Dividend chasers... YOU are the yield
There’s alpha in front-running dividend chasers especially in the tax efficient ETF wrapper
Investors are so fascinated with yield... the chasing of yield is bloating prices that then deflate after distributions.
Investors chasing dividends are buying at the top
Hartzmark and Solomon found that dividend-paying stocks tend to rise 41 to 53 basis points in the month they're expected to pay a dividend, only to drop 72 basis points over the next 40 days.
The price increases are reversed by subsequent price decreases.
If there’s a loser, there’s a winner
Here’s an illustration of the dividend selling strategy using the results from Hartzmark and Solomon’s paper1.
“…this strategy could get eaten alive after taxes”
This is where the ETF wrapper’s insane tax optionality has a clear implementation advantage:
If underlying positions are trading at a loss, harvest them and bank the tax asset
If underlying positions are trading at a gain, heartbeat them away
An ETF taking the dividend seller side of the trade could execute tax-efficiently.
Dividends are a fine use case, but imagine other scenarios that may benefit from this approach… I’ll cover that in a future blog.
These two often appear in my feed together. It’s very convenient.
LOL3K is here to stay?
Prudent.
TGIF.
Disclosure: This content is for informational and educational purposes only. It does not constitute investment advice, tax advice, or a recommendation to buy or sell any security or adopt any investment strategy. Investing involves risk, including the possible loss of principal. Dividend-focused strategies may carry risks related to market volatility, company fundamentals, interest rates, and broader economic conditions. Dividends are only one factor to consider in evaluating an investment; other factors, such as asset allocation, time horizon, liquidity needs, and individual tax circumstances, can be equally or more important. Always consult a qualified investment or tax professional before making financial decisions.