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Should Taxable Investors Shun Dividends?

Ronen Israel, Joseph Liberman, Nathan Sosner and Lixin Wang
The Journal of Wealth Management Winter 2019, jwm.2019.1.080; DOI: https://doi.org/10.3905/jwm.2019.1.080
Ronen Israel
is a principal at AQR Capital Management in Greenwich, CT
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Joseph Liberman
is an associate at AQR Capital Management in Greenwich, CT
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Nathan Sosner
is a principal at AQR Capital Management in Greenwich, CT
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Lixin Wang
is a vice president at AQR Capital Management in Greenwich, CT
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Abstract

While the benefits of capital gains management to the tax efficiency of investment strategies have been extensively documented in the literature, evidence on the benefits of avoiding high-dividend-paying stocks is less conclusive. We evaluate the tax benefit of dividend avoidance for quantitative multi-style strategies and find that it generally reduces implementation efficiency, thus lowering expected pre-tax returns. The reduction in implementation efficiency is particularly pronounced for strategies with naturally higher dividend yields, such as those with a large exposure to the value style. Importantly, dividend avoidance detracts from the ability to manage capital gains. All things considered, the tax benefit of lowering the dividend yield is not enough to compensate for the associated increase in capital gains taxes and decrease in expected pre-tax returns.

TOPICS: Factor-based models, equity portfolio management

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The Journal of Wealth Management: 25 (2)
The Journal of Wealth Management
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Should Taxable Investors Shun Dividends?
Ronen Israel, Joseph Liberman, Nathan Sosner, Lixin Wang
The Journal of Wealth Management Aug 2019, jwm.2019.1.080; DOI: 10.3905/jwm.2019.1.080

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Should Taxable Investors Shun Dividends?
Ronen Israel, Joseph Liberman, Nathan Sosner, Lixin Wang
The Journal of Wealth Management Aug 2019, jwm.2019.1.080; DOI: 10.3905/jwm.2019.1.080
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  • Article
    • Abstract
    • AN OSTENSIBLE REASON FOR AVOIDING DIVIDENDS
    • STRATEGY SIMULATION METHODOLOGY
    • BASE CASE OF NO DIVIDEND AVERSION
    • IMPACT OF DIVIDEND AVERSION
    • ANALYSIS BY LOW-, MEDIUM-, AND HIGH-YIELD STRATEGY CATEGORIES
    • CONCLUSION
    • ADDITIONAL READING
    • ACKNOWLEDGMENT
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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