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What prevents investors from buying high yield stocks and selling them as soon as their dividend is paid out?

I guess I am confused: If you know the yield and when the dividend will be paid out, why not buy a share an instant before the dividend is paid out and then sell it?

Do you have to have held the share for some amount of time to get the dividend? Is there too much volatility in the instant the dividend is paid out?

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    So, let's assume you're dealing with someone else who has figured this out. She is going to buy a share that's about to pay $4 in dividends Monday and sell it Tuesday. Are you going to be willing to pay the same price on Monday as on Tuesday? Probably not, because you know you get $4 more if you buy it on Monday... Of course everyone else also does this calculation. – Joel Oct 7 '15 at 7:45
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    Short answer is that everyone in the market has thought of this at some point in their life. – Phil Oct 7 '15 at 16:44
  • @Joel people can and do take advantage of dividend dates, any answer suggesting otherwise is wrong. the market is not smart, and the market is not efficient. see my answer below – CQM Oct 8 '15 at 17:56
  • In fact, "don't buy right before the dividend is due, wait and buy after" is fairly common advice precisely because it's believed the market factors the dividend into the price of the stock. I have no opinion on whether it's good advice, but clearly the assumption is that there isn't much room for manipulation here. – keshlam Oct 9 '15 at 0:47
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You have to be the owner of record before the ex-dividend date, which is not the same day as the date the dividend is paid. This also implies that if you sell on or after the ex-dividend date, you'll still get the dividend, even if you no longer own the stock.

Keep in mind, also, that the quoted price of the stock (and on any open orders that are not specifically marked as "do not reduce") on its ex-dividend date is dropped by the amount of the dividend, first thing in the morning before trading starts. If you happen to be the first order of the day, before market forces cause the price to move, you'll end up with zero gain, since the dividend is built into the price, and you got the same value out of it -- the dividend in cash, and the remaining value in stock. As pointed out in the comments (Thanks @Brick), you'll still get a market price for your trade, but the price reduction will have had some impact on the first trade of the day.

Source: NYSE Rule 118.30

Also, remember that the dividend yield is expressed in annualized terms. So a 3% yield can only be fully realized by receiving all of the dividend payments made by the company for the year. You can, of course, forget about individual companies and just look for dividends to create your own effective yield over time. But, see the final point...

Finally, if you keep buying and selling just to play games with the dividends, you're going to pay far more in transaction fees than you will earn in dividends. And, depending on your individual circumstances, you may end up paying more in capital gains taxes.

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    Thanks @stannius. In my mind, each paragraph is an answer to the question of why people don't/can't time the dividends profitably. – Kent A. Oct 6 '15 at 19:16
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    Why would the price of the stock be dropped by the amount of the dividend on market open? That makes no sense to me. If an owner of a particular stock XYZ is putting it on the market for sale, the owner is not going to willingly just decide to offer buyers a friendly discount. Only lack of demand could result in a price drop, and there is no guarantee that a particular dividend already paid translates to lack of demand – public wireless Oct 6 '15 at 19:45
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    @publicwireless The description on pricing is wrong. The market chooses the price on the ex-date just like every other date. There's not automatic repricing by hand. It is true that the price tends to drop by about the same amount as the dividend though - through market forces, – user32479 Oct 6 '15 at 20:00
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    @KentAnderson You are propagating a common misconception. You need to be the owner of record on the day before the ex-dividend date.. You can sell on the ex-date and still get the dividend. – user32479 Oct 6 '15 at 20:02
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    @publicwireless Its not that they offer a friendly discount afterwards, its that the stock is literally worth more to investors before that date. Consider that, before that date, a stock is worth "one unit of stock + one dividend + future dividends." After the date, it is worth "one units of stock + future dividends." Investors will value the stock higher before the date explicitly because of what the OP is trying to do. If the stock does not raise in value as the ex-dividend date arrives, someone will abuse it, exactly like the OP wants, until that is balanced out by price increases. – Cort Ammon - Reinstate Monica Oct 7 '15 at 16:56
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The market is not stupid. It realises that a company is worth less after paying out dividends than before paying them. (It's obvious, since that company has just given out part of its earnings.)

So after a company pays out dividends, its stock price normally drops approximately by the amount paid.

Therefore if you buy, get the dividend, and immediately sell, under normal conditions you won't make any profit.

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    This is a "there's no free lunch" argument. There is much wisdom in that phrase. +1 – Ross Millikan Oct 7 '15 at 3:36
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    @RossMillikan except when there is. – CQM Oct 7 '15 at 7:08
  • This is the right answer, simply expressed with no wrong answers mixed in. Should be the accepted answer. – jwg Oct 9 '15 at 7:01
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The ex-dividend date, prevents this, but people are still able to do this and this is an investment strategy.

There are some illiquid and immature markets where prices don't adjust.

In the options market people are able to find mispriced deep in the money calls to take advantage of the ex-dividend date. It is called dividend capture using covered calls.

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    Upvote for mentioning dividend capture using calls - rarely possible nowadays, but was once a good strategy. – ssaltman Oct 7 '15 at 15:34
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    @ssaltman thanks, consensus based sites really miss a lot of actual answers. When the consensus is "its priced in", "there is no free lunch", "the market is efficient", useful actionable information gets overlooked – CQM Oct 7 '15 at 16:42
  • It works better over in stack overflow where the number of professionals vs enthusiasts is higher, we kind of leak over into the other exchanges where we think we know what we're talking about. Now, my answer isn't wrong per say, at worst incomplete/overly simplistic, but a reasonable approximation overall. That's another reason the consensus works really well on the stackoverflow page, unlike economic things, there is a single discrete, easily testable answer to almost any valid question. – wedstrom Oct 7 '15 at 21:55
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The rest of the market knows when the dividends are paid out, and that will be reflected naturally in the share price. That's why there is no way to consistently beat the market. Because the market is other human beings, who's sum of knowledge is greater than any individual.

Everything in the stock market boils down to this in one way or another.

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Although the market discussion by other answers is correct, the tax structure of many developed nations (I am familiar with Canada in particular) offers a preferred tax rate for dividend income compared to taxable gains. Consequently, if your portfolio is large enough to make transaction fees a very small percentage rate, this is a viable investment strategy.

However, as the preferred tax rate for dividends typically will catch up to that for capital gains at some cut-off point, there is a natural limit on how much income can be favourably obtained in this way.

If you believe your portfolio might be large enough to benefit from this investment strategy, talk to a qualified investment advisor, broker, or tax consultant for the specifics for your tax jurisdiction.

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I remember my Finance Professor at b-school answering this question:

The next moment the dividend is paid the total market cap is decreased by the amount paid

This makes sense as cash leaves company, the value of the company is decreased by exactly the same amount.

To summarise: the moment you paid dividend, the value of the stock is decreased by the same amount.

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This investment strategy may have tax advantages. In some countries, income received from dividends is taxed as income, whereas profits on share trades are capital gains.

If you have already exceeded your tax-free income limit for the year, but not your capital gains tax allowance, it may be preferable to make a dealing profit rather than an investment income.

These arrangements are called a bed-and-breakfast.

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