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I understand that if you buy a stock on or after the ex date you wont receive the dividend.

But as the stock will drop on the ex date, Is this not an excellent opportunity to buy the stock at a discount and then sell after it rebounds?

I understand it may not rebound but its a good chance it only temporarily devalued due to the dividend being taken out?

Not many articles seem to discuss this, they just focus on needing to time it to get the dividend, but what about exploiting the lower stock price?

UPDATE - So alternatively is there opportunity in purchasing stock as soon as a dividend is announced and selling before the ex date. Again missing the dividend but riding the upward stock price?

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Surely you'd be in almost exactly the same position if you just buy before the dividend and auto invest it back into the same shares? – Richard Dalton Jan 25 at 16:47
    
That depends. If the price gap is bigger than the dividend, yes. Otherwise, no. – William Dunne Jan 25 at 16:49
    
What i dont understand though is if the stock price fell yesterday for no reason other reason than the dividend being accounted for. I would hope it would rise a little in the coming weeks. Forgetting any other fundamentals, focusing on just stock price alone surely your getting a discount on the stock? – chris cheshire Jan 25 at 17:00
    
If a company with 10 shares pays a dividend of $1 per share, it effectively makes a payment of $10 to shareholders, which reduces the amount of cash on the company's bank by $10 and therefore reduces its value by $10, i.e. $1 per share. There is no arbitrage there... – assylias Jan 26 at 12:41
    

The stock tends to drop by the amount of the dividend -- or if you prefer to think of it this way, the stock price has been pushed up by the amount of the dividend before it was paid out.

Really, all this shift does is factor out the impending dividend's effect on the real purchase cost of the stock. As such it's pretty much irrelevant except that, of course, the dividend is short-term gain that you have to pay taxes on almost immediately. Which also tends to get figured into the price folks are willing to pay for the stock.

Conclusion: no, there's no real opportunity here. There's a slight tax reason to avoid buying right before dividends are paid, but that's about it.

Basic principle: If it's simple and obvious,the market has already accounted for it.

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But i don't want the dividend. I am purely speculating on the stock price, the fact that it dropped due to the dividend and should bounce back (hopefully)? – chris cheshire Jan 25 at 16:56
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So the price went up in anticipation of the dividend in the first place? so the drop in price is not really a drop but a return to the real value? – chris cheshire Jan 25 at 17:04
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@chrischeshire In a perfect market, the value of the strategies 1) Buy stock after dividend and 2) Buy before, get the dividend is exactly the same. In both cases you get the stock; in the first case you paid x for the stock, in the latter you paid x + D for the stock and you get the dividend (of value D); your net payment for the stock was x. So if it does not make sense to buy the stock anticipating a increase in the stock price before the dividend, it does not make sense just after. In both cases you own the stock, and you paid x for it. – Ant Jan 25 at 18:16
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+1 for the "basic principle", but I would expand it beyond that. There are tens of thousands of professionals who make it their life's work to beat the market, and meta-analysis has demonstrated that not even they can, in the long run. – WannabeCoder Jan 25 at 18:24
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@chrischeshire: or another way to think about it is that the cum div price is the "real value" of the company with a big pile of money on top of it, and the ex div price is the "real value" of the company once that pile of money has been removed and paid to shareholders. – Steve Jessop Jan 25 at 19:30

I guess the answer lies in your tax jurisdiction (different countries tax capital gains and income differently) and your particular tax situation.

If the price of the stock goes up or down between when you buy and sell then this counts for tax purposes as a capital gain or loss. If you receive a dividend then this counts as income.

So, for instance, if you pay tax on income but not on capital gains (or perhaps at a lower rate on capital gains) then it would pay you to sell immediately before the stock goes ex-dividend and buy back immediately after thereby making a capital gain instead of receiving income.

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As yet another explanation of why it does not really matter, you can look at this from the valuation point of view. Stock price is the present value of its future cash flows (be it free cash flow of the firm or dividends, depending on the model). Let's have a look at the dividends case. Imagine, the price of the stock is based on only three dividends streams $5 dollars each: dividend to be paid today, in year 1, and in year 2. Each should be discounted back to today (say, at 10%), except today's dividend, since today is now.

         Dividend   PV of Dividends
Year 0   $5             $5.00 [5/(1+10%)^0]
Year 1   $5             $4.55 [5/(1+10%)^1]
Year 2   $5             $4.13 [5/(1+10%)^2]

Value                   $13.68  

Once that dividend is paid, it is no longer in the stream of cash flows. So if we just delete that first $5 from the formula, the price will adjust itself down by the amount of the dividend to $8.68. NOTE that this is a very simple example, since in reality cash flows streams are arguably infinite and because there are many other factors affecting stock price. But simply for your understanding, this example should provide you with the reason simply from the valuation perspective.

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