Postby umeca74 » February 13th, 2018, 10:46 am

perhaps my use of "accumulation" wasn't a good choice. When it comes to an ETF like Vanguard Total World Stock ETF (VT), I don't think it gives real dividends but it just appreciates (fingers crossed :)). So the choice is between something like this VT or something else that pays regular income

swill453
Lemon Quarter
Posts: 1816
Joined: November 4th, 2016, 6:11 pm
Has thanked: 100 times
Been thanked: 429 times

Re: income or accumulation?

#117832

Postby swill453 » February 13th, 2018, 11:07 am

umeca74 wrote:perhaps my use of "accumulation" wasn't a good choice. When it comes to an ETF like Vanguard Total World Stock ETF (VT), I don't think it gives real dividends but it just appreciates (fingers crossed :)). So the choice is between something like this VT or something else that pays regular income

That kind of thing is exactly what people are answering about. The growth of an accumulation ETF is, in part, due to dividends and you don't escape income tax (in this country) merely because the dividends aren't paid out to you.

Scott.

Raptor
Lemon Quarter
Posts: 1520
Joined: November 4th, 2016, 1:39 pm
Has thanked: 108 times
Been thanked: 239 times

Re: income or accumulation?

#117888

Postby Raptor » February 13th, 2018, 3:35 pm

Moderator Message:
Moving to more appropriate forum. Raptor

hiriskpaul
Lemon Quarter
Posts: 1044
Joined: November 4th, 2016, 1:04 pm
Has thanked: 20 times
Been thanked: 255 times

Re: income or accumulation?

#117923

Postby hiriskpaul » February 13th, 2018, 5:02 pm

VT does pay income. Most US listed ETFs do, it is just ones where the underlying does not pay income, such as gold, or specialist ETFs such as leveraged and inverse ETFs which do not.

There are a number of "normal" ETFs issued by iShares that are accumulating, but these are not domiciled in the US.

As others have stated, the UK tax system requires the income from accumulating ETFs and funds to be unpicked so that income and capital gains are separately accounted for. This can be tricky to get right, so it is simpler for UK residents to hold income funds. I quite like accumulating funds as it saves on reinvestment costs, but I only hold them in tax sheltered accounts.

GeoffF100
Lemon Quarter
Posts: 1187
Joined: November 14th, 2016, 7:33 pm
Has thanked: 30 times
Been thanked: 152 times

Re: income or accumulation?

#118787

Postby GeoffF100 » February 17th, 2018, 1:17 pm

Bond and international equity yields are currently about 2%. The equity risk premium is probably about 4%. For 50/50 bonds/equities, we hope to get an average total return of 4%. This suggests that we should invest our dividends in the bonds, not the equities, if we do not want our equity allocation to increase relentlessly.


Return to “Passive Investing”

Who is online

Users browsing this forum: No registered users and 3 guests