Building a very diversified portfolio as first timer investor

#26

Looking at that chart: Just exclude financials (primarily banks), and I’d bet the dividend-paying stock would be outperforming.

EDIT: On second thought… maybe, maybe not. Maybe it’s just me, but from the looks, it suggests the HDY index does outperform for in upward trending markets - and underperforms at the tail end of them, and in downward trending markets.

#27

Sure - I’m not advocating avoiding dividend paying companies altogether else you miss out on large sectors of the market. My feedback here was based on investorn00b’s portfolio which looks to overweight dividend paying companies.

All returns are equal in the sense that a company chooses how to return value to its shareholders, through dividends or alternatives.

I haven’t seen any full analysis on returns of dividend companies vs non dividend paying companies but I’d imagine this fluctuates by temporal trends more than anything and in the long run is irrelevant.

I would be very surprised if dividend paying companies have had higher absolute returns than non-dividend paying companies over the last decade. The large tech stocks which have led the market (Facebook, Amazon, Google) do not pay dividends and have contributed the most to recent stock market growth.

#28

I never said capital appreciation was not also taxed by wealth tax.

Dividends are just taxed in multiple ways.

#29

Though I fail to see the point regarding dividends and wealth tax? Whether it’s capital gains or dividend income that’s still on your accounts - it doesn’t make a difference with regards to wealth tax - or does it?

Except for the psychological pitfall of higher temptation for me to spend cash :sweat_smile:

#30

If you’re employed, many 2a funds seems to have a very large portion of real estate in their portfolio, so there’s a good chance you’re already well covered.

#31

Instead of guessing maybe you should do some backtest and read some studies

#32

Thanks a lot all who replied so far, it’s being a really nice discussion and definitely a lot of learning (at least for me as I have less experience than most of you). Here replies to some previous points:

I have read different things (in this forum and somewhere else) so, since I may have got it wrong, here is my understanding as I also wrote on one of my previous replies:

  • For funds registered at ICTax, The Swiss tax authorities will tax distributed dividends, but also the value appreciation part that is caused by accumulated dividends.
  • this means that whether that dividend sum is distributed to you or accumulated in the fund, will get taxed anyway and in the same way
  • In case the fund is not registered at ICTax, they don’t know which part of the value appreciation is caused by accumulated dividends and which by increase in value price (capital gain, which is not taxed), they will tax the whole appreciation.

TL;DR Given the above, Dist vs Acc it doesn’t matter from tax perspective. Did I get it wrong? (I fear the answer is yes, but better ask)

The ratio 25/10 is not that specific or scientific, but the choice of VOO+VB instead of VTI is because VTI has very small exposure to small-cap, 5.47% according to MorningStar. Probably my 25/10 does not reflect the marked distribution so probably should rethink this as well.

Well, QQQ is not full tech despite what many tend to believe. To be precise is “only” 56% Tech, but has also pharma/healthcare, consumer defensive, etc.

Agree, thanks a lot. I’ve realized EU weight is too big. And I had overlooked the overexposure to Australia and HK. I will look for one only European ETF and review the Asia (ex Japan) one.

This is the thought I’m having in the back of my mind too… I think I will probably keep a small amount to invest directly into stocks.

Thanks a ton, loved it :slight_smile:

#33

So I did read the first study that I came across, and lo and behold…:

“an emphasis on stocks with high dividend yields, and on those with a history of growing their dividends – have produced higher returns, with less volatility, than the global equity market, resulting in higher risk-adjusted returns”

(no, I didn’t miss the limitations and explanations they give)

#34

I did work out the numbers for one or two I had from their annual reports (and the tax authorities’ guidance "Besteuerung kollektiver Kapitalanlagen und ihrer Anleger) for a couple of years, and declared them myself. Never was I questioned about them. But they probably just didn’t bother about me.

Otherwise, I concur with the assessment that all other things equal, it doesn’t matter if an equity ETF is distributing or accumulating.

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#35

Yes, picking the right city is a much more powerful way to optimize your post-tax returns.

For instance, even for 10m you just pay 14k (14bps!) wealth tax in Freienbach and the marginal tax rate is always quite manageable. Just run the numbers here (you will be surprised!): https://www.sz.ch/privatpersonen/steuern-natuerliche-personen/steuerberechnung/steuerrechner/steuerkalkulator-natuerliche-personen.html/3481

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#36

Yes, your WEALTH is subject to wealth tax. But you were saying that dividends are subject to wealth tax. They aren’t. If you claim that dividends are subject to wealth tax, then capital gains are even more subject to wealth tax so even worse OMG more tax because of capital gains dividends are better?

#37

Generally a good strategy, and what OP wanted anyway?

#38

Not more than capital gains of course but since they add to your wealth they are taxed the same. He just means they also have an extra tax on top of wealth tax.

#39

As @Gesk mentioned in the post above, I am just trying to convey the additional tax drag on dividends. There is wealth tax on both capital gains and dividends.

Lets take an example:

  • CHF100k income in a high tax canton; so we’ll assume 35% marginal income tax rate
  • CHF1m portfolio and no other assets (house, cash, car); so we’ll assume 0.5% wealth tax

Now lets compare the two extremes of a portfolio:

  • Portfolio A: CHF1m in high dividend portfolio returning approx 6% in dividends a year and no capital appreciation
  • Portfolio B: CHF1m in a no dividend portfolio returning approx 6% in capital appreciation a year

Ignoring any income or wealth tax on our income and portfolio wealth, what is the additional tax burden we have from our 6% return?


Portfolio A (6% Dividends)

  • We get CHF60k in dividends paid to us
  • At the end of the year, we declare our wealth of CHF1.06m and income of CHF160k
  • Our additional tax burden on the CHF60k is:
    • Income Tax: 35% * CHF60k = CHF21k
    • Wealth Tax: 0.5% * CHF60k = CHF300

Total additional tax burden = CHF21,300
Net return from 6% portfolio appreciation = CHF38,700
Note: we may lose more to WHT if fund is not held in a swiss-tax friendly domicile so we could lose 0%-30% more here


Portfolio B (6% Capital Appreciation)

  • Our portfolio appreciates CHF60k from CHF1m valuation to CHF1.06m valuation
  • At the end of the year, we declare our wealth of CHF1.06m and income of CHF100k
  • Our additional tax burden on the CHF60k is:
    • Income Tax: 35% * CHF0 = 0
    • Wealth Tax: 0.5% * CHF60k = CHF300

Total additional tax burden = CHF300
Net return from 6% portfolio appreciation = CHF59,700


For all sakes and purposes whether a company returns value to a shareholder through capital appreciation (share buybacks or internal investments) or paying the shareholder directly (dividends) can be assumed to be equal.

However, as a smart Swiss investor you would avoid dividends as much as possible while maintaining ample diversification because we are exposed to this unequal tax drag.

#40

I don’t recall OP mentioning he wanted to overweight small-caps in his portfolio. Exposure yes, overweight no.

And overweighting small-caps is generally a good strategy to achieve identical returns in the long run but expose yourself to higher volatility with unequal weightings yes.

#41

It can be assumed to be “equal” if all other things would be equal. Which is quite a stretch to assume.

There are many of long-running, solid and stable companies that have been paying dividends for ages. Many of them have in face been growing dividend payouts for long times. Nestlé, Unilever… Procter & Gamble has raised their dividends each year for 63 years, I read the other day. They have certainly proven great investments. And as I said: Dividends (usually) come out of profits, not losses.

On the other hand, there are tons of non-dividend paying companies that aren’t profitable, that aren’t stable, that aren’t profitable, that don’t survive, let alone grow their businesses over the long term.

Not every non dividend payer is an Alphabet/Google. In fact, I wouldn’t be surprised if for every Google there are multiple defunct/broke companies that haven’t paid much or any dividend during their lifetime.

Avoiding dividends “as much as possible” is, I believe, a pretty surefire way to load up on bad eggs and crappy investments (if based on equity (ETFs)) in your portfolio - and in the end, to me, just not good investment advice.

Minimising dividend taxation should rightly be one consideration. But it should be a means to an end (maximising returns from good investments), not an end in itself (minimising dividend taxation on dividends).

But neither should maximising dividends be the goal. Companies - or equity funds - with dividend yields that seem too good to be true should considered carefully. Because if it sounds too good to be true, it often is - and there will be a catch. That’s why “high dividend” yield stocks or a selection of such that goes “only” by the dividend criterion might a questionable investment.

I’d rather pay taxes on a good investment - than avoid them on a crap one.

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#42

My message and full quote is not in any way advocating avoiding all companies that pay dividends.

#43

Well, „as much as possible“ suggests you leave them out of your portfolio entirely …unless you couldn’t replicate certain regions or sectors …at all, in order to maintain diversification.

In any case, you must a certain idea or definition of „what‘s possible“ (while maintaining „ample diversification“) and „what’s impossible“ in this context.

So how, in practical terms, would you „avoid them as much as possible“?

You stated above:

How would you go about that? Invest in a „growth“ fund? I can imagine this would have a considerably different risk profile than a fund that full of steady and proven dividend payers.

#44

??? “identical returns”???

#45

In this thread @investorn00b was looking to invest in a high dividend yield fund…

I would suggest avoiding those for one.

I don’t believe I have ever suggested anything else, you just seem to enjoy interpreting my posts however you like rather than reading them in full.

If you really believe that all companies that pay dividends are “steady” and “proven” then by all means, go overweight them in your portfolio.

But when the $GEs with long paying dividends lose 70% of their stock price, or the $Ts stop being able to finance their dividends with excessive corporate debt you will not only be eating their losses but will have gained less from their upside as the Swiss government took a larger cut from it.

I’m hesitant to give recommendations to underweight dividend stocks. Especially as most retail investors end up worse off from trying to complicate their portfolio. Keeping something simple you can stick to in the long run is usually the best advice.

But if you really want some strategies; sure some may alter your risk profile but would you not take a 10->11 standard deviation for 6%->7% return as a long-run investor? Tbh some strategies will keep your risk profile the same or even reduce it depending on your current allocations.

You could:

  • Bias equities more than your mean-variance weighting in a long term portfolio as the diversifying retail asset classes are very tax inefficient (REITs or Bonds)
  • Bias US equities slightly more than US v International weightings due to lower current dividends in the US
  • Go partly in BRKA/B in place of US equities
  • Actively seek out high quality low/non dividend paying funds

There is a trade off in near everything with portfolio management. But if you want to build a portfolio on the efficient frontier as a Swiss investor you can’t ignore the unequal tax drag we have here compared to investors from other parts of the world. Overweighting dividend stocks is a sure way to not get there…