I am 32 years old and have started to invest passively in low-fee stock ETFs: one global (VT) and one local Swiss ETF (CHSPI). However I was not sure whether to buy accumulating (dividends auto-reinvested) or distributing (dividends paid out automatically) ETFs. What are things I should consider to help inform my decision?
asked Jan 5, 2020 at 9:54
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I guess the question is, do you need the money as income? If you have dividends paid to you, what would you do with them?– Robert LongsonJan 5, 2020 at 11:09
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3Whether you occasionally receive money or get it reinvested doesn't matter from a financial standpoint, but it can have significant tax differences (e.g. selling shares being more tax-efficient than receiving capital gains through dividends).– amonJan 5, 2020 at 12:53
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2With the auto-reinvestment ETF, you can create "homemade dividends" by selling shares whenever you need cash. With the ETF that distributes dividends, you can reinvest by buying more shares with the dividends. As you can see, the auto-reinvestment ETF and the ETF that distributes dividends can be made equivalent. In practice, the differences will be due to tax.– FluxJul 30, 2020 at 13:34
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1 Answer
Valid dilemma. It would depend on two things, the size of your portfolio/investment as well as whether you are paying taxes on dividends received.
Should your portfolio be of considerable size and the amount of income generated is meaningful, i.e you can use it to pursue other investments or to support your living expenses, then you should opt for a distributing class. Otherwise, you should perhaps consider an accumulating class, particularly if you have to declare any dividends paid as income in your tax declaration and get taxed on them.
