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Dig Deeper Into Dividends To Find Tax Efficiency
Tax season is fast approaching, but it comes every year like clockwork. What can investors do to prepare themselves for making the most of tax efficiency year-round in the short - and long-term?
Dividend income is useful in a portfolio for a potentially steady stream of capital. But income that's being paid out by dividend vehicles may be taxed differently depending on what's held in a fund.
Qualified dividends can offer tax advantages when appropriately woven into a fund's portfolio.
Qualified dividends are paid out to investors from preferred and common stock from U.S. and some foreign companies. If a fund owns stock in a company that distributes qualified dividends, the dividend keeps its qualified status. Foreign stocks may change the tax structure.
Generally, qualified dividend income offers a lower tax rate than non-qualified dividend income.
For the 2018 year, it was 0% tax for $38,600 or less of ordinary income. Followed by 15% between $38,600 to $425,800 of ordinary income. Finally, for ordinary income equal to or more than $425, 801, the tax rate is 20%. In comparison, the federal income tax brackets fall between 10% to 37% for the 2018 year. They were between 10% to 39.6% in 2017.
These tax savings can be passed on to investors in a dividend-paying fund. But only if the investment manager understands how these tax advantages work. Not every portfolio manager might be aware of the ability to do this. That's why it's important to talk to investment managers to understand a fund's structure and/or come up with solutions for tax efficiency.
For example, investors should note that in order to get these tax advantages, the securities need to be held for at least 61 days. Any less and the dividends paid on stocks are subject to the regular income tax rate.
To understand how well a portfolio manager understands taxation on dividends, there are two top questions to ask.
First, what percentage of dividends in a fund qualified for the preferred tax rate of qualified dividend income? It's important to gauge this answer by looking at a historical context. Generally, the higher percentage, the better.
There should be a good balance. A healthy percentage shows that a portfolio manager is paying attention to and making use of tax strategies.
Second, once it's pretty clear what the ratio is, measure that against the portfolio returns to see whether or not the strategy has positive long-term performance. It's critical to take note of the return drivers. What's the percent that's coming from long-term gains, short-term gains and qualified dividend income?
Understanding this bigger picture can help evaluate how well a portfolio manager understands and employs tax-efficient strategies.
Though there are tax advantages to owning stocks that provide qualified dividend income, every investor will have different goals. To figure out if this strategy fits within a portfolio, having a discussion can lead to better decisions and outcomes.
IMPORTANT INFORMATION
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Aberdeen Standard Investments is a brand of the investment businesses of
Aberdeen Asset Management and Standard Life Investments.
Closed-end funds are traded on the secondary market through one of the stock
exchanges. The Fund's investment return and principal value will fluctuate so that an
investor's shares may be worth more or less than the original cost. Shares of closed-
end funds may trade above (a premium) or below (a discount) the net asset value
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objective. Past performance does not guarantee future results.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies. Dividends are not guaranteed and a company's future ability to pay dividends may be limited. The use of leverage will also increase market exposure and magnify risk.
Dividends are not guaranteed and a company's future ability to pay dividends may be limited.
Under U.S. tax rules applicable to the Fund, the amount and character of
distributable income for each fiscal year can be finally determined only as of the end
of the Fund's fiscal year. The Fund anticipates that sources of distributions to
shareholders may include net investment income, net realized short-term capital
gains, net realized long-term capital gains and return of capital. The estimated
composition of the distributions may vary from time to time because the estimated
composition may be impacted by future income, expenses and realized gains and
losses on securities. For more detailed information related to the composition of the
Fund's distributions, see aberdeenAOD.com.
Commentary contained within this document is for informational purposes only, and is not intended as an offer or recommendation with respect to the purchase or sale of any security, option, future or other derivatives in such securities. Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/ her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.
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Important information
Effective the close of business May 4, 2018, Aberdeen began managing the Aberdeen Total Dynamic Dividend Fund, which until May 7, 2018 was known as the Alpine Total Dynamic Dividend Fund. Performance information for periods prior to May 4, 2018 reflects performance of a prior, unaffiliated investment manager.
As of close of regular business on April 27, 2018, the reorganization of seven closed-end funds into the Aberdeen Chile Fund, Inc. (CH) was successfully completed. CH changed its name, ticker symbol, benchmark, investment objective and strategy effective April 30, 2018. Aberdeen Latin American Equity Fund, Inc. is the performance and accounting survivor for AEF. Performance information for periods prior to April 30, 2018 do not reflect the current investment strategy.
Disclaimer – Aberdeen Emerging Markets Equity Income Fund
Pursuant to valuation policies adopted by the Board of Directors of the Fund, the Fund values foreign equity securities that primarily trade in certain markets that close ahead of the Fund's daily 4:00 pm Eastern net asset value (“NAVâ€) calculation time at their fair values using prices provided by third-party independent pricing services. The fair value of each such security generally is calculated by applying a valuation factor provided by the independent pricing service to the last sales price for that security, or, if, the pricing service is unable to provide a fair value for a security, at the price at the close of the exchange on which it is principally traded, subject to adjustment by the Fund's Pricing Committee. These daily fair valuations seek to reflect information available after the local market close that may affect the value of the foreign equity securities held by the Fund. As a result, this official NAV calculation reflects adjustments that may cause it to vary from a calculation based solely on closing prices. In contrast, the “Unadjusted NAV†of the Fund (shown above) is for informational purposes only and is computed using the closing prices on the relevant exchange. It does not reflect any daily fair valuation adjustments of the Fund's foreign securities. The Unadjusted NAV does not represent the official NAV of the Fund, nor is the Unadjusted NAV used for Fund accounting or performance purposes. Investors should not rely upon the Unadjusted NAV when making their investment decisions.
Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund's investment return and principal value will fluctuate so that an investor's shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund's portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.
The use of leverage will also increase market exposure and magnify risk.
Dividends are not guaranteed and a company's future ability to pay dividends may be limited.
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