Dividend tax, and why it changes what you should own
You control when you realise a capital gain. You do not control when a dividend arrives, or the tax on it.
See why the same return can cost you more depending on the form it arrives in.
How Dividend tax works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The divergence that precedes most disasters
Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.
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Dividends are taxed on receipt, and you have no say
The company decides to pay, and a tax liability lands on you whether or not you wanted the cash, and whether or not you reinvested it. A capital gain, by contrast, is taxed only when you choose to sell.
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Which makes a buyback quietly more tax efficient
A buyback returns cash to shareholders by concentrating ownership rather than by paying you. No taxable event occurs until you sell. This is a large part of why buybacks became so popular, and it is rarely mentioned in the arguments about them.
It does not make buybacks automatically better. A buyback above intrinsic value still destroys value, tax-efficiently.
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The dividend allowance is small and shrinking
A modest amount of dividend income is exempt each year; above it, the rate depends on your income band. For a portfolio of any size, held outside a wrapper, this is not a rounding error.
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So shelter the income first
If some of your holdings are in an ISA and some are not, the high-yielding ones belong inside it. That is a free improvement that takes an afternoon.
You can say which of your holdings are generating taxable income outside a wrapper.
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You control when you realise a capital gain. You do not control when a dividend arrives, or the tax on it.
We screen for yield AND the balance sheet behind it, because the biggest yields belong to the companies least able to pay them.