Should Taxable Investors Shun Dividends?

The Journal of Wealth Management, Winter 2019, 22 (3) 49-69; DOI: org/10.3905/jwm.2019.1.080

42 Pages Posted: 24 Jun 2019 Last revised: 7 Nov 2019

See all articles by Ronen Israel

Ronen Israel

AQR Capital Management, LLC

Joseph Liberman

AQR Capital Management, LLC

Nathan Sosner

AQR Capital Management, LLC

Lixin Wang

AQR Capital Management, LLC

Date Written: August 26, 2019

Abstract

Whereas 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. We find that dividend avoidance generally reduces implementation efficiency, thus lowering expected pre-tax returns. Such reduction in implementation efficiency is particularly pronounced for strategies with naturally higher dividend yields, such as strategies 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.

Keywords: Tax-Aware Portfolio Management, Active Management, Quantitative Strategies, Long-only Investing, Dividend Yield, Capital Gains

JEL Classification: G11, H21, H24

Suggested Citation

Israel, Ronen and Liberman, Joseph and Sosner, Nathan and Wang, Lixin, Should Taxable Investors Shun Dividends? (August 26, 2019). The Journal of Wealth Management, Winter 2019, 22 (3) 49-69; DOI: org/10.3905/jwm.2019.1.080. Available at SSRN: https://ssrn.com/abstract=3402622 or http://dx.doi.org/10.2139/ssrn.3402622

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Joseph Liberman

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Nathan Sosner (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Lixin Wang

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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