I am long AAPL, but my portfolio is a bit heavily weighted towards AAPL so I don't really want to buy and hold any more. However, I thought I would try to arbitrage the dividend and recent dip from $600. So I just bought some AAPL on a dip yesterday. This was a bit of a spur of the moment decision and I want to make sure it all makes sense before I sell, as I've never done this before or really even thought about dividends in the past.

I was thinking of selling the AAPL stock today or in the next few days.
I bought 50 more shares of AAPL at 590.35, yesterday 5/7. I believe that AAPL is ex-dividend today 5/8. The record date is 5/12 (i.e. you need to be a shareholder of record on this date to get the dividend) but I'm under the impression that it takes a few days to get taken off the record so as long as I'm a shareholder today I get the dividend of $3.29 per share. Is that correct?

currently AAPL is up about 2 points from where I bought (592.50)
50 shares x (592.50-590.35) = 50 x 2.15 + 50 x 3.29 = $272 minus any trading fees.

Basically, the question is if it is okay to sell today or should I wait a few days to make sure I get the dividend?



Edited 1 time(s). Last edit at 05/08/2014 11:53AM by Chris Y.

Once the stock goes ex-dividend you are entitled to the dividend. It won't be paid for a few weeks, but it will definitely show it up. If you want to capture the dividend, make sure you hold it they day before it goes ex and the sell it after. Barring any major moves in the price, the opening price should be roughly lower by the amount of the dividend.

Is this in a tax-deferred account?

If not, you'll pay short-term gains as well as you may not qualify for the qualified dividend tax rate if you don't hold the shares for at least 60 days. You could be paying 50% or more in taxes with this move.

Even if this in a tax-advantaged account you are still paying transaction costs like commissions and spreads. You are basically feeding investment bankers and high-frequency traders that everyone seems to rail on so much.

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Wailer
Once the stock goes ex-dividend you are entitled to the dividend. It won't be paid for a few weeks, but it will definitely show it up. If you want to capture the dividend, make sure you hold it they day before it goes ex and the sell it after. Barring any major moves in the price, the opening price should be roughly lower by the amount of the dividend.

Is this in a tax-deferred account?

If not, you'll pay short-term gains as well as you may not qualify for the qualified dividend tax rate if you don't hold the shares for at least 60 days. You could be paying 50% or more in taxes with this move.

Even if this in a tax-advantaged account you are still paying transaction costs like commissions and spreads. You are basically feeding investment bankers and high-frequency traders that everyone seems to rail on so much.

Thanks for the mention of the tax implications. I hadn't thought of that. This is not in a tax deferred account. The commissions are relatively low (not sure about spreads). Anyway, thanks for the info. I'm glad to know I can sell the shares now and get the gain and the dividend. Not particularly worried about feeding the investment banks. I don't think I should forego any gains to spite them.

The opening price today was a bit lower than the close yesterday but it's up a bit from that opening and still above where I bought yesterday.



Edited 1 time(s). Last edit at 05/08/2014 12:17PM by Chris Y.

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Chris Y
I believe that AAPL is ex-dividend today 5/8.

I think you'll be fine:

[www.thestreet.com]
"The ex-dividend date (typically two trading days before the holder of record date for U.S. securities) is the day in which a company begins trading without the dividend. In order to have a claim on a dividend, shares must be purchased no later than the last business day before the ex-dividend date." [emphasis mine]

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currently AAPL is up about 2 points from where I bought (592.50)

I think it will be up a lot more than that over the next few months. Hold on to it…



Edited 1 time(s). Last edit at 05/08/2014 12:19PM by Article Accelerator.

Please don't take this the wrong way, but you're killing yourself with the taxes.

Why not sell shares that you've held long term instead? If you are in the 10% or 15% federal tax bracket, you'll pay 0% on the gains. That is a HUGE bonus available only to the lower income taxpayers (see below). Otherwise, you'll pay 15% unless you are one of the "unfortunate" top taxpayers in which case you'll pay, at most, 23.8%. All of those are probably better than paying ordinary income taxes on your short term gains PLUS having your dividend disqualified and paying ordinary tax on that too. I cringe just thinking about this but as a fellow taxpayer I appreciate your contribution.

Furthermore, if you sell your long-term shares, you'll have a higher basis on your new AAPL shares; you'll owe less tax when you sell down the road and if they lose value, you can deduct up to $3k/yr against ordinary income.

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The 0% rate is such a huge tax break. A married couple that takes the standard deduction who's only income is $90k/year in capital gains and qualified dividends will pay 0% federal tax.



Edited 1 time(s). Last edit at 05/08/2014 01:13PM by Wailer.

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Wailer
Please don't take this the wrong way, but you're killing yourself with the taxes.

Why not sell shares that you've held long term instead? If you are in the 10% or 15% federal tax bracket, you'll pay 0% on the gains. That is a HUGE bonus available only to the lower income taxpayers (see below). Otherwise, you'll pay 15% unless you are one of the "unfortunate" top taxpayers in which case you'll pay, at most, 23.8%. All of those are probably better than paying ordinary income taxes on your short term gains PLUS having your dividend disqualified and paying ordinary tax on that too. I cringe just thinking about this but as a fellow taxpayer I appreciate your contribution.

Furthermore, if you sell your long-term shares, you'll have a higher basis on your new AAPL shares; you'll owe less tax when you sell down the road and if they lose value, you can deduct up to $3k/yr against ordinary income.

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The 0% rate is such a huge tax break. A married couple that takes the standard deduction who's only income is $90k/year in capital gains and qualified dividends will pay 0% federal tax.

Thank for the tax info! that is quite interesting, as I was not aware of this, and I see your point about selling the long-term shares first. I will read more about this before I sell and try to figure out how to best apply this to my tax situation.
Plus, now the share price is below where I bought it so I guess I hold it until it goes back up at least.

just a quick thread-jack: when does Apple propose to split the shares?

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Chris Y

Thank for the tax info! that is quite interesting, as I was not aware of this, and I see your point about selling the long-term shares first. I will read more about this before I sell and try to figure out how to best apply this to my tax situation.
Plus, now the share price is below where I bought it so I guess I hold it until it goes back up at least.

Most people think this way. They want to sell their gains quickly and hold their losses until they break even. Psychologically we want to show off our superior investing acumen (realize the gain) and we don't want to admit a mistake (selling for a loss).

Most people have it backwards; you actually want to hold your gains and sell your losses.

Your gains are worth more when you don't sell because you are earning a return on the amount you owe in taxes. Over several years, this becomes worth a lot. Almost every great fortune is a result of unrealized gains compounding without the drag of taxes. 10% per year for 50 years will turn an initial investment of $10k into $1M after 15% capital gains tax. The same $10k at 10% per year where you churn it each year will only turn into $184K if you are in the 40% bracket (not including transaction costs). Even if you use the same tax rate, you will come out way ahead if you let your gains compound over long periods. But combine this with the opportunity to realize $90k/year in gains and pay no tax and you've pretty much beaten the taxman.

Buffett, Perot, Romney and even our buddy Donald Sterling all built their wealth by not realizing gains and avoiding excessive taxes. Of Buffett's ~$70B in net worth, about $69B is in unrealized gains of Berkshire stock that grows ever year. Technically, he owes the government about 23.8% of that as a capital gain. Unfortunately (for them), it will likely never be taxed as a capital gain since it's all going to charity or will be stepped-up when he dies. Just think, ~$17B he owes to the IRS that is earning a return each year! If he can earn 10% (historically he's returned over 20%), he's making himself $1.7 billion a year on just what he hasn't paid taxes on. If you can just avoid paying, say, $10k in taxes and keep it invest it for 50 years, you'll probably do pretty well.

Your loss is worth more if you sell it than if you hold it. If you are in the 40% bracket and you suffer a $3k loss, Uncle Sam will cover $1200 of that loss for you. If you wait 30 days (to avoid the wash-rule), you can rebuy the stock. If it the price is the same, you've essentially made $1200 versus holding and waiting and turned lemons into lemonade. Of course, you'll owe more tax when you sell. But if you can sell at the aforementioned 0% rate, you'll have not only beaten the taxman but beaten his grandkids and taken their lunch too.

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Wailer
The 0% rate is such a huge tax break. A married couple that takes the standard deduction who's only income is $90k/year in capital gains and qualified dividends will pay 0% federal tax.

Which sounds patently absurd, but that's a topic for the dark side, I suppose.

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mrbigstuff
just a quick thread-jack: when does Apple propose to split the shares?

June 9th:

[investor.apple.com]

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Wailer

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Chris Y

Thank for the tax info! that is quite interesting, as I was not aware of this, and I see your point about selling the long-term shares first. I will read more about this before I sell and try to figure out how to best apply this to my tax situation.
Plus, now the share price is below where I bought it so I guess I hold it until it goes back up at least.

Most people think this way. They want to sell their gains quickly and hold their losses until they break even. Psychologically we want to show off our superior investing acumen (realize the gain) and we don't want to admit a mistake (selling for a loss).

Most people have it backwards; you actually want to hold your gains and sell your losses.

Your gains are worth more when you don't sell because you are earning a return on the amount you owe in taxes. Over several years, this becomes worth a lot. Almost every great fortune is a result of unrealized gains compounding without the drag of taxes. 10% per year for 50 years will turn an initial investment of $10k into $1M after 15% capital gains tax. The same $10k at 10% per year where you churn it each year will only turn into $184K if you are in the 40% bracket (not including transaction costs). Even if you use the same tax rate, you will come out way ahead if you let your gains compound over long periods. But combine this with the opportunity to realize $90k/year in gains and pay no tax and you've pretty much beaten the taxman.

Buffett, Perot, Romney and even our buddy Donald Sterling all built their wealth by not realizing gains and avoiding excessive taxes. Of Buffett's ~$70B in net worth, about $69B is in unrealized gains of Berkshire stock that grows ever year. Technically, he owes the government about 23.8% of that as a capital gain. Unfortunately (for them), it will likely never be taxed as a capital gain since it's all going to charity or will be stepped-up when he dies. Just think, ~$17B he owes to the IRS that is earning a return each year! If he can earn 10% (historically he's returned over 20%), he's making himself $1.7 billion a year on just what he hasn't paid taxes on. If you can just avoid paying, say, $10k in taxes and keep it invest it for 50 years, you'll probably do pretty well.

Your loss is worth more if you sell it than if you hold it. If you are in the 40% bracket and you suffer a $3k loss, Uncle Sam will cover $1200 of that loss for you. If you wait 30 days (to avoid the wash-rule), you can rebuy the stock. If it the price is the same, you've essentially made $1200 versus holding and waiting and turned lemons into lemonade. Of course, you'll owe more tax when you sell. But if you can sell at the aforementioned 0% rate, you'll have not only beaten the taxman but beaten his grandkids and taken their lunch too.

Interesting divergence of this topic onto the issue of taxes. It's clear you've thought alot about this.

So let's say I have a bunch of apple shares at various cost bases. You are saying you should always sell the losers and not the gainers. Regardless of which shares I sell, I'll still have the same amount of share value on paper, but the tax implications are such that selling losses means I don't owe taxes while if I sell the gainers, I will owe some taxes and thus will lose the future gains on this particular amount.

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Chris Y
So let's say I have a bunch of apple shares at various cost bases. You are saying you should always sell the losers and not the gainers. Regardless of which shares I sell, I'll still have the same amount of share value on paper, but the tax implications are such that selling losses means I don't owe taxes while if I sell the gainers, I will owe some taxes and thus will lose the future gains on this particular amount.

Sounds like life, as you know it, just got better.
Congrats.
==

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Sometimes it is what it is...
and then there's times when it's really better.



==

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Chris Y
Interesting divergence of this topic onto the issue of taxes. It's clear you've thought alot about this.

So let's say I have a bunch of apple shares at various cost bases. You are saying you should always sell the losers and not the gainers. Regardless of which shares I sell, I'll still have the same amount of share value on paper, but the tax implications are such that selling losses means I don't owe taxes while if I sell the gainers, I will owe some taxes and thus will lose the future gains on this particular amount.

In addition, if all my stocks were to be gainers (for example, if AAPL went back to 700), then would another implication of this be to sell the stocks with the highest cost basis first (assuming they are held for over a year), since this would mean the lowest tax owed for a given sale of shares?

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Chris Y
sell the stocks with the highest cost basis first (assuming they are held for over a year), since this would mean the lowest tax owed for a given sale of shares?

Yep, paying less tax on investments is the ticket.

Now, go max out that 401k & IRA/rIRA and avoid Cap Gains altogether.

It depends on your present tax situation and what you foresee.

If you can take advantage of the 0% cap gains rate, you should, in my opinion, sell the shares that have the largest gain. In fact, if I were in that situation, I'd maximize my long-term gains until I breached the 15% rate. The tax laws allow you sell-for-a-gain and then immediately rebuy, so I'd probably sell tax-free and then rebuy at the same time.

However, if I were in the on of the top federal tax brackets (more than 35%), I would avoid any investment income because I'd pay at least 23.8%. I'd look for losses to deduct against my high marginal income, ie sell the shares of AAPL that generated a loss. Keep in mind that the tax laws don't let me sell, deduct a loss, and rebuy within 30 days (before or after). I'd let my gains continue to compound and once they reached a significant amount, I'd plan on retiring early so that I could realize those gains tax-free over several years.

Search for "tax-loss harvesting" or see Bogleheads on Tax-loss harvesting

One last thing...

If a brokerage holds lots purchased at different times with different bases, you have to be explicit about which shares you want to sell. If you don't, the IRS assumes FIFO. Some brokerages, like Schwab and Fidelity, let you identify the lots when you sell online. Others, like Merrill Lynch, require calling in before the trade settles and having them note which lot was sold. They send me a confirmation statement which I keep in my tax file.