Dividend Investing Question

[cashrich]

Recently I was reading about Dividend Investing and came across this statement -

"Waiting to purchase the stock until after the dividend payment may be a better strategy because it allows you to purchase the stock at a lower price without incurring taxes."

I am not sure if they mean "ExDiv Date" or "PayDate"
Also how is it possible that it will not incur taxes, Eventually at the end of the year all of dividends will be Income and should be reported to IRS.

Any thoughts?

[jpg7n16]

Typically when a stock pays a dividend, the price falls by an identical amount the following day.

So if a stock closed at $5 and paid a .10 dividend, it would typically open at 4.90 the following morning.

If you buy the stock after the ex-div date, you will not receive the dividend, and therefore won't have to report it on your taxes at year end - which is how it 'saves' taxes. (he conveniently ignores that you will pay cap gains tax on a slightly larger amount, due to a reduced cost basis, effectively cancelling out that tax 'advantage')


Let's say you and I each have $5, and are going to buy the same stock trading at $5/share.

If I bought at $5, I would get a 10 cent div - pay taxes of 15% on 10 cents, have cash on hand of 10 cents (from my dividend received), and still have a basis of $5. So if the price rises to $6 and I sold, I'd pay taxes on $1 cap gains.

But you wait till after the dividend pays and buy at 4.90 - you don't get the dividend and therefore pay $0 taxes. And you have 10 cents cash on hand from savings on your purchase price. But if the price rises to $6 and you sell, you have to pay taxes on $1.10 of cap gains.


So it seems like a strategy with no real benefit except potentially deferring a small amount of taxes.

[cashrich]

Thank you JPG for your detailed example and explanation.

I am still wondering If I want to invest in a new stock - should I wait till the Dividend Pay date or EX Div Date?
I want to purchase stock when the price drops(clearly I am more interested in picking the stock at lower price whatever it is due to) as compared to the dividend and taxes.

[jpg7n16]

Thank you JPG for your detailed example and explanation.

I am still wondering If I want to invest in a new stock - should I wait till the Dividend Pay date or EX Div Date?
I want to purchase stock when the price drops(clearly I am more interested in picking the stock at lower price whatever it is due to) as compared to the dividend and taxes.

welcome

I think.... you should calculate what you feel the share is worth, then look at whatever price the market is currently offering you. If you are getting a great deal (with a sufficient margin of safety), I think you should buy and not bother worrying about what date the dividend will pay.

The price could very well rise 10 to 50 cents while you're waiting to avoid a 15 cent dividend. Then you end up paying more and have no dividend to show for it. There's no guarantee that prices will stay level long enough for you to wait.

The strategy doesn't have enough tax benefits to warrant passing up a known good price.