Tax efficiency of zero dividend stocks

[Tangler]

Reading about taxes.

Finishing TheTax Alpha Dog, by Phil DeMuth.

Zero dividend single stocks in taxable.

Growth in capital gains is never realized then you die and step up in basis means your kids pay zero also.

I have no kids and I like the diversification of index funds but this argument is convincing.

Anyone pick single low dividend stocks as part of their taxable for estate planning?

[FIREshrink]

Low dividend stocks are not representative of the total market. Will you outperform, underperform?

Some people like BRKA but seems like a particular bet, as well.

[Tangler]

I am not pursuing it, but for high income high tax estate planning I see the appeal.

[The White Coat Investor]

This one seems more like letting the tax tail wag the investment dog to me.

[Larry Ragman]

This one seems more like letting the tax tail wag the investment dog to me.

I see what you did there.🐕

[Tangler]

I see what you did there.🐕

Tax Alpha doggie!

[Tangler]

I guess the part that seems most convincing is if you did this as part of taxable and had value in IRAs to make a well rounded diversified plan.

I am not doing this plan but i see the logic.

[Lithium]

So, if you look at the S&P 500, you have Amazon, Tesla, Meta, Berkshire Hathaway, and Alphabet. After that, I don’t even know what the largest company that pays no dividend is - maybe Adobe at ~#35 in market cap.

The market is pretty concentrated at the top already, but if you go put a market cap weight zero dividend portfolio together, you are pretty much going all in on those five companies. The other problem is that some of those companies are probably going to pay a dividend eventually.

[Turf Doc]

Are tax efficient index funds really that bad, even in a taxable account? i guess i never did the math to see what the tax protection does for growth...

[Larry Ragman]

Are tax efficient index funds really that bad, even in a taxable account? i guess i never did the math to see what the tax protection does for growth...

They are efficient enough for internal capital gains, especially Vanguard, but the index funds will still generate (mostly) qualified dividends.

[PhysicianOnFIRE]

Are tax efficient index funds really that bad, even in a taxable account? i guess i never did the math to see what the tax protection does for growth...

It's easy enough to do the math.

Dividend rate (currently ~1.5%) x tax rate on qualified dividends (15% or 20% + 3.8% for most docs + state income tax). Comes out to 0.3% to 0.6% for index funds for most people.

[Tim]

Are tax efficient index funds really that bad, even in a taxable account? i guess i never did the math to see what the tax protection does for growth...

Tax efficient funds would simply be a tilt. No one can say if total after-tax return will be better.

[Turf Doc]

Tax efficient funds would simply be a tilt. No one can say if total after-tax return will be better.

By tax efficient i only meant something like VTI, which i believe is pretty tax efficient as a fund in general

[bovie]

The 0.3-0.4% tax drag of an S&P or TSM index fund—or less for something like QQQ or an LG fund—is, to me, well worth the simplicity and diversification.

Cobbling together a bunch of non-dividend paying stocks without inadvertently creating some massive tilt, and likely still being under-diversified—not to mention managing that portfolio once it’s built—sounds like a nightmare.

[bovie]

It's easy enough to do the math.

Dividend rate (currently ~1.5%) x tax rate on qualified dividends (15% or 20% + 3.8% for most docs + state income tax). Comes out to 0.3% to 0.6% for index funds for most people.

Can also just look it up on Morningstar for any fund or ETF.

Reported as three-year tax cost ratio.