Is it worth waiting for dividends with regular investments?

Investing / Portfolios
1

I was intrigued by the title question. So I ran a small backtest.
Result: no, it is not worth timing the dividends vs. naive monthly investing it by a tiny amount.

Assumptions:

  • $1000 monthly budget
  • only invest in VT
  • time horizon: 2013+, where VT starts distributing quarterly
  • $0.33 transaction fees (IB-style)
  • 30% income tax applies to dividend distributions
  • buy shares at End of Month. in case of the wait-for-dividends, only in case of a distribution within the month

_m is the naive monthly, _d the waiting for dividends

image
image584Ă—853 44.3 KB

A Date Close feed EoM_m EoM_d diff
2410 2022-07-29 00:00:00-04:00 88.238220 1000 188138.655674 187085.197117 -1053.458557
2433 2022-08-31 00:00:00-04:00 84.662292 1000 181514.447745 180547.141453 -967.306291
2454 2022-09-30 00:00:00-04:00 76.594856 1000 165830.142229 165135.322705 -694.819524
2475 2022-10-31 00:00:00-04:00 81.479149 1000 177404.305714 176660.973264 -743.332450
2496 2022-11-30 00:00:00-05:00 88.227806 1000 193095.802496 192204.329587 -891.472909
2517 2022-12-30 00:00:00-05:00 84.312820 1000 186506.644679 185729.628497 -777.016182
2537 2023-01-31 00:00:00-05:00 90.759285 1000 201765.894238 200924.743411 -841.150828
2556 2023-02-28 00:00:00-05:00 87.873535 1000 196350.542395 195570.322314 -780.220081
2579 2023-03-31 00:00:00-04:00 90.378075 1000 203391.036615 202524.287270 -866.749345
2598 2023-04-28 00:00:00-04:00 91.663734 1000 207283.441143 206404.165200 -879.275943
2620 2023-05-31 00:00:00-04:00 90.554733 1000 205775.659521 204920.002602 -855.656919
2641 2023-06-30 00:00:00-04:00 95.814117 1000 219758.410322 218719.893110 -1038.517212
2661 2023-07-31 00:00:00-04:00 99.380714 1000 228936.287208 227858.867430 -1077.419778
2684 2023-08-31 00:00:00-04:00 96.555099 1000 223428.566026 222410.814161 -1017.751865
2704 2023-09-29 00:00:00-04:00 92.446899 1000 215579.499857 214684.115994 -895.383863
2726 2023-10-31 00:00:00-04:00 89.748299 1000 210288.731464 209417.965008 -870.766456
2747 2023-11-30 00:00:00-05:00 97.834183 1000 230233.627897 229193.387875 -1040.240022
2767 2023-12-29 00:00:00-05:00 102.879997 1000 244425.426549 243211.384577 -1214.041972
2788 2024-01-31 00:00:00-05:00 102.879997 1000 245425.096549 244211.384577 -1213.711972
2804 2024-02-23 00:00:00-05:00 107.519997 1000 257491.165093 256180.343134 -1310.821959

here the working example:

import yfinance as yf
import pandas as pd
import matplotlib.pyplot as plt
import seaborn as sns
import datetime
import numpy as np

pd.set_option('display.max_columns', None)

# Fetch historical data
vt = yf.Ticker('VT')
end_date = pd.Timestamp.now()
start_date = datetime.date(2013,1,1)
hist= vt.history(start=start_date.strftime('%Y-%m-%d'), end=end_date.strftime('%Y-%m-%d')).reset_index()
hist['yield'] = (hist["Dividends"]/hist["Open"])

# get End of Month data (will be used in purchasing & Net worth calculation)
df_EoM = hist.filter(hist['Date'].dt.to_period('M').drop_duplicates(keep='last').index, axis = 0)

# global parameters 
div_tax = 0.3 # fraction of dividends you owe to the government. consider your marginal income tax rate
tansaction_fees = 0.33 # transaction fees. for IB, around 1/3rd of a $

# prepare the data. _m for the monthly staratedy, _d for waiting for dividends
df = hist.filter(hist['Date'].dt.to_period('M').drop_duplicates(keep='last').index, axis = 0)
df["cash_m"] = 0
df["distribution_m"] = 0
df["feed"] = 1000
df["shares_bought_m"]=0
df["shares_m"]=0
df["EoM_m"]=0
df["fees_m"]=0
shares_m = 0
cash_available_m = 0

df["cash_d"] = 0
df["distribution_d"] = 0
df["shares_bought_d"]=0
df["shares_d"]=0
df["EoM_d"]=0
df["fees_d"]=0
shares_d = 0
cash_available_d = 0

# let's go
for i, (idx, row) in enumerate(df.iterrows()):
    year = row.Date.year
    month = row.Date.month
    price = df_EoM[(df_EoM.Date.dt.year == year) & (df_EoM.Date.dt.month == month) ].Close.values[0] # close price at the end of the month
    div_yield = hist[(hist.Date.dt.year == year) & (hist.Date.dt.month == month) ].Dividends.sum()*(1-div_tax) # dividend yield of a month, minus tax
    
    # first monthly investing
    # collect cash
    distribution_m = shares_m * div_yield
    cash_available_m = cash_available_m + row.feed + distribution_m # available cash for purchase
    
    # buy shares
    shares_bought_m, cash_available_m  = divmod(cash_available_m,price) 
    shares_m += shares_bought_m
    cash_available_m -= tansaction_fees

    # Net Worth End of Month
    EoM_m = shares_m * price + cash_available_m
    
    df.at[idx,"distribution_m"] = distribution_m
    df.at[idx,"shares_bought_m"] = shares_bought_m
    df.at[idx,"cash_m"] = cash_available_m
    df.at[idx,"shares_m"] = shares_m
    df.at[idx,"EoM_m"] =  EoM_m
    df.at[idx,"fees_m"] =  tansaction_fees
    
    # second the dividend cycle invest
    # collect cash
    distribution_d = shares_d * div_yield
    cash_available_d = cash_available_d + row.feed + distribution_d # available cash for purchase
    
    # buy shares
    if div_yield > 0:
        shares_bought_d, cash_available_d  = divmod(cash_available_d,price)
        shares_d += shares_bought_d
        cash_available_d -= tansaction_fees
        df.at[idx,"fees_d"] =  tansaction_fees
    else:
        shares_bought_d = 0

    # Net Worth End of Month
    EoM_d = shares_d * price + cash_available_d
    
    df.at[idx,"distribution_d"] = distribution_d
    df.at[idx,"shares_bought_d"] = shares_bought_d
    df.at[idx,"cash_d"] = cash_available_d
    df.at[idx,"shares_d"] = shares_d
    df.at[idx,"EoM_d"] =  EoM_d
df["diff"] = (df.EoM_d-df.EoM_m) 

df.plot(x="Date",y=["EoM_m","EoM_d"],title="Net worth")
df.plot(x="Date",y=["diff"],title='Difference')
keepcols = ['Date', 'Close',
      'cash_m', 'distribution_m',
       'feed', 'shares_bought_m', "fees_m", 'shares_m', 'EoM_m', 'cash_d',
       'distribution_d', 'shares_bought_d', "fees_d", 'shares_d', 'EoM_d', 'diff']
df[keepcols].tail(20)

follow-up question:

  • 2013-2024 is one of the strongest bull markets in history. would we have the same results in a sidways-or bear market?
6 Likes
2

Great question and test, which sideways market will you pick? That could be trickier because VT itself is not that old. You could pick something like VTSAX or SPDR for simplicity but these are US-only as you know.

3

Nice exercise.

In a long bear market, the best result would be to not invest at all or go short.

On average, even an expected return of 5% per year for time in the market will beat tax savings of 40% for a 0.5% quarterly dividend. Of course, the time period is too short to make reasonable assumptions of average returns.

Quarterly investment seem valid for convenience or when facing high fees for smaller purchases, though.

4

Nice exercise and you can throw results away :laughing:. I think the only reason to wait for dividends before investing is because the transaction fees are significant.

1 Like
5

Nice, thanks. Very interesting.
There is another reason for buying only 4 times a year: peace of mind. You have to send money to IB, go change the currency, wait for 2 days to settle, log in again and place the order. And in March the next year you have to fill out a lot of transactions in the tax declaration. So basically, I’m just lazy. But I was thinking about investing more often, as salary and saving rate is increasing.

6

Fair enough, that’s what I meant with convenience.
Hopefully, it won’t change your life whether you end with 257k or 256k in Nuggets example.

7

That’s not true. I change and buy immediately.

8

It’s true for me. Not always, but more than 50% of the time. Not sure, why, though.

9

If you set up a recurring investment and automatic reinvestment of dividends, you have to log in about twice a year to manually invest the leftovers from improvise currency exchange.
You can invest monthly without exchange fees.

2 Likes
10

2 posts were merged into an existing topic: IBKR: Recurring Investments available!

11

A side note, but my lazy-ish / peace of mind / “I like round numbers” approach is

  1. check how much USD I need for a nice round number of VT
  2. log in to bank account to transfer (roughly) equivalent CHF amount to IB
  3. log in to IB in the afternoon, execute market order, close negative USD balance

1 login to the bank, 1 login to IB, doesn’t take more than a few minutes overall.

I’ve had recurring transfers and investments set up, but still ended up canceling them and performing this “ritual” as soon as the next salary arrived :upside_down_face:

12

Margin vs cash account

13

Thanks, yes, I thought that.