Tax efficiency of zero dividend stocks

[Turf Doc]

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.

So conceptually, can I think of those percentages as kind of like an extra expense ratio? If so, that’s not so bad, and certainly not worth changing your investing strategy over

[Tangler]

The book: The Overtaxed Investor, slash your tax bill and become a tax alpha dog is a good and easy read. I highly recommend it.
I will not be adding a bunch of single stocks that pay no dividends to my taxable but i will roll my eyes when I see a doc complaining about low dividends.

Tax-wise dividends suck.

Dividends = forced taxation since you pay the tax whether you need the dividends or not.

Zero control.

Better to have unrealized capital gains that you can realize in early retirement (when income low prior to RMD).

Control. It will help when doing Roth conversions prior to RMD also.

Read the book. Easy to read. Fun. (not a paid endorsement, obviously)
Make sure you get the 2020 version:
https://www.amazon.com/Overtaxed-Inv...a-888186005196

[Random1]

The problem is , if you a good accumulator you will end up with a large taxable account. And trying to avoid taxes, although a great ambition might not end up to be the best overall financial decision.

Back in 2020, I bought a lot of oil , at the bottom of the barrel , which are high dividend stocks. and due to the nature of the way my accounts are set up I could not do that easily in a tax deferred account. I will probably pay more on taxes for dividends than I would like, but if I avoided buying them I would have missed out on tremendous returns

I think the biggest psychological issue people run into with dividend stocks, is the dividend is looked at as free money, which is easier to spend especially when retired. It is a lot more difficult to sell shares to finance something , than just to spend the “free” dividends.

[Tangler]

The problem is , if you a good accumulator you will end up with a large taxable account. And trying to avoid taxes, although a great ambition might not end up to be the best overall financial decision.

Back in 2020, I bought a lot of oil , at the bottom of the barrel , which are high dividend stocks. and due to the nature of the way my accounts are set up I could not do that easily in a tax deferred account. I will probably pay more on taxes for dividends than I would like, but if I avoided buying them I would have missed out on tremendous returns

I think the biggest psychological issue people run into with dividend stocks, is the dividend is looked at as free money, which is easier to spend especially when retired. It is a lot more difficult to sell shares to finance something , than just to spend the “free” dividends.

I see a few things in what you are saying.

Point 1: "The problem is , if you a good accumulator you will end up with a large taxable account." This is not a problem for someone planing for step up in basis at death. This is a pretty good strategy if you want to give away to kids at death. The taxes don't get paid.

If I was made king = "lord of the tax code" and could change our ridiculous tax code I would simplify the he!! out of it and just flat out eliminate step up in basis at death. I would make our tax code fit on a post card, and I would probably piss everyone off.

Point 2: "And trying to avoid taxes, although a great ambition might not end up to be the best overall financial decision. " This I agree with. The whole dog tail thing.

Point 3: "II think the biggest psychological issue people run into with dividend stocks, is the dividend is looked at as free money, which is easier to spend especially when retired. It is a lot more difficult to sell shares to finance something , than just to spend the “free” dividends"

Well, this is a problem with the person. They don't understand math and/or do not appreciate the ability to take advantage of the tax code. They could be better off deciding when they want to take a gain and waiting to sell and capture LTCG when they have a period of low income, for example right after retirement but prior to RMD for a doc.

[Dusn]

I’ve been tempted to do this, mainly because it would be one less thing to enter while filing my taxes.

It might be a good plan in the small taxable account I opened with Merrill edge for the sole purpose of increasing my BoA credit card rewards.

[Hatton]

I read the book when it first came out. If one wanted to do this they should start early in their career before they have significant capital gains. It was not a practical strategy for me. It is an argument for BRK.A. I do not own any.

[Tangler]

I read the book when it first came out. If one wanted to do this they should start early in their career before they have significant capital gains. It was not a practical strategy for me. It is an argument for BRK.A. I do not own any.

why not BRK.B?

POF talking about BRK!

https://www.whitecoatinvestor.com/why-this-index-fund-investor-purchased-an-individual-stock/?ck_subscriber_id=560999113&utm_source=convertkit&utm_medium=email&utm_campaign=The+White+Coat+Investor+–+Investing+%26+Personal+Finance+for+Doctors%20-%208187107

[Hatton]

why not BRK.B?

POF talking about BRK!
https://www.whitecoatinvestor.com/wh...%20-%208187107

I think either would be fine.

[PHANTASOS]

Zero dividends is only part of the tax efficiency story. A portfolio of zero-dividend stocks will always have individual components that are winners and losers relative to an index fund. If you tax-loss-harvest and donate appreciated shares to charity, this type of portfolio becomes much more valuable.

[abds]

So conceptually, can I think of those percentages as kind of like an extra expense ratio? If so, that’s not so bad, and certainly not worth changing your investing strategy over

The issue for me is not so much tax drag, because it’s just not a huge deal in my opinion. I don’t seek out non-dividend paying individual stocks (except BRK-B), because the tax drag isn’t worth changing my plan (which is mostly VTI).

The bigger issue for me is the hassle of paying the taxes. Several million in VTI results in a 5 figure tax bill. Since I currently just have dividends auto-reinvest, it’s something I have to plan for is all. Eventually if the numbers get big enough and it’s tough to cover the tax bill from my income I’ll turn off the “auto reinvest” and it will be less of a hassle.

Its an ok problem to have.