The Lemon Fool

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?

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.

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.

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

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.

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.

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.