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Dividends vs Growth and Tax

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Minesadouble
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Dividends vs Growth and Tax

#252635

Postby Minesadouble » September 19th, 2019, 8:46 am

Looking at the tax rate on dividends against the tax on rate on capital gains, why don’t more investors pursue Growth rather than Income?
I’m obviously referring to investments held outside ISAs and SIPP. I’m also looking at top rates.
Genuine question, I’m curious.

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Re: Dividends vs Growth and Tax

#252638

Postby BusyBumbleBee » September 19th, 2019, 8:53 am

Perhaps because most investors don't let the tax tail wag the dog ;)

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Re: Dividends vs Growth and Tax

#252643

Postby OhNoNotimAgain » September 19th, 2019, 9:19 am

Because the bulk of equity returns come from dividends, not capital growth.

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Re: Dividends vs Growth and Tax

#252646

Postby tjh290633 » September 19th, 2019, 9:30 am

Minesadouble wrote:Looking at the tax rate on dividends against the tax on rate on capital gains, why don’t more investors pursue Growth rather than Income?
I’m obviously referring to investments held outside ISAs and SIPP. I’m also looking at top rates.
Genuine question, I’m curious.

Several reasons for that. First and foremost, if you were properly organised, all your investments would be in a tax shelter, like an ISA.

Second, the growth that many investors seek is growth in dividends. This can be achieved in two ways, first by investing in companies who give regular increases in their dividends at least in line with inflation. Secondly by reinvesting dividends in those companies which give the best yield, taking sustainability into account.

Some people contend that you should go for total return instead of maximising the flow of dividend income. At some stage this has to change to concentrating on dividend income. There has been discussion in another topic about combining drawing on capital with withdrawing cash from dividends. Compared with relying on dividends alone, this can lead to running out of money, as the flow of dividends will decrease each year and the amount drawn from capital increases to compensate. A prolonged bear market could wipe you out completely.

TJH

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Re: Dividends vs Growth and Tax

#252656

Postby Minesadouble » September 19th, 2019, 10:17 am

TJH,

Both the SIPP and ISA have strict limits on how much you can invest.
And I’ve invested to the maximum that was allowed, consistently since inception.

I’m addressing funds held outside those shelters.
In my original post I should have said “ why don’t more investors pursue Growth in addition to Income?” instead of “why don’t more investors pursue Growth rather than Income?
I find the tax advantage quite compelling, but maybe I’m alone in this?

MAD

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Re: Dividends vs Growth and Tax

#252669

Postby SalvorHardin » September 19th, 2019, 10:57 am

There's a selection process at work on TLF, with the investment boards being dominated by the two High Yield Portfolio boards. Most of these investors are using their portfolio to supplement their income in retirement (or close to retirement) and are consequently much more interested in income than capital growth.

"High Yield - Practical" on its own has more posts than on the other investment roundtable boards combined. TLF is a website where income-seeking investors are in the majority.

ISAs enable investors to reduce their tax rate on sheltered dividends to zero, putting them on par with capital gains inside ISAs. Only a small minority of us on TLF can't get all of our portfolio into ISAs; we're going to be more favourably towards growth investments (if only because we don't need to chase income) especially because capital gains rates are a bit lower than income tax rates (and the capital gains tax free allowance is nice). But tax rates and exemptions can be changed.

Dividends are more reliable than capital growth. Investors can have years when they have capital losses, rather than growth, but their dividends won't fall to zero.

Many investors don't want the hassle of selling shares to realise capital growth which they can then spend as income. It's easier to buy dividend paying shares. Many investors have a strong aversion to realising capital gains and then spending them ("eating into capital").

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Re: Dividends vs Growth and Tax

#252670

Postby Parky » September 19th, 2019, 11:00 am

Minesadouble wrote:
I find the tax advantage quite compelling, but maybe I’m alone in this?

MAD


I agree with you. Money is money, whether it is dividend income or capital appreciation. I take my full CGT allowance every year. One way to overcome the objections raised in previous replies (tax tail wagging dog, possibility of being wiped out in a prolonged bear market, most of return comes from dividends - all of which I would question) is to invest in BMO UK High income B shares (BHIB). The A shares pay normal dividends, and the B shares pay an equivalent amount as return of capital, which is taxable as capital gain. ( Declaration - I hold BHIB).

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Re: Dividends vs Growth and Tax

#252672

Postby mc2fool » September 19th, 2019, 11:25 am

Minesadouble wrote:I find the tax advantage quite compelling, but maybe I’m alone in this?

Undoubtedly not alone but it's also not universal. E.g. if your only source of income (in the general sense) is investments then if you get £50000 of dividends your tax bill will be £2000 ((£50000-£2000-£12500)*7.5%), whereas if you get £50000 of capital gain it'll be £3800 ((£50000-£12000)*10%).

That's the basic rate max and, of course, every additional £1 above those in the HRT band will be taxed at 32.5% and 20% respectively, and I'll leave it as an exercise for the reader to figure out the cross over level, but my point is that while just looking at the headline rates may make it appear compelling, individual circumstances do count.

(While the example above may be unusual, I do recall from my days on the HYP boards that there were a few folks living entirely off of their dividends.)

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Re: Dividends vs Growth and Tax

#252678

Postby BBLSP1 » September 19th, 2019, 11:43 am

mc2fool wrote:(While the example above may be unusual, I do recall from my days on the HYP boards that there were a few folks living entirely off of their dividends.)


Very close to my situation, and having built up the portfolio whilst being being non-resident I was not able to use ISAs - I process I may start once I return, but it will take a long time.

More interestingly, whilst HYPers can reel off a long list of the usual suspect dividend shares, where are the growth shares? Which are these? There is no growth board (at least here) anywhere near so active as the HYP boards.

Furthermore, as 'tjh' notes above, keeping your capital preserved by only living off secure dividends is a desirable position to be in. By secure dividends, I mean dividends paid out of genuine company profits and likely to track or better inflation. Not always the case I know.

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Re: Dividends vs Growth and Tax

#252685

Postby SalvorHardin » September 19th, 2019, 12:36 pm

BBLSP1 wrote:More interestingly, whilst HYPers can reel off a long list of the usual suspect dividend shares, where are the growth shares? Which are these? There is no growth board (at least here) anywhere near so active as the HYP boards.

The best place to find growth shares is overseas stock markets and amongst the smaller companies quoted in London, not the FTSE100 which yields more than twice the S&P500.

There are a few growth companies in the FTSE100; I’d pick out Burberry, Diageo, Smith & Nephew and Unilever (my four largest UK holdings).

When it comes to growth shares London doesn’t offer anything that can match Wall Street’s technology sector. Or even the North American railroads, a 19th century technology with spectacular growth in recent years. But these companies don’t get talked about much on TLF.

As you said, there isn’t a growth board and HYP dominates. Though whether a growth board would get much use is debatable; for that sort of company I favour the US Motley Fool and Seeking Alpha.

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Re: Dividends vs Growth and Tax

#252689

Postby Minesadouble » September 19th, 2019, 12:57 pm

SalvorHardin wrote:There's a selection process at work on TLF, with the investment boards being dominated by the two High Yield Portfolio boards. Most of these investors are using their portfolio to supplement their income in retirement (or close to retirement) and are consequently much more interested in income than capital growth.

"High Yield - Practical" on its own has more posts than on the other investment roundtable boards combined. TLF is a website where income-seeking investors are in the majority.

ISAs enable investors to reduce their tax rate on sheltered dividends to zero, putting them on par with capital gains inside ISAs. Only a small minority of us on TLF can't get all of our portfolio into ISAs; we're going to be more favourably towards growth investments (if only because we don't need to chase income) especially because capital gains rates are a bit lower than income tax rates (and the capital gains tax free allowance is nice). But tax rates and exemptions can be changed.

Dividends are more reliable than capital growth. Investors can have years when they have capital losses, rather than growth, but their dividends won't fall to zero.

Many investors don't want the hassle of selling shares to realise capital growth which they can then spend as income. It's easier to buy dividend paying shares. Many investors have a strong aversion to realising capital gains and then spending them ("eating into capital").


Thank you for this response, suddenly all is perfectly clear.

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Re: Dividends vs Growth and Tax

#252690

Postby Minesadouble » September 19th, 2019, 1:06 pm

SalvorHardin wrote:
BBLSP1 wrote:More interestingly, whilst HYPers can reel off a long list of the usual suspect dividend shares, where are the growth shares? Which are these? There is no growth board (at least here) anywhere near so active as the HYP boards.

The best place to find growth shares is overseas stock markets and amongst the smaller companies quoted in London, not the FTSE100 which yields more than twice the S&P500.

There are a few growth companies in the FTSE100; I’d pick out Burberry, Diageo, Smith & Nephew and Unilever (my four largest UK holdings).

When it comes to growth shares London doesn’t offer anything that can match Wall Street’s technology sector. Or even the North American railroads, a 19th century technology with spectacular growth in recent years. But these companies don’t get talked about much on TLF.

As you said, there isn’t a growth board and HYP dominates. Though whether a growth board would get much use is debatable; for that sort of company I favour the US Motley Fool and Seeking Alpha.


It sounds as though we’ve been fishing in the same pond. Unilever, Astra Zeneca and Diageo have fuelled my largest single share gains. The NASDAQ technology sector though has also resulted in large gains with Polar Capital Technology, Scottish Mortgage and Edinburgh Worldwide. Admittedly large positions and held for a long time. Thanks again for your response.

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Re: Dividends vs Growth and Tax

#252691

Postby Alaric » September 19th, 2019, 1:13 pm

SalvorHardin wrote:There are a few growth companies in the FTSE100; I’d pick out Burberry, Diageo, Smith & Nephew and Unilever (my four largest UK holdings).


Diageo and Unilever both pay substantial dividends in comparison to the returns on cash or Government Bonds. The "problem" as I see it is that they increase them every year at a rate well above inflation with the consequence that the shares are in demand and rise to a premium price which reduces the dividend yield to below the average of the FTSE 100.

Wetherspoons have an unusual policy. Their dividend has been static in money terms for many years. As it's a profitable Company, the share price has provided most of the return to investors.

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Re: Dividends vs Growth and Tax

#252697

Postby SalvorHardin » September 19th, 2019, 1:48 pm

Alaric wrote:Diageo and Unilever both pay substantial dividends in comparison to the returns on cash or Government Bonds. The "problem" as I see it is that they increase them every year at a rate well above inflation with the consequence that the shares are in demand and rise to a premium price which reduces the dividend yield to below the average of the FTSE 100.

Wetherspoons have an unusual policy. Their dividend has been static in money terms for many years. As it's a profitable Company, the share price has provided most of the return to investors.

Agreed. I'm convinced that the market has also re-rated Diageo in line with its nearest competitor, Pernod-Ricard. Diageo used to trade at a big discount to Pernod-Ricard but nowadays their P/E ratios are similar. I always thought that this difference was a bit odd given how similar the businesses are - it seems as if the market now agrees.

I suspect that the failed KraftHeinz bid has played a big part in raising Unilever's profile in America and thus the demand for its shares. The dramatic collapse in KraftHeinz's share price since the bid failed (from just over $91 to $28.41 as I type this) has probably reinforced the benefits of holding Unilever for some of these investors.

Wetherspoon is one of my smaller holdings. It's brilliantly run and is no doubt responsible for many of its competitors closing over the years.

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Re: Dividends vs Growth and Tax

#252708

Postby Lootman » September 19th, 2019, 3:23 pm

SalvorHardin wrote:
BBLSP1 wrote:More interestingly, whilst HYPers can reel off a long list of the usual suspect dividend shares, where are the growth shares? Which are these? There is no growth board (at least here) anywhere near so active as the HYP boards.

The best place to find growth shares is overseas stock markets and amongst the smaller companies quoted in London, not the FTSE100 which yields more than twice the S&P500.

There are a few growth companies in the FTSE100; I’d pick out Burberry, Diageo, Smith & Nephew and Unilever (my four largest UK holdings). When it comes to growth shares London doesn’t offer anything that can match Wall Street’s technology sector.

The US market not only contains most of the true global growth companies. It also acts relatively better than other markets when things go wrong (as also does the dollar). The combined effect of that "growthy defensiveness" is that US market cap is over 50% of global market cap. The US is a "must invest" location in the sense that nowhere else is or comes close. Throw in the US's absolute commitment to capitalism and free markets, and other markets can be seen as perpetually more risky (Asia) or sclerotic (Europe).

That said, in some ways the distinction between capital growth and dividends can be seen as illusory. For instance the earning yield of the UK and US markets are not that different. What is different is that the UK has a dividend culture (as reflected by the near obsession with dividends on TMF and TLF), and the US does not. So dividend cover in the UK is much lower than the US or, put another way, the payout ratio in the UK is much higher whilst retained earnings are much lower. The UK is hooked on dividends and the US is hooked on growth.

This becomes self-perpetuating. UK investors are addicted to dividends and so demand high payouts. This stymies growth and feeds back into an ever greater fixation with dividends. You just don't see that in the US, where four of the biggest six companies by market cap (Google, FaceBook, Amazon and Berkshire Hathaway) don't pay dividends at all, and investors don't mind. In the UK they'd be baying.

Another way to show the illusory nature of the distinction is that there are various ways of converting capital into income, and vice versa. So for instance if you sell calls against your portfolio, you effectively convert (the potential for) future capital gains into (premium) income. Conversely if you use a share replacement strategy of holding long-dated in-the-money calls instead of holding shares, then you get no income but higher gains. Again, split capital investment trusts allow you to draw either income or gains from the same pool of underlying investments. How significant can the distinction be when they can be converted into each other so readily?

As things stand at the moment there is not too much difference between the way dividends and gains are taxed, in terms of rate, as mc2fool showed above. The one benefit of gains not reflected in the rates is that you can largely choose when to take those gains, whereas dividends impose a taxable event upon you whether you want one or not. More significant for developing a tax strategy, perhaps, is whether you hold your higher-yielding holdings in an ISA or a taxable account. But there is no one simple answer to that either. It all depends.

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Re: Dividends vs Growth and Tax

#252714

Postby PrefInvestor » September 19th, 2019, 3:58 pm

Hi All, I am relatively new to the TLF and as an income seeker it suits me very well in the main. But I guess that I am surprised that there is no obvious board (or set of boards) dedicated to discussing growth stocks. I guess any user could create a topic in Investment Strategies but this hardly gives it the equal footing that it probably deserves ?.

I really dont know how one goes about requesting the addition of a new top level board here, maybe there is a mechanism - but if so I am unaware of it.

ATB

Pref

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Re: Dividends vs Growth and Tax

#252716

Postby tjh290633 » September 19th, 2019, 4:03 pm

Minesadouble wrote:TJH,

Both the SIPP and ISA have strict limits on how much you can invest.
And I’ve invested to the maximum that was allowed, consistently since inception.

I’m addressing funds held outside those shelters.
In my original post I should have said “ why don’t more investors pursue Growth in addition to Income?” instead of “why don’t more investors pursue Growth rather than Income?
I find the tax advantage quite compelling, but maybe I’m alone in this?

MAD

In that case you should have 7 figure sums in both.

What you have outside the tax shelters can be used in the most tax efficient way. Transferring into a tax shelter is the obvious step, by selling to make use of the CGT allowance. Unless you have enormous capital gains, that should give you the sum that you need. If you have more unused CGT allowance, use it and reinvest to rebase the original cost. You have an allowance for dividend income before you pay tax, and likewise for interest. Organise your affairs to make use of them. Maybe use some Government bonds to do this. No CGT on them, of course, but you could end up with capital losses if you but at a high premium.

If you want to realise gains, then reinvest in a similar share, like say sell AZN and reinvest in GSK or another pharma that you don't hold.

There are other ways to avoid CGT, but that is another subject about which I know little.

TJH

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Re: Dividends vs Growth and Tax

#252722

Postby Minesadouble » September 19th, 2019, 5:05 pm

tjh290633 wrote:
Minesadouble wrote:TJH,

Both the SIPP and ISA have strict limits on how much you can invest.
And I’ve invested to the maximum that was allowed, consistently since inception.

I’m addressing funds held outside those shelters.
In my original post I should have said “ why don’t more investors pursue Growth in addition to Income?” instead of “why don’t more investors pursue Growth rather than Income?
I find the tax advantage quite compelling, but maybe I’m alone in this?

MAD

In that case you should have 7 figure sums in both.

What you have outside the tax shelters can be used in the most tax efficient way. Transferring into a tax shelter is the obvious step, by selling to make use of the CGT allowance. Unless you have enormous capital gains, that should give you the sum that you need. If you have more unused CGT allowance, use it and reinvest to rebase the original cost. You have an allowance for dividend income before you pay tax, and likewise for interest. Organise your affairs to make use of them. Maybe use some Government bonds to do this. No CGT on them, of course, but you could end up with capital losses if you but at a high premium.

If you want to realise gains, then reinvest in a similar share, like say sell AZN and reinvest in GSK or another pharma that you don't hold.

There are other ways to avoid CGT, but that is another subject about which I know little.

TJH


Thanks Terry,

Each year in April, I use the CGT allowances for both myself and my wife, utilising any capital losses we might have available. Similarly I transfer funds to use both ISA allowances fully. My SIPP was under fixed protection, but is now in drawdown, my wife’s Pension is under fixed protection awaiting drawdown. The bulk of our investments are outside our SIPP/ISA Accounts, but both have been consistently invested in ever since they were available as PEPs and Single Co PEPS, I even had TESSAs and then TOISAs before ISAs. Same with the SIPPs.
I’ve used the strategy you mention above but using Polar Capital Technology and Allianz Technology quite regularly. We’re both still paying tax on Capital Gains and Dividends though.
I’m looking at that delta between 20% and 32.5% on the Capital Gains and Dividend Tax Rates, I think SalvorHardin may be in a similar situation and understands the scenario, that’s a significant difference in tax treatment.

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Re: Dividends vs Growth and Tax

#252733

Postby Wuffle » September 19th, 2019, 6:09 pm

This isn't entirely a 'high rate' persons problem.
unless I am missing something which I would be only too pleased to hear about.

The gap between the basic UK pension and the start of the tax band isn't huge.
A bit of downsizing could generate a lump large enough that the dividend income generated gallops towards being taxable.
A decent inheritance just turning up can't be squirreled away into ISA's at the drop of a hat either.
A 12,000 CGT allowance starts to look large and appealing.
I may be having to limbo under certain thresholds and pick and choose over the next few years.
Any advice?

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Re: Dividends vs Growth and Tax

#252739

Postby BusyBumbleBee » September 19th, 2019, 6:28 pm

Wuffle wrote:This isn't entirely a 'high rate' persons problem. ... unless I am missing something which I would be only too pleased to hear about.

The gap between the basic UK pension and the start of the tax band isn't huge.
A bit of downsizing could generate a lump large enough that the dividend income generated gallops towards being taxable.
A decent inheritance just turning up can't be squirreled away into ISA's at the drop of a hat either.
A 12,000 CGT allowance starts to look large and appealing.
I may be having to limbo under certain thresholds and pick and choose over the next few years.
Any advice?
I too had a problem like that - and my solution was to invest some into the NFU with profits fund via their flexibond. This essentially uses another tax privileged type of fund and allows you to decide when or if you want to pay higher rate tax : This post explains a lot more:

viewtopic.php?f=8&t=4676&p=48870&hilit=NFU#p48870


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