Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. 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 Roth IRA, she will not incur taxes 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 stock price will result from the dividend. Ignoring any discounting for time, what advice should you give?

Question

Quizplus · Accepted Answer

Since the retiree will not incur taxes on the dividend or capital gains, the only factor affecting their decision to sell the stock is the price. Holding onto the stock after the ex-dividend date would result in a decrease in the stock price by the amount of the dividend, but selling before the ex-dividend date would allow the retiree to receive the dividend and sell the stock at a higher price. However, since the stock is largely held by tax-paying institutional investors, it is expected that the stock price will decline slightly after the ex-dividend date. Therefore, selling the stock ex-dividend is the best option as the stock price is likely to decline, but by less than the dividend amount.

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