Hi, I've been considering the same thing... is it better to invest in funds that don't pay out dividends and instead reinvest them internally? Specifically while living in Japan, as the pros/cons are entirely due to taxation - with no tax there would be no difference.
During the accumulation phase it is obviously better to use funds that reinvest dividends internally, you save 20% withholding tax on the dividends, and with dividends being historically responsible for very roughly 50% of total returns* then your total portfolio should be worth around 10% more without paying the dividend tax, which sounds pretty significant.
Now the possible disadvantage is when you start withdrawing money to live off your portfolio. With the non dividend paying fund you have to sell a fraction of the portfolio every year, and pay capital gains tax at a flat 20% of the
gain (so roughly 10-15% of the amount you sell, as you deduct the initial cost you paid).
For the dividend paying fund you would generally pay flat 20% tax on the whole dividend, which would make it a bit higher than the non dividend fund case. However for dividend income only (not capital gains) you can choose to have the income taxed along with your main income (aggregate taxation). This may or may not give a lower rate than 20%, it depends on your other income and deductions etc. If you invest only in Japanese companies though there is a substantial dividend deduction (10% of dividend income), which can lower your tax rate a lot if it is your main income.
Caveat, all of this is just from reading and playing with the NTA online tax calculator, I have not confirmed any of this with an accountant...
So the trade-off seems to be your portfolio will be worth roughly 10% more money to start with, but then during retirement you may have to pay more tax on the withdrawals from it. Exactly how much tax difference between capital gains and dividends income depends on if you have other income and how much you withdraw, and also of course the tax rules in place in 30 years time...
This of course assumes that you can find funds that do really reinvest dividends internally without paying tax (there seems to be Japanese mutual funds that do this but not ETFs. I'm considering Ireland based ETFs (e.g. SWDA), which definitely don't pay tax) AND that Japan doesn't tax dividends internally reinvested (some countries do, but I haven't found anything from the NTA that suggests Japan does and the existence of the Japanese mutual funds doing this without paying withholding tax suggests they don't).
Would love to hear thoughts on this, there doesn't seem to be much discussion online about it. Maybe because the US doesn't have internally dividend reinvesting funds and other countries tax treatments makes them not advantageous.
*
http://www.simplestockinvesting.com/SP5 ... eturns.htm gives 44% for SP500, it will vary a lot depending on how you invest though.
