Value Factor: Improving the Tax Efficiency

Do Value Stocks Need to be Dividend-Yielding?

April 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • 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


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.

In factor investing, some strategies are more affected by taxes than others. Value stocks are often also high-yielding stocks, which makes them unattractive from a dividend tax perspective. In this short research note we aim to improve the tax-efficiency of the Value factor by decreasing the exposure to dividend-yielding stocks (read Resist the Siren Call of High Dividend Yields).


We focus on the Value factor, which selects stocks based on a combination of price-to-book and price-to-earnings ratios, and the Dividend Yield factor, which ranks stocks by the current dividend yield. The factors are created via long-short beta-neutral portfolios based on the top and bottom 10% stocks in the US, Europe and Japan. Only stocks with a market capitalisation of larger than $1 billion are included. Portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points.

Although this research note focuses on improving the tax efficiency of the Value factor, all returns are shown pre-tax as taxes tend to be different for institutional and retail investors, dependent where the dividend was incurred and where the investor is domiciled.


There are various ways of defining Value stocks and the most common metrics are likely price-to-book, price