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Tax efficiency of zero dividend stocks

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  • abds
    replied
    Originally posted by Turf Doc View Post

    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.

    Leave a comment:


  • PHANTASOS
    replied
    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.

    Leave a comment:


  • Hatton
    replied
    Originally posted by Tangler View Post

    why not BRK.B?

    POF talking about BRK!
    https://www.whitecoatinvestor.com/wh...%20-%208187107
    I think either would be fine.

    Leave a comment:


  • Tangler
    replied
    Originally posted by Hatton View Post
    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/wh...%20-%208187107

    Leave a comment:


  • Hatton
    replied
    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.

    Leave a comment:


  • Dusn
    replied
    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.

    Leave a comment:


  • Tangler
    replied
    Originally posted by Random1 View Post
    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.

    Leave a comment:


  • Random1
    replied
    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.

    Leave a comment:


  • Tangler
    replied
    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

    Leave a comment:


  • Turf Doc
    replied
    Originally posted by PhysicianOnFIRE View Post

    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

    Leave a comment:


  • bovie
    replied
    Originally posted by PhysicianOnFIRE View Post

    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.

    Leave a comment:


  • bovie
    replied
    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.

    Leave a comment:


  • Turf Doc
    replied
    Originally posted by Tim View Post

    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

    Leave a comment:


  • Tim
    replied
    Originally posted by Turf Doc View Post
    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.

    Leave a comment:


  • PhysicianOnFIRE
    replied
    Originally posted by Turf Doc View Post
    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.
    A "taxable" account is actually a post-tax account that can be quite tax-efficient. I share tips to minimize the tax drag on your investments.

    Leave a comment:

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