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Say a UK tax-payer is in the higher tax brackets for taxes. They will pay 20% on their capital gains, and 38% on their dividend gains.

It seems to me that it is strictly worse to use dividend paying ETF or funds rather than non-dividend paying ones? If money is needed, some of the holdings could be sold, and the taxes would be less.

Given that I think most of the ETFs and funds (at least the biggest) pay significant dividend (say around 2%) I feel that I am missing something. Can anyone let me know why I should not always invest in ETFs/funds that do not pay dividend, but instead increase their value?

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  • Related: Why is it rational to pay out a dividend?
    – Ben Miller
    Commented Feb 19, 2018 at 16:32
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    Perhaps because dividends are a fairly constant income stream, while selling holdings when money is needed exposes you to market fluctuations?
    – jamesqf
    Commented Feb 19, 2018 at 18:03
  • 2% is not a large dividend btw
    – Neuromancer
    Commented Feb 19, 2018 at 18:39

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There are several good reasons

1 If you hold them in an ISA (and you should be) dividends are tax free

2 You have an tax-free allowance for dividends https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet

3 You can take advantage of pound cost averaging

4 Most of the long term grown in stock markets comes from reinvested dividends

5 Having to pay a dividend in real cash is a way of enforcing good practice you cant use accounting tricks to make the company look better. (this is more for individual shares but I hope you take the point)

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