Key insights
- The article discusses a potential arbitrage opportunity for individuals in low tax brackets regarding dividend ex-dates. It questions the efficient market hypothesis by suggesting that if a stock price drops by the full dividend amount on the ex-date, low-tax investors could theoretically profit by selling before the ex-date and repurchasing afterward to avoid dividend taxes. The author posits that taxes reduce the value of dividends for high-tax investors, implying a price drop less than the full dividend amount. However, the article concludes that this is not a significant driver of US market movements and thus has minimal influence.
Let's say my income is very low as a retiree, student, etc.
To a hedge fund or rich person owning a stock, if they receive a $1 dividend it's really not worth $1 because of taxes. It's probably worth $0.70, so the stock should drop by (1- average stockholder tax rate) * dividend amount in theory, right?
if it actually drops proportional to the dividend that doesn't make sense in efficient markets. I would just sell before the dividend hits and re buy at that cheaper price to not pay taxes on the dividends, whatever my tax rate
People cite the post-ex date as dropping exactly by the dividend amount but given taxes I dont think that makes sense unless this theory is just empirically wrong and observations prove else wise.
So if you're in a low tax bracket is this an actual arbitrage or not? I haven't heard this before anywhere