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By Jason Stipp | 02-15-2012 02:00 PM

Larson's Stock Picks for Your Taxable Account

Morningstar's Paul Larson highlights three undervalued tax-efficient stocks that have reinvested profitably for investors, plus one attractive MLP that offers a nice tax-advantaged income stream.

Jason Stipp: I'm Jason Stipp for Morningstar. It's Tax-Wise Investing Week on, and today we're talking about how to maximize those taxable accounts.

One way to do that is to pick low- or no-yielding stocks for your taxable accounts; it will help save on that tax bill, but you want to pick the right kind of company. Here with to walk us through some of those steps is Morningstar's Paul Larson, he is the editor of Morningstar StockInvestor and an equity strategist.

Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: One thing that we know right now is that dividends are actually taxed at a pretty low rate, so it's not a horrible thing to have dividend-paying stocks in your taxable account. But there is some uncertainty about that. We know that the dividend tax rates could go up, and if you wanted to be as efficient as possible, you would actually look for stocks that don't pay out income.

But when you're doing that, of course, you want to know, well, what are they going to do with that money? Are they going to actually be able invest it in a way that will help me as a shareholder? So, I asked you to come up with short list of ideas of stocks that we can consider there, and I think there are probably some similarities between the advantages of these companies. Why don't you kick it off with your first stock idea.

Larson: Well, one stock that does not pay a dividend that does look attractive to us is Berkshire Hathaway, led by Warren Buffett, And this is a stock that's trading at only about 1.2 times book value, which is a very attractive price for the quality of the business that you're getting.

Berkshire just recently announced a share buyback about six months ago, and this is really big news for Berkshire because before this point in time, they had basically accumulated all their capital and had not returned any capital whatsoever to common shareholders. I think it's probably only a matter of time before Berkshire initiates a real dividend, but that point is maybe still a little bit down the road.

Stipp: I was going to ask about that. So, it does seem like with the kind of the cash hoard that Buffett has, it's a little bit harder for him to find the kind of opportunities that he would like fund. Would you have liked to have seen a dividend instead of the buyback announced at this point, or do you think this is a natural progression?

Larson: I think this is a natural progression, and clearly Buffett thought that he could do better with the money himself than shareholders can do on their own buying random stocks out in the market.

But you're absolutely right--with the opportunities set continually shrinking as Berkshire continues to grow, again, I think it's only a matter of time before they start to pay it out because as they say, trees don't grow to the sky.

Stipp: The second one, Paul, is in the tech sector, a search engine giant. What's the story behind that and why do you think that’s a good stock to consider right now?

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