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I have a position in a stock (oil company) which has already announced a ~7% dividend with the ex-div date set to 13 May and payment date to 7 June.

I am looking to double my position in this stock but only if there's a ~7% correction on the ex-div date, which seems to be the general rule.

The question is, will a stock always correct itself to minus the dividend amount on the ex-div date ?

thanks

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  • Does your question assume that there will be no price fluctuations? – Flux Apr 29 at 13:44
  • Yes, the stock is currently growing steadily into ex-div and yes I am assuming there won't be a major correction before ex-div. My plan is to double the position if the ex-div correction comes, then sell the entire position if it bounces up quickly. Otherwise hold. – lmlmlm Apr 29 at 13:47
  • What do you mean by "correct itself"? You mean bounce back to the price it was before the dividend? The answer is assuredly no, not always. – D Stanley Apr 29 at 13:56
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    Why would you only double your position after the dividend? If you doubled it before, you'd get twice the dividend and be back in the same position (wealth wise)/ – D Stanley Apr 29 at 14:43
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    @DStanley , that's actually a very poor idea, as the net result is identical, and dividends have an immediate tax liability. Basically, you volunteer to pay some extra taxes. – Aganju Apr 30 at 14:34
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Yes a stock will on average drop by the amount of a dividend. The actual change can fluctuate during the day just based on normal market fluctuations. But things like market stop and limit orders will adjust automatically by the exchange by the exact amount of the dividend due to this effect.

The reason that a stock drops after a dividend is because it has sent cash out the door. If a company is worth $100 per share, and gives $10 per share to its shareholders, that company is now worth $10 less (because of the cash out the door). From a shareholder wealth standpoint it's a wash since it now has a $90 share and $10 cash.

What the stock does from there is not guaranteed. It can go back up, or go down for completely unrelated reasons, but there's no fundamental reason that the stock would go one way or the other after the dividend adjustment.

(there may be some patterns that can be observed before and after dividend announcement/ex-div that can be exploited on average, but they are not guaranteed and there's no fundamental reason for a single stock to behave any differently just because a dividend has been paid)

I am looking to double my position in this stock but only if there's a ~7% correction on the ex-div date

From a wealth standpoint, it won't matter (other than rate and timing of taxes). Say the stock is at $100 today and has announced a 7% ($7) dividend, and you own 100 shares for a total value of $10,000. All else being equal, after the ex-div date the stock will drop to $93 and you'll be eligible for a $7 dividend. Your total wealth from this stock will still be $10,000 ($9,300 in stock and $700 in cash) less any taxes you'd owe on the dividend (but the capital gains you'd pay eventually on the stock would be lower as well). If you double before the ex-div, you'll still have $20,000 ($18,600 in stock and $1,400 in cash). If you double after, you'll also have $20,000 ($18,600 in stock, $700 in cash form the dividend and $700 "saved" from buying at $93 instead of $100).

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    Assuming all else equal, the one difference between buying before the ex-div date and after is taxation if the dividend is received in a non sheltered account. – Bob Baerker Apr 29 at 18:20
  • True, there can be a difference in tax treatment, but that's not germane to the question (IMHO) – D Stanley Apr 29 at 19:17
  • I'm not the one who stated that they're the same: From a shareholder wealth standpoint it's a wash. It would only be a wash if there is no taxation. – Bob Baerker Apr 29 at 19:26
  • Share price drops overnight by the exact amount of the dividend on the ex-div date not some 'average' amount. The close to close one day change before and including the ex-div date will vary due to subsequent trading resumes on the ex-div date. – Bob Baerker Apr 30 at 18:00
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Yes a stock will always drop by the amount of a dividend.

The reason that a stock drops after a dividend is because just before the ex-div date, that stock was worth its actual value plus the guaranteed dividend. If the objective value of a share is $90, and that share also provides $10 per share to its shareholders tomorrow, that company share will be traded at a value of $100. From a shareholder wealth standpoint it's a wash since after the ex-dividend date they now have a $90 share and $10 cash.

What the stock does from there is not guaranteed. It can go back up, or go down for completely unrelated reasons, but there's no fundamental reason that the stock would go one way or the other after the dividend adjustment.

The question about whether you buy a stock the day before the ex-dividend date or the day after will not make much of a difference. Before the ex-dividend date, you are basically paying $10 extra in order to compensate the previous owner for the $10 dividend they are going to miss out on tomorrow. But you are going to get those back when the dividend is paid. So you won't save any money by waiting for a day.

(Yes, this answer is partially based on the answer by D Stanley. It boils down to the exact same conclusions, but I find this perspective of looking at it a lot easier to understand)

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  • Never said anything about buying before ex-div. I already have a position in this stock and looking to double it AFTER ex-div, in case the price drops by the amount of the dividend. – lmlmlm Apr 29 at 16:32
  • @lmlmlm I see. But that doesn't change much. I updated the answer. – Philipp Apr 29 at 16:35
  • "just before the ex-div date, that stock was worth its actual value plus the guaranteed dividend" This is a bit misleading. The "actual value" of the stock goes down because the value of the company that it represents goes down. It's not like $10 of value is "created" just by declaring a dividend (which is how this could be interpreted). – D Stanley Apr 30 at 2:40
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    @DStanley Your perspective is just as misleading, because it implies that the market cap of a company and the net worth of a company are the same thing. Which is simply not true. The value of a company according to the accountants and according to the investors can be very different. – Philipp Apr 30 at 7:31
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You can check this by looking at history.

There are many stocks that issued a percentage dividend and then did NOT drop by that percentage on the ex-dividend date.

The reasons why are many and various, but that's not what you asked.

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  • What data are you looking at? On of my stocks is traded ex-Div today and is at -2,70€ at the moment. However, on opening it was at -3,30€ which happens to be exactly the dividend.Historical data on closing price is not helpful for ex-dividend, you need the closing of the dividend and the opening of the ex-div – Manziel Apr 30 at 13:49
  • Let's just pick the first one I find... BPMP, ex-div a few days ago. Closed 13.86 , dividend of 0.348 , opened at 13.60 Dropped, but not by the same amount as the dividend. Anyone looking for a guarantee that a stock will drop by the same amount as the dividend is asking for something that just isn't guaranteed. – Moschops Apr 30 at 14:03
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    @Moschops a stock can change by more or less than the dividend just due to normal price fluctuations during the day (or changes in expected future performance). The point is that the stock should be expected on average to drop by the dividend amount. Meaning if you took 100 independent dividend-paying stocks and look at their changes relative to their dividend, you should expect an average change very close the the dividend amount. – D Stanley Apr 30 at 16:02
  • @Moschops - You do not understand the ex-dividend process. In the U.S. stock exchanges reduce share price by the exact amount of the dividend on the ex-dividend BEFORE shares resume trading on the ex-div date. When trading resumes, share price may increase, decrease or remain the same. By looking at the close to close change, you are conflating the ex-div process with price change due to subsequent trading. – Bob Baerker Apr 30 at 17:56
  • cont. - If you want to see this clearly, find an ex-div for tomorrow and compare tomight's closing price with tomorrow's adjusted close BEFORE trading resumes. You'll see that share price has dropped EXACTLY the amount of the dividend. Furthermore, FINRA Rule 5330 requires that all open orders must be adjusted by the amount of the dividend in order to avoid premature order execution due to this share price reduction. – Bob Baerker Apr 30 at 17:56

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