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Value Factor: Improving the Tax Efficiency

Do Value Stocks Need to be Dividend-Yielding?

Nicolas Rabener
10 min read
16 Apr 2018

SUMMARY

  • The tax efficiency of the Value factor can be improved by reducing exposure to dividend-yielding stocks
  • Improving the tax efficiency reduces the performance in Europe and Japan, but not in the US
  • Reducing turnover can be considered for minimising capital gains and stamp duty taxes

INTRODUCTION

Tax is not a particular exciting dinner party topic, but is highly relevant for net investor returns. A UK-based investor buying Swiss quality stocks like the food company Nestle or the pharmaceutical company Novartis has to pay a 35% tax on dividends, which reduces the post-tax return significantly. Then there are also capital gains taxes and special taxes like stamp duty in countries like Hong Kong and Singapore, which incentivize investors to minimise portfolio turnover.

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