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Sprechen Sie Dividend?

Jonathan Clements  |  December 1, 2015

I DON’T TRADE very often, let alone buy new funds. But there’s a good chance I’ll purchase the no-load Vanguard International High Dividend Yield Index Fund, which is slated to be launched this month. It will charge 0.3% in annual expenses for the Admiral Shares, which require a $10,000 minimum investment, and 0.4% for the Investor Shares, which will have a $3,000 minimum.

In theory, it shouldn’t matter whether a stock pays a dividend. On the day the dividend is paid, the stock should drop by a comparable amount, so shareholders are no better off. In practice, I think dividend-paying stocks are attractive, for two key reasons. First, having to pay a regular dividend helps discipline management, so they’re more careful with the corporation’s cash. Second, history tells us that value stocks—which would include stocks with higher dividend yields—perform better than average over the long haul.

An added bonus: For those with a taste for dividends, foreign stocks offer more income than U.S. shares. As of Oct. 30, MSCI’s Europe, Australasia and Far East Index had a yield of 3.1%, versus 2.1% for MSCI’s USA Index.  The Vanguard fund, with its focus on high-yield stocks, will pay even more. The index it’ll track, the FTSE All-World ex-US High Dividend Yield Index, was kicking off almost 4% in dividends as of Oct. 30. Keep in mind that those dividends may have less purchasing power than hoped, should the dollar’s value continue to climb in the currency markets.

Congressional Inaction

Reminiscent of Bill Murray in Groundhog Day, we’re once again down to the wire on so-called tax extenders, those tax breaks that are set to expire—but for which Congress may offer a last-minute reprieve. Here are three key tax breaks that hang in the balance:

  • Qualified charitable distributions. This is a special provision for those age 70½ and older. You can give up to $100,000 directly from your individual retirement account to a charity, and count it toward your required minimum distribution. Intrigued? Have your IRA custodian cut a check made out to the charity in question. If this extender doesn’t pass, you’ll have to count the IRA distribution as part of your 2015 income. The silver lining: You should also be able to deduct the charitable contribution on your tax return.
  • Sales tax deduction. For those who file Schedule A listing their itemized deductions, this is an alternative to claiming the deduction for state and local taxes—which means it’s especially attractive for those who live in states like Florida and Texas, where there’s no state income tax.
  • Tuition and fees deduction. This can generate a tax deduction of up to $4,000 for higher education expenses. It’s claimed directly on Form 1040, which means you don’t have to file Schedule A to get the tax break.

Psychic Income, Physical Benefits

When I talk to college students, I don’t encourage them to follow their dreams. Instead, I tell them to take high-paying jobs and save as much as they can. My rationale: When you’re in your 20s and 30s, the work world is novel and exciting—even if the work itself isn’t—so you should opt for a job that pays lots of dollar income, because at that juncture psychic income isn’t so important.

Once you get into your 40s, however, the work world no longer seems novel and exciting, so psychic income becomes more crucial—and you may be hankering for a career change. If you had earned and saved a fair amount through your first few decades in the workforce, you will likely have the financial freedom to swap into a career that’s less lucrative, but which you may find more fulfilling.

It turns out that this more fulfilling work can also be good for your health. Lauren Schmitz, a research fellow at the University of Michigan, looked at the connection between working conditions and health for workers age 50 and older. “Occupations that allow men to use their strongest abilities and give them a sense of achievement, independence, variety, authority, creativity, and status are associated with improved health at older ages,” Ms. Schmitz writes. She says the health impact of having a fulfilling job was equal in magnitude to the effect of exercising vigorously three times or more per week.

Living to 100? Not So Fast

Retirees should worry less about dying in their 60s and 70s—and more about living longer than they ever possibly imagined. Because of this “longevity risk,” I think most retirees should delay Social Security to get a larger monthly check, keep at least 50% of their money in stocks, and seriously consider purchasing immediate-fixed annuities that pay lifetime income.

Longevity risk will be an even bigger issue for our children and grandchildren. But here’s the surprise: The risk won’t be significantly greater. To understand why, consider some figures from the Social Security Administration. For women, life expectancy as of birth has climbed from age 58 for those born in 1900 to age 84 for those born in 2000, an increase of 26 years. The comparable life expectancy figures for men are age 52 for those born in 1900 and age 80 for those born in 2000, an increase of 28 years.

But in the case of both men and women, the big rise in life expectancy—fully 20 years—occurred during the first half of the 20th century, reflecting a sharp drop in infant mortality. Since then, improvements have come much more grudgingly. Indeed, for women born in 2050, the projected life expectancy is age 87, while for men it is age 84.

What if you look at life expectancy as of age 65, which is more relevant to those contemplating retirement? Improvements have proven even more modest. During the 20th century, life expectancy as of age 65 increased by just five years for women and seven years for men. Even for today’s toddlers who make it to age 65, the projections suggest they won’t live beyond their late 80s. Medical advances, of course, could change all that. But based on current projections, it seems our grandchildren won’t all live to be centenarians.

Three Links

  • Will your retirement savings carry you through a long retirement? Check out the nest egg calculator at Vanguard.com.
  • Get a handle on global stock market valuations with the interactive map from StarCapital.de.
  • When should you claim Social Security? Try out AARP’s Social Security calculator.

Neither a Borrower Nor a Lender Be

How much wealth do we collectively own? The numbers are far from precise. A 2014 study in the Financial Analysts Journal puts the total value of the global “investable universe” at some $91 trillion as of year-end 2012. This “market portfolio” consisted of 36% stocks, 55% bonds, 5% commercial real estate and 4% private equity.

To get a handle on global wealth, you need to add a few items, including the value of private businesses, government-owned assets, precious metals and art. Probably the biggest missing piece is residential real estate, which is worth $22 trillion in the U.S. alone. If you really want to get fancy, you would also include the value of our human capital, which is our income-earning ability.

That brings us to an intriguing question: If we’re interested in global wealth, rather than in what the investable universe looks like, should we even include bonds? For every dollar lent, there is a dollar that has been borrowed, so the world’s net bond position is zero. If we were to wave a magic wand and eliminate all corporate, mortgage and government bonds, we would enrich shareholders by boosting the value of stocks, enrich homeowners by increasing their home equity and help taxpayers by trimming the interest payments that they fund with their tax dollars. But, by an equal sum, we would also impoverish holders of corporate, mortgage and government bonds.

This doesn’t mean that, collectively, we can’t have too much debt. Cast your mind back to 2008’s financial crisis. Overall, the global net bond position was—and always will be—zero. The big problem: Some folks had more debt than they could handle, and their inability to pay created financial havoc not only for these debtors, but also for those to whom money was owed.

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