Suppose you are advising a retiree who holds 2,000 shares of Cronulla Brewing Company. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's superannuation fund, she will not incur tax on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the share price will result from the dividend. Ignoring any discounting for time, what advice should you give?
A) Sell the shares now-the share price is likely to decrease more than just the dividend amount.
B) Sell the shares ex-dividend-the share price is likely to decline, but by less than the dividend amount.
C) Sell the shares now-it is always better to sell the shares immediately regardless of the tax consequences.
D) It doesn't matter when the shares are sold.

Question

Quizplus · Accepted Answer

Since the retiree will not incur tax on either capital gains or dividends, the best option is to sell the shares ex-dividend. This is because when the shares go ex-dividend, the share price is likely to decline, but by less than the dividend amount. Therefore, by selling the shares just after the ex-dividend date, the retiree can receive the dividend payment and also sell the shares at a slightly reduced price, resulting in a higher overall return. Option A suggests selling the shares now, which may not be the best choice as the retiree could miss out on the dividend payment. Option C is incorrect as the tax consequences should be considered. Option D is incorrect as the timing of the sale can affect the overall return.

Suppose You Are Advising a Retiree Who Holds 2,000 Shares