Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

Coming soon: our new one-on-one advice packages. Learn more

Now available: our new one-on-one advice packages. Learn more

<title>Dismiss</title>
Tax Planning

How We Use Your Dividends and Deposits to Keep Your Tax Bill Low

Every penny that comes into your account is used to rebalance dynamically—and in a tax-savvy way.

Articles by Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment  |  Published: July 11, 2013

“Do you know the only thing that gives me pleasure?” once mused John D. Rockefeller. “It’s to see my dividends coming in.”

There is no doubt that dividends time always feels good. It’s not just well-deserved returns from the companies you are funding; it’s also a sweet reminder that investing works while you do other things, like spend time with family or hit the beach. Here at Betterment, we also use your dividends to keep your tax bill as small as possible.

Why are dividends important?

There are two opportunities for profit when you buy a share: when the value of the share appreciates, and when the share generates income, that is, dividends (your portion of a company’s earnings). Not all companies pay dividends, but as a Betterment investor, you almost always receive some as your money is invested across more than 3,500 companies in the world. And dividends make up a significant proportion of the total return you expect from investing in those companies.

Your dividends are also the essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor – your portfolio is also getting a quick micro-rebalance that keeps your tax bill down at the end of the year.

This is especially crucial after coming through a period of market volatility, like we did at the end of the last quarter. Big market changes have a tendency to shake things out of whack in your asset allocation. However, in order to control risk, you want to get back to your correct asset allocation as quickly as possible.

How tax-efficient rebalancing works

When your account receives any cash – whether through a dividend or deposit – Betterment’s software identifies which investments need to be topped up. Rather than using the new cash to buy shares according to your allocation, we automatically use the incoming dividend or deposit to buy more shares of the lagging part of your portfolio, and return the portfolio back to its original asset allocation. This is a sophisticated financial planning technique that traditionally has been only available to big accounts, but we make it possible to do it with any size account.

The secret is that we can do this because we handle fractional shares. That means every penny that enters your account reinforces full diversification. An upcoming brief from the Betterment research team will show more precisely the savings our tax-efficient rebalancing offers.

This contrasts with how many individual investors handle dividends on their own. Some online brokers offer an automatic option, and may reinvest dividends into whatever fund the cash came from. However, this blind reinvesting is not the most efficient use of dividends, and can very easily lead to a poorly allocated portfolio that requires a sell-off of gainers – and accompanying capital gains tax – to rebalance it over time.

Instead, our tax-efficient rebalancing helps you avoid such a “hard” rebalance which would require a major sale – or in tax terms, exposure to capital gains. For the DIY investor, this automated tax-efficiency is virtually impossible to achieve. At Betterment, it’s included on every dividend, every deposit, every time, for every client. And you do not need to do a thing.

More from Betterment: 

Recommended Content

View All Resources
Our Team of Experts

Our Team of Experts

Our executive investing committee includes experts from a range of backgrounds. We make strategic decisions based on a systematic, evidence-based approach.

Frequently Asked Questions

Frequently Asked Questions

Just starting out exploring Betterment? These are the frequently asked questions that help people find their way.

New Tax Bill: How to Plan During Tax Reform Ups and Downs

New Tax Bill: How to Plan During Tax Reform Ups and Downs

To help you navigate the uneasy waters of new tax legislation, here are three tips on how to plan during the ups and downs of tax reform.

How would you like to get started?

Your first step toward a smarter investing future starts here.

Create a Betterment account

Go ahead and join the smart, modern way to invest.

Select an investing goal

Answer a few questions, and we'll recommend a portfolio for you.

See what we can do for you

Tell us a bit about yourself, and we'll show you the benefits of investing with us.

Get a free investing checkup

Help us get a sense of your investing approach and see how you could improve.

Transfer a 401(k) or an IRA

Move an existing retirement account into a Betterment IRA.

Download the mobile app

Enjoy the Betterment experience anywhere on the go.

<title>Close</title>

Search our site

For more information and disclosures about the Betterment Resource Center, click here. | See our contributors.