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In theory, when a company pays out $1 in cash dividends per share, its stock price will fall by $1 due to the cash dividend. Does this relationship change when investors have to pay taxes on the dividends they receive? When investors have to pay taxes on the dividends they receive, will the stock price still fall by $1, or will it fall by less than $1? Does the tax rate affect how much the stock price will fall?

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Taxes paid by shareholders would not change the impact of the dividend payment on the price of the stock because it doesn't affect the financial position of the company.

Differing tax rates on dividends might theoretically impact how attractive a dividend paying company might be, and hence the price. However, that impact has nothing to do with how much the dividend itself would move the stock price.

If the company pays $1 in dividends then the company has $1 less in assets either way.

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You are conflating two issues.

Share price is reduced by the exact amount of the dividend on the ex-dividend date before trading resumes that day.

What happens when trading resumes is a separate and subsequent issue. Any factor (such as dividend taxation) that induces traders to either buy or to sell shares will result in share price change of more or less than the amount of the dividend reduction.

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  • I've seen this information shared regularly on here when discussing benefits/cons of dividends and it makes sense in a perfect, rational market but it doesn't really seem to fit how things actually work. I own a number of solid dividend stocks and while there might be a dip on the ex-div date, even over the short term (weeks) it's like that change never happened. Am I missing something? Dec 21 '21 at 16:15
  • @user1723699 Stock price charts are usually adjusted for dividends and stock splits. Could that be the reason why you did not notice the price drops caused by dividends?
    – Flux
    Dec 22 '21 at 4:15
  • @Flux No, I am just saying over the short/medium term the adjustment doesn't seem to actually make a difference. If a stock was trading consistently for $100 prior to a $1 dividend and it goes to $99 right after, it tends to go back to $100 shortly thereafter. This has been seemingly true with the stocks I hold purely for dividends and makes the "negative" aspect of dividends seem fabricated and only in a "perfect" market that doesn't exist. Dec 22 '21 at 15:27
  • @user1723699 - What you're missing is that these are two separate events. What happens after the ex-dividend date has nothing to do with the share price reduction in the exact amount of the dividend on the ex-dividend date. Dec 22 '21 at 15:37
  • @BobBaerker I'm not missing it, I understand what's happening but what I don't understand is why people claim this is some reason why dividends aren't a value add when at the end of the day the price typically recovers and it's like the ex-dividend date drop never happened Dec 22 '21 at 16:20
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Does this relationship change when investors have to pay taxes on the dividends they receive? When investors have to pay taxes on the dividends they receive, will the stock price still fall by $1, or will it fall by less than $1? Does the tax rate affect how much the stock price will fall?

A share of company stock can end up in the hands of an individual investor in the United states via a:

  • Tax deferred account like a Traditional IRA or Traditional 401(k)
  • Tax free account like a Roth IRA, Roth 401(k), or 529 plan
  • Fully taxable account.

It can even end up in a mutual fund, or ETF. Each of which could be in one of the types listed above.

To make it even more complex the tax rates for the taxable portion could range from 0% to 40% or more.

Then you factor in the non-US stock owners.

So yes some dividends are taxed, and some aren't. Therefore the paying of dividends can be great news, or Ok news, or bad news. Even if the company knew these numbers in great detail, it doesn't change the fact that all investors are buying the shares via the same linked markets.

Stockholders do have mechanisms to try to influence the consistency or growth of the dividends via the board of directors and corporate votes.

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