Wealth Management & Financial Planning

Wealth Management & Financial Planning

Balancing Yield & Tax Considerations In Your Portfolio

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As the world’s most tracked stock index, the S&P 500 was never intended to be an investment guidance tool.  Rather, the index was developed to serve as an indicator economists could use when comparing various sectors of the U.S. economy.

The index’s creators based the design on the theory that the economy vacillates between market peaks and bottoms, expanding and contracting in a cyclical manner. Standard and Poor’s was commissioned to identify U.S. companies representing various sectors which would presumably perform differently based on the economic movement. For example, utilities and consumer goods companies are expected to perform well when the economy contracts into a recession. Likewise, industrial companies should do better when the economy is expanding. While most financial professionals discount the index as a reliable economic indicator, it continues to serve as a central measure of investment performance nonetheless.

Today’s S&P index is composed of nine sectors and the difference in dividend yields between one sector and another can be substantial. Let’s say you are a passive investor and simply own an Exchange Traded Fund (ETF) that attempts to replicate the performance of the S&P500 in both a qualified and non-qualified account. You have an equal amount of money in your IRA and in your taxable account each owning the fund. Becoming proactive from a tax investment perspective can put money in your billfold.

Currently, the dividend yield in XLY, the exchange traded fund representing the consumer discretionary stocks within the S&P 500 is 1.29%. Though each sector has a positive yield, XLY’s yield is currently the lowest. The highest yielding sector is XLV, the ETF for the Health Care sector, at 3.23% – a 2% difference over XLY.

If you put the higher dividend yielding sectors in your IRA and the lower yielding sectors in your taxable account the investment profile remains the same creating simultaneous tax efficiency. The higher your marginal bracket the better this gets.  Being a proactive investor means paying attention to the taxes as well as fees and expenses not just the investments themselves.


Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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