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zero-dividend investing in taxable account

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  • #16
    You could easily go to motif.com, make a motif of the 30 largest zero-dividend stocks and weight them accordingly.  Maybe this has already done, but I didn't see it.  If someone would do the hard part for me (finding out what these 30 largest stocks actually are and their relative weight in the S&P 500) I'd be tempted to give it a try.  I would just need to compensate with a value tilt in the tax deferred accounts.

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    • #17




      I have noticed that there are several threads on taxable accounts and tax efficiency (including outside articles by jfoxcpacfp and PoF).

      After reading Phil DeMuth’s book (The Overtaxed Investor), it was with great interest that I watched this thread unfold on the Boglehead forum: https://www.bogleheads.org/forum/viewtopic.php?t=198334

      In short, the idea is holding a portfolio of individual stocks in your taxable account which do not pay a dividend.

      I admire the Bogleheads for their commitment to a particular dogma which serves most people best.  However, I felt that this thread on the Boglehead forum was limited by the ideology embraced by Bogleheads.

      I suspect the crowd here may be a little bit more open minded – would a reasonable person try something like this?
      Click to expand...


      I'm not a fan of trying to maximize dividends, but I won't go to the other extreme of trying to form a zero-dividend portfolio in taxable. The problem with a zero-dividend stock portfolio is that you have to stick with it for decades. I can stand behind a total stock market ETF for decades. While Amazon and Facebook are hot right now, they may become IBM and Microsoft in 10-20 years, replaced by the next hot thing. Microsoft, Intel, and Cisco also used to not pay dividends. They do now, and the cost of rotating out of these stocks into the current no-dividend stocks may wipe out the tax-efficiency of constructing a zero-dividend portfolio.

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      • #18
        A value stock is not necessarily a high dividend stock. Most of the added return of these stocks is being Value, not high dividend. In addition, a high dividend stock portfolio is usually large cap and very undiversified.

        www.etf.com/sections/index-investor-corner/swedroe-irrelevance-dividends?nopaging=1

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        • #19
          Interesting discussion.  No matter what you do you cannot avoid paying taxes completely.  Over time you will incur huge capital gains by trading out of dividend paying stocks to replace them with non-dividend stocks.  Hopefully your stocks will really appreciate so it becomes a larger but a good problem to have.  You can drive yourself crazy by trying to have a "perfect" portfolio.  I do not invest for dividend income but I have a lot of it.  I am not incurring capital gains to get rid of it either.  As your portfolio grows a 2% dividend becomes a sizable amount of money.  In my case it is more than "enough".  I will just pay the tax.

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          • #20
            These dividend strategies just skew your allocations in ways that you likely don’t understand. Diversification is your only friend in the market. Don’t pass up diversity just so you can 40-50 bps in taxes.

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            • #21
              Originally posted by Lithium View Post
              You could easily go to motif.com, make a motif of the 30 largest zero-dividend stocks and weight them accordingly. Maybe this has already done, but I didn't see it. If someone would do the hard part for me (finding out what these 30 largest stocks actually are and their relative weight in the S&P 500) I'd be tempted to give it a try. I would just need to compensate with a value tilt in the tax deferred accounts.
              Let's bring back an old thread just for fun, and see how time changes things...

              In Sept 2016 jfoxcpacfp was giving me a hard time for even suggesting that zero-dividend investing could be useful (normally I like almost everything she contributes here).

              Some people love to say "don't let the tax tail wag the dog" - what could be a worse saying when taxes are the biggest expense with index investing in a taxable account? Certainly much worse than the underlying expense ratios.

              Well, WCI just ran this article: https://www.whitecoatinvestor.com/di...-not-exciting/ - hopefully people are being more thoughtful about this now, rather than reciting mantras about taxes, dogs and tails.

              Lithium clearly had the right idea, that Motif had the right tools to implement this - but they seem to be out of business now.

              I am thinking that M1 finance might be the best way to implement a zero-dividend, broadly-diversified, low-expense taxable account. Does anyone have experience with this platform? Would it work for this strategy in taxable?

              Thanks



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              • #22
                Originally posted by Zaphod View Post
                ...however. I mostly have muni funds in my taxable for now, and other things that are not fit for mentioning on this forum.
                Like what?

                Btw - I'm liking these random resurrections of old zombie threads.

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                • #23
                  Originally posted by xraygoggles View Post

                  Like what?

                  Btw - I'm liking these random resurrections of old zombie threads.
                  He may have made some changes since 2016.

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                  • #24
                    Originally posted by Hatton View Post
                    I read Demuths book on taxes too. In a perfect world assuming no changes to future tax law it could make sense to invest in no dividend stocks. However the world is not perfect. If you have been investing for a while you already have assets in a taxable account that are paying dividends and you would incur large LTCG by selling. Figuring out good stocks with no dividends seems to be individual stock picking and market timing. It is simply impossible to legally avoid all taxes. I think it is a good position to be in having to worry about the taxes your taxable account is throwing off because that means you have done a good job in the accumulation phase.
                    Yes. Death and taxes. Zombie thread, but interesting topic.

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                    • #25
                      Originally posted by PHANTASOS View Post

                      Let's bring back an old thread just for fun, and see how time changes things...

                      In Sept 2016 jfoxcpacfp was giving me a hard time for even suggesting that zero-dividend investing could be useful (normally I like almost everything she contributes here).

                      Some people love to say "don't let the tax tail wag the dog" - what could be a worse saying when taxes are the biggest expense with index investing in a taxable account? Certainly much worse than the underlying expense ratios.

                      Well, WCI just ran this article: https://www.whitecoatinvestor.com/di...-not-exciting/ - hopefully people are being more thoughtful about this now, rather than reciting mantras about taxes, dogs and tails.

                      Lithium clearly had the right idea, that Motif had the right tools to implement this - but they seem to be out of business now.

                      I am thinking that M1 finance might be the best way to implement a zero-dividend, broadly-diversified, low-expense taxable account. Does anyone have experience with this platform? Would it work for this strategy in taxable?

                      Thanks


                      I've thought of doing something like this with M1 --- would take some time to set up and you'd essentially have a growth fund. Over time, some companies will start to pay a dividend, and there's nothing you can do about that.

                      If you wanted to remain diversified, it would be best to buy a dividend fund in a tax-advantaged account or create your own with stocks you didn't include in the no-dividend pie.

                      I wish a company would set this up as a low-cost ETF. Wishful thinking.

                      More thoughts on the subject from me:and Big ERN, Ph.D.Cheers!
                      -PoF

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