Meb Faber | Source | CIO at Cambria Investment Management

Advisors have exposure to the stock market through:
1. Their personal portfolio – obviously, a bear market will erode the value of the advisor’s own portfolio.
2. Their shorter-term business revenue (i.e. client portfolios) – a bear market will decrease the size the advisor’s total book (client market cap), resulting in less revenue spun off from the smaller asset base.
3. Their longer-term business revenue – lengthier bear markets will result in some clients panicking and withdrawing their investments entirely, which could permanently shrink the advisor’s book.
4. If the advisor is an employee of a parent company, he/she risks potential employment termination due to downsizing.

Research shows that a significant portion of the total returns of a dividend strategy comes from the reinvestment of the dividend payment itself. But over the years,
dividends have been subject to various tax treatments, and we all know Uncle Sam will not be denied. At times, high tax rates have substantially reduced this portion of returns. While currently taxed at 15%, dividends have been totally exempt from taxes at times, but at other times, taxed at the individual’s income tax rate up to, and I’m not kidding, 90%.

Given this, I was curious whether we could create a strategy that replicated a dividend strategy’s total return and outperformance – but without the actual dividend. If so, could we sidestep injurious tax treatments altogether and increase our after-tax returns? Put another way: Can we create a superior dividend strategy… by avoiding dividends?