Tax efficient way to unwind a dividend growth portfolio?

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divideby9
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Joined: Sat Feb 02, 2013 10:34 pm

Tax efficient way to unwind a dividend growth portfolio?

Post by divideby9 »

Over the past 3 years I've been an avid reader of dividend growth blogs and I've been putting together a portfolio of those stocks in a taxable account in an attempt to meet the FI crossover point. I've read quite a few posts on this forum regarding dividend growth strategies versus total return and something recently clicked. Simplifying my portfolio into 3 funds makes the most sense and will reduce my risk while capturing better returns.

I currently have 38 individual stock positions. About half of these positions have short-term gains and the other half are long-term. If I liquidated the portfolio today, I would only be able to offset 1/10th of the gains with losses.

I'm looking for advice as to how to liquidate the portfolio in the most tax efficient manner. Should I sell the positions with the long-term gains this year and hold the short-term gains until they become long-term? I'm in the 25% tax bracket.

Thanks for your time!
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retiredjg
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Re: Tax efficient way to unwind a dividend growth portfolio?

Post by retiredjg »

divideby9 wrote:I'm looking for advice as to how to liquidate the portfolio in the most tax efficient manner. Should I sell the positions with the long-term gains this year and hold the short-term gains until they become long-term? I'm in the 25% tax bracket.
This step is kind of a given so yes, do this at least up to a point (not sure you should do it all at one time).

Offset as much of the gains with a loss as you can. Continue to watch for other losses or even just break even points where you could sell with little or no gain.

If you have not already done it, turn off automatic reinvestment of dividends. Send the dividends to a money market account or to your checking or savings account. This will meant that no more short term gains get born.

Determine if you want to just rip off the bandaid or string this out over a few years. I'm not sure how much difference it makes - either could be a good decision depending on what the market, and that individual stock, decides to do. If you are a rip the bandaid type, sell all the rest as soon as the short term gains become long. You will be out of individual stocks within a year.

Determine if there are any stocks you want to keep. Not encouraging this, but keeping a little in individual stock will not ruin your portfolio.
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Electron
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Re: Tax efficient way to unwind a dividend growth portfolio?

Post by Electron »

I would first look at the magnitude of the net long term gain available this year and see if the applicable capital gains tax rate is 15%. Be aware that the new 3.8% Medicare Investment tax applies after a certain threshold. Also determine if the gain could trigger the Alternative Minimum Tax. Lastly, see if there is any chance of qualifying for the 0% capital gains tax rate in the next year or two. If so, at least a portion of your capital gain could avoid taxation.

Taking gains now can be a long term penalty depending on your age and investment time horizon. It is best to defer taxable gains where possible. A stock market correction would be a great opportunity to make the portfolio changes if one comes along in the coming months.
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bberris
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Re: Tax efficient way to unwind a dividend growth portfolio?

Post by bberris »

I would not pay taxes to do this. 38 different companies could be pretty good diversification as long as they are not all airlines. If you are in the 0 % cap gains then I would do it.
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grabiner
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Re: Tax efficient way to unwind a dividend growth portfolio?

Post by grabiner »

bberris wrote:I would not pay taxes to do this. 38 different companies could be pretty good diversification as long as they are not all airlines. If you are in the 0 % cap gains then I would do it.
With 38 stocks and not too much in any one stock, you could treat these stocks as an index fund and build the rest of your portfolio around them. If you have dividend growth stocks, this could be treated as comparable to an S&P 500 index; Vanguard Dividend Growth is large-blend. If you have high-dividend stocks, it would be comparable to a value index, so you might buy a separate growth index to balance it out if you don't want to overweight value.
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Electron
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Re: Tax efficient way to unwind a dividend growth portfolio?

Post by Electron »

Treating the dividend paying stock portfolio as an index fund does sound like an attractive possibility. It might be worth seeing if all major S&P 500 sectors are represented with a reasonable percentage in each. Here is a site showing the nine basic sectors within the S&P 500. You could also check the correlation of your portfolio to the S&P 500 Index.

http://www.sectorspdr.com/sectorspdr/

Another thought on the original question is to direct all dividends into the desired new portfolio. In that way, you could take your time selling the 38 stocks. If a stock market correction comes along you might be able to exit most of the positions with much less gain than today. At the same time you would be buying the new investments at lower prices.

I don't believe anyone has mentioned stock commissions which do lower overall returns. Hopefully commissions already paid have been low.
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