Newbie here. First introduction to ETFs advice

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4

You buy 100 units of a distributing ETF at a price £100 each, for a total of £10’000.

A year later you will have received

  1. £3 cash distribution/share * 100 units = £300 cash dividend in total (gross, before tax) AND
  2. your 100 ETFs will have increased in price to £107 = £10’700 in total

£300 + £10’700 = £11’000. That’s a 10% year-over-year return (with a dividend yield of 3%).

EDIT: Had you bought an accumulating ETF and all other things equal, each of the your 100 shares would be worth £110. (Again, this is very simplified and doesn’t take into account tax).

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5

No, to take your example, you might get 1% dividends and 9% capital gain on avg.

So something like this

1st year: 1% dividends, capital gain 20%
2nd year: 1% dividends, capital loss -12%

How much is coming from dividends and how much capital gain depends on the etf. As written above, for CH, capital gains are very interesting as the aren’t taxed.

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6

Wow. So basically you want to retire more than on dividends… on reselling part of the stocks for a sum that still covers inflation. Right?

Because if for 10% average, only 1-3% is going to be dividends (I guess this varies from ETF to ETF, that I get it) you should have an insane amount of money invested in ETFs to generate a yearly profit that allows you to pay all month expenses, etc…

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7

Dividends are “irrelevant” - either your stock maintains the price, or you receive a dividend and the price drops for the same amount (in general).
In fact, in CH you would be better off if there weren’t any dividends paid out (since they are taxed as income).

And yes - you would be withdrawing/selling from your stash whatever you would need on top of the dividends, to cover your expenses once you FIRE.

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8

Ok I think I’m starting to get it.

So let´s say (gross example, I am newbie) that yearly inflation is 2% and you get 10% anual from your ETF (either in dividends or on revalorization of the shares) then you would sell that 8% and live out of that.

By that you can do FIRE without losing wealth over time.

9

When you start to retire, it’s expected to start using up your capital, the goal is to have enough capital until you die. Also don’t underestimate the effect of compounding.

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10

Dude… but that means you have to put a date on your expected time of death. How do you know that? How do you know if you’ll live until 70 or until 90? Or even until 110 if medicine advances so much as it appears is.

What is compounding?

11

Compounding is :

1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.1^4 > 1 + (4 x 0.1)

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12

Not an exact date, just a “confidence interval” :grin:
You can also “overplan” it and leave an estate, inheritance, foundation, donate etc.

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13

Ehmmm in laymans terms? :sweat_smile:

14

You get the return on your returns, (if kept invested or reinvested). The second year, you get 10% on 110% of your original investment. If everything is reinvested, you get (1+annual return)^number of years.

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15
start year 1 year 2 year 3 year 4 year 5
1 1.1 1.2 1.3 1.4 1.5 … non-compounding
1 1.1 1.21 1.331 1.4641 1.61051 … compounding

With the same 10% rate of return, compounding increases total return by 22% over only five years.

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16

Thanks a lot guys! Really appreciated. Seems like a very good thing. Time to do more in-depth research now.

Also time to research how much should I invest so it compensates having to do tax declaration (I don’t do it now since I am taxed at source).

Cheers :slight_smile:

17

actually you always pay tax for either type of dividends.
https://www.mustachianpost.com/swiss-tax-guide-for-investors-in-etfs/

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18

What “type of dividends” are you talking about?

What I am saying is that - purely tax wise in CH - it would be “better” to hold equity which pays no dividend (e.g. Berkshire Hathaway) than equity that does.
[Assuming the math “price1 = price2 + div” holds]

I was not talking about distributing vs. accumulating ETFs, if that’s what you’re trying to refer to.

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19

Something been bothering me when talking about reinvesting dividends to get the sweet compounding effect. Myself I’m currently only invested in VT on IBKR. I got my first dividends distributed (17 USD yay :grin:). The thing is that I can only buy full shares of VT@~100USD. So basically it’s just sitting on my account not working for me :pensive:

How are you guys handling this?

20

That amount is insignificant in the grand scheme of things.
Calm down and keep building up, so when the dividends get significant you won’t have the same “problem” anymore.
By the same logic - are you worried about the 50CHF cash bill in your wallet or some coins in the cupboard “not working for you”? :grin:

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21

I personally second @dbu , but if it still bothers you, simply “check this box” at IB described in this thread (incl pro’s and con’s)

For more details see
https://www.interactivebrokers.com/en/software/am/am/manageaccount/dividendreinvestment.htm

22

Thanks guys. To be clear it doesn’t really bother me but I was trying to wrap my head around it. Because everytime it’s explained like in this thread it’s never mentioned that actually you never really attain this goal since you cannot actually reinvest the dividends entirely.

I thought I was missing something

23

There shouldn’t be a problem if you keep investing each month. For example if you invest 1K/month, the month after the dividend you will be able to invest the 1K + the dividends