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Apple announced a dividend of $2.65/share on August 16th. I was thinking... could somebody buy, say 1,000 shares of Apple, receive the dividend, and then sell the shares right back?

http://www.latimes.com/business/technology/la-fi-tn-apple-dividends-20120724,0,6646852.story

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Suppose that Apple shares are being sold for $300/share. If I have 1000 shares of Apple, then the moment Apple announces the dividend to be paid on August 16 (that is, to those owning shares on August 16), why would I sell my shares to you today at $300/share when I could just wait for a week and get the $2650 dividend? – Dilip Sarwate Aug 12 '12 at 2:27
But some people must be selling shares prior to the dividend date, right? Also, what typically happens to a stock's price the day after a dividend? – Kirk Aug 12 '12 at 3:14
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"what typically happens to a stock's price the day after a dividend?" Usually the price drops by the dividend amount but is also tugged up or down by more recent news and market sentiment (e.g. Apple wins/loses suit against Samsung the next morning) so that the price does not always change by exactly the amount of the dividend per share. – Dilip Sarwate Aug 12 '12 at 3:21
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The moment it trades "ex-div" it will traded for (old price - the dividend). Dividends are tax favored compared to short term gains, and there is some buy/capture dividend/sell going on, but not on stocks whose dividend is a fraction of a percent. – JoeTaxpayer Aug 12 '12 at 12:58
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General principle: If you have to ask "can X be exploited?" the answer is probably either "no" or "yes, but you'll have to compete with other traders, including high-frequency traders, with better understanding of short-term trading risks, larger amounts of working capital, higher risk tolerance, sub-millisecond latency to the stock exchange, and the willingness to undercut your exploitation - or each others', for that matter." :) Which is not to say you can't make money... there's probably just not as much easy money as you'd hope, or it's a far risker operation than you understand. – fennec Aug 12 '12 at 22:34

5 Answers

up vote 2 down vote accepted

Yes, somebody could buy the shares, receive the dividend, and then sell the shares back.

However, the price he would get when he sells the shares back is, ignoring other reasons for the price to change, exactly the amount he paid minus the dividend.

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Can you explain this answer? – C. Ross♦ Aug 21 '12 at 15:14
I you imagine a company as a bunch of cash, each share represents ownership of a part of that cash. If the company pays a dividend, the bunch of cash becomes smaller and each share represents the amount of the dividend less ownership of that bunch of cash. – Andrew J. Brehm Aug 22 '12 at 1:12
up vote 6 down vote

The moment the dividend is announced, especially from a company that doesn't normally pay dividends, the dividend is factored into everybody's analysis.

In the absence of any other news the price of apple would be expected to drop once the dividend in locked in. Why would I buy shares from you at full price one day after the dividend is paid, if I will have to wait for the next dividend?

Also keep in mind the dividend was announced on July 24th, and is given to shareholders of record on August 13th. You are way behind the curve.

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up vote 4 down vote

In an ideal world
Say on 24th July the share price of Apple was $600. Everyone knows that they will get the $ 2.65 on 16th August. There is not other news that is affecting the price. You want to go in and buy the shares on 16th Morning at $600 and then sell it on 17th August at $600. Now in this process you have earned sure shot $2.65/-

Or in an ideal world
when the announcement is made on 24th July, why would I sell it at $600, when I know if I wait for few more days I will get $2.65/- so i will be more inclined to sell it at $602.65 /- ... so on 16th Aug after the dividend is paid out, the share price will be back to $600/-

In a real world, dividend or no dividend the share price would be moving up or down ... Notice that the dividend amount is less than 1% of the stock price ... stock prices change more than this percentage ... so if you are trying to do what is described in paragraph one, then you may be disappointed as the share price may go down as well by more than $2.65 you have made

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up vote 4 down vote

No, the dividends can't be exploited like that.

Dividends settlement are tied to an ex-dividend date.

The ex-dividend, is the day that allows you to get a dividend if you own the stock. Since a buyer of the stock after this date won't get the dividend, the price usually drop by the amount of the dividend. In your case the price of a share would lose $2.65 and you will be credited by $2.65 in cash such that your portfolio won't change in value due to the dividend.

Also, you can't exploit the drop in price by short-selling, as you would be owing the dividend to the person lending you the stock for the short sale.

Finally, the price of the stock at the ex-dividend will also be affected by the supply and demand, such that you can't be precisely sure of the drop in price of the security.

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up vote 2 down vote

In addition to the other answers it's also noteworthy that the stock exchanges themselves adjust the price quotes via their ex-div mechanism. All limit orders present in the book when the stock goes ex-div will be adjusted by the dividend.

Which means you can't even get "accidentally" filled in the very unlikely case that everyone forgot to adjust their quotes.

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Is it a stock exchange that sets prices or market makers? And is it one's broker who is responsible for adjusting the limit order in the book or whomsoever is running the book? – Dilip Sarwate Aug 14 '12 at 12:19
Noone "sets" prices. And yes, it's the stock exchange (at least NYSE, NASDAQ, TSE, LIFFE, Deutsche Boerse) that adjusts the books. – hroptatyr Aug 14 '12 at 12:23
@Dilip: quick research suggests that any exchange that allows GTC/GTD limit orders will do the adjustment. – hroptatyr Aug 14 '12 at 12:30

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