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Each year I end up having to report dividends to the IRS and it costs me money. Is it not better just to look for non paying dividend companies that are good value as well or over the long run it's worth pay taxes for the dividends?

Thanks

  • 2
    This was the theory that led to lots of companies returning money to shareholders via buy-backs rather than dividends in the early 2000's. But dividends seem to be back in style now. – The Photon Dec 27 '17 at 17:42
  • Dividends stocks do have a small tax drain over time though it tends to mostly even out as capital gains tend to be higher on non-dividend stocks. You do delay tax payments though on stocks which depend on capital gains which is generally good. Still, you can distort your overall portfolio adding a significant amount of risk by only owning non-dividend stocks. – rhaskett Dec 28 '17 at 14:24
  • You might read Stocks For The Long Run by Jeremy Siegel for information on how dividend paying stocks have performed versus the market over the long run. (The punch line is they have done well.) – zeta-band Dec 28 '17 at 18:04
  • "tends to mostly even out as capital gains tend to be higher on non-dividend stocks" How does this happen? Can you explain this concept to a novice? – Mr Monee Dec 31 '17 at 12:18
  • This probably deserves a US tag - the IRS is a strong hint. Other countries have other tax rules. I for instance do not pay dividend tax, and even get a small tax refund for foreign dividends that were taxed abroad.. – MSalters Mar 20 '18 at 12:39
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It depends on whether you need the dividend income or not - certainly you'll pay more tax on dividends than you would eventually on the capital gains, but if you don't need the income (or would rather cash out stocks and pay capital gains taxes) then yes, non-dividend-paying stocks would (all else being equal) be better from a tax standpoint.

That said, I would NOT eschew a stock JUST because it pays dividends. If you have a stock that you feel is a good value but it pays a dividend, the gains on the stock might outweigh the dividend plus the tax paid on the income.

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Yes.

Let's consider what you need to have good success in investing:

  • Diversification. Don't put all your eggs into one basket.
  • Time horizon. Buy now, don't sell.
  • Risk. If you don't take equity risk, your returns will be poor due to low interest rates in bonds. If you take equity risk and can't bear the losses, and sell at the worst possible moment, you are also guaranteed to fail.
  • Low costs. Keep them in check at all times!

These four are the only free lunches in investing.

Now let's consider what Berkshire Hathaway offers you:

  • Diversification: good diversification in US stock market, but poor international diversification. All of this by the purchase of only one type of stock.
  • Risk. Berkshire Hathaway has equity risk, and therefore it also has equity returns.
  • Low costs. Berkshire Hathaway is probably the world's cheapest actively managed fund.

The time horizon entirely depends on you. Plus, on top of these, Berkshire Hathaway pays no dividend.

So, if you find it acceptable that you don't have international diversification, by all means go ahead and purchase Berkshire Hathaway's non-dividend-paying stock.

You probably won't find a good portfolio of non-dividend-paying stocks other than Berkshire Hathaway.

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