17

Theoretically, the price of a stock should always fall whenever a dividend is paid out to shareholders. Is this true in practice? If it is, I can just short the stock before the dividend is paid and get sure profits?

3
  • 2
    I think arbitrageurs prevent this ..
    – Fattie
    Jul 25, 2018 at 17:11
  • 15
    No, because when you short a dividend-paying stock, you have to pay the dividend.
    – Rocky
    Jul 25, 2018 at 17:47
  • 15
    Any money making scheme that looks like sure profits almost certainly has an undiscovered flaw in it. Why? Because if it did work, someone would be doing it and the profit making opportunity would be gone.
    – zeta-band
    Jul 25, 2018 at 17:54

2 Answers 2

32

If you short the stock on the record date, that is the date that the calculation eligibility for dividends is made, you'd be liable to pay the dividend to the original owner of the stock, so no you can't get sure profits that way.

4
  • 2
    Agreed, though if your using an investing simulator like Investopedia that does not account for dividends, this would be a high confidence way to outperform peers provided the dividend is relatively large.
    – A.K.
    Jul 25, 2018 at 17:21
  • 4
    Investopedia's simulator is more like a poorly designed game than a simulator. A good simulator duplicates market trading and there are no freebies. Jul 25, 2018 at 19:33
  • What if you take a short position by buying a put option? Jul 26, 2018 at 6:19
  • 1
    @chrislam5459 that would seem to be this question Jul 26, 2018 at 6:20
3

With T+2 settlement, the Ex-Dividend date is two days before the Record Date. While it is true that if you are short the stock on the Record Date then you are liable for the dividend (you pay it to the lender), it's easier to focus on the Ex-Div date because that's the info that most web sites provide (U.S.).

Theoretically, the price of a stock should always fall whenever a dividend is paid out to shareholders. Is this true in practice? If it is, I can just short the stock before the dividend is paid and get sure profits?

Most people don't realize that share price drops by the exact amount of the dividend on the ex-dividend date when the stock exchanges adjust the closing price. There is no Free Money with a dividend. Dividends provide ZERO Total Return. You will incur a capital loss equal to the amount of the dividend. And to add insult to injury, if this occurs in a non sheltered account, you will incur a tax liability as your own investment capital is returned to you via the dividend. Arbitrageurs have no involvement in preventing this from occurring.

There is a Dividend Arbitrage involving put options but that has nothing to do with this question.

There are numerous web sites that tout a free money concept of Dividend Capture. What they don't explain is that its success is dependent on the stock's share price appreciating. Without that, there's nada. There are no free lunches and if it sounds too good to be true, it is.

24
  • share price drops by the exact amount of the dividend on the ex-dividend date when the stock exchanges adjust the closing price -- That isn't really how dividends work. Your answer implies that this occurs automatically as a result of a stock exchange price adjustment; what actually happens is a bit more subtle than that. See money.stackexchange.com/a/29772 Jul 25, 2018 at 23:29
  • Victor's answer is incorrect. He is conflating ex-div share price reduction with subsequent trading the next day... and you are one of those people unaware of what is happening with your stocks on the market side (not corporate valuation). I suggest that you look up stocks that are going ex-dividend tomorow. Also note the closing price of the stock today. In the morning, you will see that the today's clsoing price has been reduced by the exact amount of the dividend by the stock exchange. You can also go to Yahoo Finance (or similar) and look up historical data and see this as well. Jul 26, 2018 at 0:27
  • 1
    @Robert Harvey - Celanese (CE) closed at $113.98 yesterday. This morning it went ex-dividend by 54 cents. At 9:50 AM EST today, the last trade is up 69 cents at $114.13 . That means that the close was $113.44 . How could it be that the close shown today is $113.44 when it actually closed yesterday at $113.98 ? Where did that 54 cents go to? (1) Is it bad data? (2) Is it a conspiracy? (3) Or is it that the stock exchange reduces share price by the exact amount of the dividend? Given that this occurs with all stocks on the ex-dividend date, it's door number (3). Jul 26, 2018 at 14:00
  • Then I would defer to the question at that other post: why would you ever take a dividend when it reduces your stock value by the same amount? Jul 26, 2018 at 15:02
  • 1
    For what it's worth Bob, Bloomberg shows: $365.06 -$6.90 (-1.86%) - I am saying that it's up to the portal to perform adjustments. Some do, some don't. Bloomberg did NOT adjust for the dividend at all. bloomberg.com/quote/ALX:US Nor did Reuters reuters.com/finance/stocks/overview/ALX.N thestockmarketwatch adjusted its summary for the dividend, but not its chart. Stockwatch adjusted its chart for the dividend stockcharts.com/h-sc/ui?s=ALX - As you can see they all do it differently! And that is my point - it is NOT done by the exchange. Aug 5, 2018 at 23:02

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .