Why you shouldn't put everything in growth and then convert to dividends
So I have been wondering this for a while. Is it really tax efficient to go all growth then convert to dividends or build up your dividends and not convert?
So here are the numbers assuming $250,000 initial with $1000 monthly contributions over 10 years, I used a 20% capital gains rate since that is what I pay and will pay:
All growth VTI (80%) and VXUS (20%), Selling Half of the portfolio and buying dividends:
Total capital Gains/taxes= $85,791
Total Real Returns (returns-taxes): $1,027,389.90
All Dividend Growth SCHD (80%) and VYMI (20%):
Total capital Gains/taxes= $46,873
Total Real Returns (returns-taxes): $1,086,520
Mix growth+dividend VTI(40%)+VXUS(10%)+SCHD(40%)+VYMI(10%):
Total capital Gains/taxes= $29,172
Total Real Returns (returns-taxes): $1,094,114.2
Looks like it is better and more tax efficient to add dividends from the beginning and not going 100% growth then selling, since you end up paying more taxes. It also surprised me that the total returns are actually almost the same after taxes!!! It's true you get to delay taxes in the growth funds but it will take time for the dividends to build up and be substantial as well so in my opinion it is better to spread the tax burden over multiple years.
Note: Used dripcalc.com for the projections. VYMI (and SCHY) suggested dividend growth rate was crazy and threw off the numbers so I used SCHD's dividend growth rate.
Note 2: It would be the most tax efficient to go all growth in a 401K or IRA then transfer to dividend since you do not pay capital gains. This is assuming the funds are in a taxable account!