Pros and cons of taking the dividends from mutual funds versus reinvesting-and-selling to generate income?

Question

I have some money in a portfolio of 6 (non-qualified) mutual funds, and I would like to use these investments to generate a steady supplemental income stream. My funds distribute dividends and capital gains on quarterly and annual bases, and my thought was to simply set my funds to distribute to my money market acc't rather than reinvest. But my financial advisor felt that it was better to let the funds reinvest, and then simply sell a set dollar amount of shares on a quarterly basis. This doesn't seem intuitive to me, but I don't know the pros and cons of either arrangement. Can anyone help?

Answer 1

If you are not in need of the money at this age of your life, it would be best that you have the dividend re-invested,

Re-investing will help grow your portfolio so that when you do need periodic income it will be more benefical

Listen to your advisor, it appears they know more about investing than you do

Answer 2

Pros - You have extra money if you need it

Cons - If you are taking your dividends out, you never let your investments really grow. If you keep reinvesting and reinvesting, compound interest will start working and your money will grow exponentially.

If you can leave your money in, it's much better in the long-term.

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Answer 3

- how much are the quarterly dividends?

- if you were to reinvest the dividends, then sell x number of mutual fund shares at the end of each quarter, how much will price of each share will be?

You can't tell what the market price of those shares will be three months down the road. If your mother depends on the cash flow from her capital base, then we can't rely on how much we can sell the mutual fund shares in the future.

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Answer 4

If your mother needs the money have her take it.  She wont get the gains of possible increases in the fund but the basis will remain the same. This happened to me. What they were doing was charging me a fee for reinvesting the divendens, but never showed up on the statement. I did the math, called the advisor and he assured me they wouldn't do that, I canceled the the reinvested dividends and started getting the checks. Your paying taxes on it whether your take it or reinvest it. If your mother needs it, take it.

Answer 5

Perhaps there is a point to the strategy recommended by your advisor.  The dividends and capital gains distributions are not necessarily a steady stream of income.  The capital gains mostly are paid at year end with a few exceptions.  By taking a steady quarterly distribution, you will have a steady and know stream of income reguardless of the amount of distributions.