Author Topic: No Dividend Funds  (Read 5250 times)

hodedofome

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No Dividend Funds
« on: March 12, 2015, 12:00:15 PM »
I did a few google searches and didn't come up with anything. Does anyone know if there's index funds available that don't pay any dividends, but reinvest all income into more shares without making a taxable event to the investor? It's really just a stock buyback strategy but at the index fund level.

I don't even know if this is possible, but I could see folks in the growth stage of their portfolio using this in their taxable accounts.

Cathy

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Re: No Dividend Funds
« Reply #1 on: March 12, 2015, 12:30:57 PM »
Keep in mind that an "index fund" or "mutual fund" is not a legal structure for tax purposes. In the US, most mutual funds appear to be "regulated investment companies" as defined in 26 USC 851.

The default rule is that regulated investment companies are taxed the same as corporations, paying corporate income tax on any taxable income.

However, pursuant to 26 USC 852, a "regulated investment company" can avoid the application of the normal corporate tax regime and instead be taxed under an alternative regime if the dividends it pays to shareholders exceed 90% of the regulated investment company's income for the year, and if it also satisfies some other conditions.

Under the alternative regime, regulated investment companies are only taxed on retained earnings and certain capital gains, as opposed to all taxable income.

A regulated investment company that retains all dividends would not qualify for the alternative tax regime and so would have to pay normal corporate tax on all its earnings, subject to the usual corporate deductions and exclusions including the deduction for dividends received described in 26 USC 243. The computation of the corporate tax that would apply is itself complicated, and it may not be accurate to say it's always worse than the alternative regime. I have not calculated any examples to see if there are any edge cases where the corporate taxation regime could actually be better for shareholders, but they may exist.
« Last Edit: March 12, 2015, 12:44:35 PM by Cathy »

rmendpara

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Re: No Dividend Funds
« Reply #2 on: March 12, 2015, 12:50:15 PM »
I did a few google searches and didn't come up with anything. Does anyone know if there's index funds available that don't pay any dividends, but reinvest all income into more shares without making a taxable event to the investor? It's really just a stock buyback strategy but at the index fund level.

I don't even know if this is possible, but I could see folks in the growth stage of their portfolio using this in their taxable accounts.

To my knowledge, if any of the fund holdings pay out dividends, they have to allocate those earnings and pay them out to the fund shareholders.

Seems to be an easy way to cheat dividend income taxes if a fund structure could simply add to your shares.

I will say that most funds give you the option to automatically reinvest... but that does still create a taxable event.

I'd be interested if anyone has any info to the contrary?...

skyrefuge

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Re: No Dividend Funds
« Reply #3 on: March 12, 2015, 12:57:02 PM »
Does anyone know if there's index funds available that don't pay any dividends, but reinvest all income into more shares

That particular thing exists; I was invested in an S&P 500 fund that didn't pay out any dividends, which confused the hell out of me at first.

However, that's only possible if the fund is structured as a "Collective Investment Trust", and it appears that such a structure is only allowed inside 401(k) plans and the like. Which of course makes its dividend-tax avoidance irrelevant.

http://www.bogleheads.org/blog/what-is-a-collective-investment-trust/

waltworks

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Re: No Dividend Funds
« Reply #4 on: March 12, 2015, 01:13:32 PM »
Is this a tax question or a strategy question? It would be interesting to construct an anti-Aristocrats fund consisting only of companies that do not pay dividends.

-W

forummm

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Re: No Dividend Funds
« Reply #5 on: March 12, 2015, 01:29:04 PM »
It's called BRK

tj

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Re: No Dividend Funds
« Reply #6 on: March 12, 2015, 01:53:20 PM »
BRK.B


hodedofome

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Re: No Dividend Funds
« Reply #7 on: March 12, 2015, 02:26:44 PM »
Is this a tax question or a strategy question? It would be interesting to construct an anti-Aristocrats fund consisting only of companies that do not pay dividends.

-W

It's a tax strategy, a way of avoiding taxes on dividends in taxable accounts during the growth stage of your portfolio. I figure if there's nothing out there now, that there would be a market that would buy it if available.

With the ETF redemption process, they can avoid most or all capital gains apart from dividends. If someone could figure out a way to incorporate dividends into that, they could have a decent product on their hands.

hodedofome

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Re: No Dividend Funds
« Reply #8 on: March 12, 2015, 02:49:16 PM »
It's called BRK

Yeah I'm aware of BRK but it's still not the same thing :)