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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?

Dheer
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chrislam5459
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    I think arbitrageurs prevent this .. – Fattie Jul 25 '18 at 17:11
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    No, because when you short a dividend-paying stock, you have to pay the dividend. – Rocky Jul 25 '18 at 17:47
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    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 '18 at 17:54

2 Answers2

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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.

Robert Longson
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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.

Bob Baerker
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  • 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 https://money.stackexchange.com/a/29772 – Robert Harvey Jul 25 '18 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. – Bob Baerker Jul 26 '18 at 00:27
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    @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). – Bob Baerker Jul 26 '18 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? – Robert Harvey Jul 26 '18 at 15:02
  • There is so much bad info in the answers in your link that I don't know where to begin - and won't. As for your question, you don't buy a stock because it pays a dividend. You buy because it is financially healthy and growing. As earnings grow, so does share price. If it pays a dividend, fine. If not, OK as well. Another benefit is that since the dividend reduces your cost basis, you will experience compounding should share price rise. That's the key in all of this. Share price appreciation. If there is none, a dividend is detrimental (taxable if non sheltered) and a non event otherwise. – Bob Baerker Jul 26 '18 at 15:31
  • Fair enough. I have some quibbles with some of your assertions, but I'll accept your conclusions. – Robert Harvey Jul 26 '18 at 15:33
  • If you have quibbles, feel free to present your case rather than implying some deficiency in what I have explained. – Bob Baerker Jul 26 '18 at 15:41
  • Just a small comment about price adjustments. These are done by the data vendor, not by the stock exchange. The stock exchange simply sends out a corporate action message that describes the dividend details. Note that proportional adjustment for dividends slightly distorts the time series - although it's known as a "total return" time series it doesn't actually show the current total return between any two points on the chart (unless they don't incorporate a dividend in between, or it's the day prior+ex-date of dividend). It's traders who set the price. – Richard at NorgateData Jul 30 '18 at 00:20
  • @Norgate Data - You are also one of thosee unaware of what's happening to your stocks in your brokerage account on the ex-div date. I suggest that you look up stocks going ex-div tomorow. Note the previous closing price BEFORE it goes ex-dividend and then look up the closing price early in the morning of the ex-div date before trading resumes. You'll observe that the adjusted close in YOUR brokerage account (as well as any web site providing quotes) is less than the previous close by the amount of the dividend and the position's value will be less by the amount of shares times the dividend. – Bob Baerker Jul 30 '18 at 01:18
  • Bob, it varies from broker to broker as to what is shown. The good ones will show you an adjusted amount as a settlement value (this is most definitely required for accounts that trade on margin) but as soon as it's trading again on the ex-date, the traded price applies to your position value. It's up to the trading participants to determine the price of a stock. For what it's worth, tier 1 terminal vendors such as Bloomberg and Thomson Reuters do not adjust their charts/previous close price unless you specifically turn on settings to incorporate dividend adjustments (these are not default). – Richard at NorgateData Jul 30 '18 at 01:33
  • You are conflating how vendors adjust the historical data in their databases with the adjustment of the closing price by the exchanges on the ex-dividend date. One has nothing to do with the other. Determination of the price of a stock by trading participants occurs after trading resumes on the ex-dividend date also that has nothing to do with ex-div share price adjustment by the stock exchanges. Look 'em up as I suggested. Price doesn't lie. – Bob Baerker Jul 30 '18 at 12:25
  • Bob - I am referring to the data feeds from the exchanges. Of course an exchange might display other information on their web site, or what a broker might display, what a financial portal might display etc. is up to them. For example: https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf does not adjust the previous close price for any dividends. – Richard at NorgateData Aug 02 '18 at 07:43
  • That's a really impressive 91 page document. But given that the only mention of dividends is on page 76 defining the extensions DP and DV then what relevance does the CONSOLIDATED TAPE SYSTEM MULTICAST OUTPUT BINARY SPECIFICATION have in regard to stock exchanges reducing share price by the amount of the dividend on the ex-dividend date? Try looking at what happens to share price when a dividend occurs. That means prices from any brokerage firm or web site offering quotes. That's where the answer lies not some obtuse data provision rules. – Bob Baerker Aug 02 '18 at 16:22
  • Quite simply, this is how the Stock exchanges put out data Bob. You seem to keep claiming that the Stock Exchanges adjust the data - they do NOT adjust it.
    It's up to the brokerage site, financial portal etc. to determine if they will adjust it and what methodology they will use. Many do not. Consider a "choice" dividend where you can elect to take a stock dividend or a cash dividend. Which do you use to adjust? What about a spinoff? How do you value that? What about a stock dividend in a different class of the same company? Deciding all of this is the core business of a data vendor.     – Richard at NorgateData Aug 02 '18 at 23:53
  • (1) Your off on a tangent question about spinoffs is a distraction to this discussion of dividends but since you asked, spin offs result in adjustments as well. Exchange traded options for the parent company are adjusted to reflect this. For example, ALV recently spun off VNE. Money (and shares) isn't given away for free. Here's how they handled the options to reflect this: https://www.miaxoptions.com/sites/default/files/alert-files/ALV_Distribution_43259.pdf . Vendors do not decide brokerage account valuations. – Bob Baerker Aug 03 '18 at 01:07
  • (2) Multiple ways cannot exist for adjusting due to a dividend, meaning that some brokers will do it and others will not. The simple fact is that share price is reduced by dividend on the ex-div date. Dividends do not create Total Return. Only share price appreciation does. For example, ALX closed at $371.96 today and will go ex-div tomorrow for $4.50. All quotes tomorrow will reflect that reduction. If you own the stock, 100 shares will be worth $37,196 EOD today and tomorrow they will be worth $35,746 before trading resumes plus you will be due $450 on the Payable Date. – Bob Baerker Aug 03 '18 at 01:08
  • @Norgate Data - It's 8 AM EST. StockMarketWatch and other web sites now show that yesterday's close for ALX was $367.46. OK, you claim that deciding all of this is the core business of a data vendor so those sources are invalid. Then how come Ameritrade also shows a close of $367.46 as does my account at Interactive Brokers? Where did the $4.50 disappear to Norgate? If I owned 100 shares, my stock position would be down $450 today though I'd eventually get $450 from ALX on the Payable Date. This share price reduction by the dividend is the answer to the OP's question about Dividend Capture. – Bob Baerker Aug 03 '18 at 12:26
  • I'm not disagreeing that many financial ports and brokerage sites adjust their data for dividends and other corporate actions. I am simply saying that this is NOT done by the exchanges. You should also be aware that it's not always done consistently too. You cite StockMarketWatch as an example of price adjustment, yet its price chart is unadjusted for the dividend as at 3 Aug 2018 22:15 EST. http://thestockmarketwatch.com/stock/?stock=ALX – Richard at NorgateData Aug 04 '18 at 02:13
  • I'm almost at a loss of what to say at this point. ALX closed at $371.96 on Thursday. Your link says it closed Friday at $365.06, down $2.40. $365.06 plus $2.40 is $367.46. How can the close be $371.96 on Thursday, be down $2.40 and close at $365.06 ?? Where did the $4.50 disappear to ?? Given that Friday was ex-dividend for $4.50, the closing price was indeed adjusted by the EXACT amount of the dividend. Splain that one to me, eh? Remember, this is about Dividend Capture not that some services adjust the charts and some don't. Your stock positions aren't valued from a stock chart. – Bob Baerker Aug 05 '18 at 22:39
  • If you can't grasp this by now, if you own any dividend stocks, look closely the next time that there is a dividend. Look at the value of you position in your brokerage account after the close the day before ex-dividend. Then look at it the next morning on the ex-dividend date. Maybe that will open your eyes to the fact that share price is being reduced by the EXACT amount of the dividend. Dividends don't create Total Return so the offset is the capital loss on the position. Get back to me on that future date. – Bob Baerker Aug 05 '18 at 22:40
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    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. https://www.bloomberg.com/quote/ALX:US Nor did Reuters https://www.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 https://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. – Richard at NorgateData Aug 05 '18 at 23:02
  • @Bob Baerker - Stock Market Watch shows BBDC at $12.34 today, 9:10am EST 6 Aug 2018. It hasn't yet traded today. Today is the ex-date for a $1.783612 special dividend.. This is not shown on Stock Market Watch at all. Yahoo is showing premarket $10.87 trading at (-$1.47 -11.91%). I'm trying to show that these sorts of events are not always handled well/properly/consistently. – Richard at NorgateData Aug 06 '18 at 13:17
  • Market is open now at 9:33am on 6 Aug 2018. Marketwatch.com shows $10.55 (-$1.79 - 14.51%) https://www.marketwatch.com/investing/stock/bbdc - Yahoo now shows $10.59 @ 9:37 (+0.03 +0.32%). Stockmarketwatch shows $12.34 +1.7836 (16.90%). If you click on the Premarket tab, it shows $10.87 (-1.47 -11.91%). As you can see, it's a riot! – Richard at NorgateData Aug 06 '18 at 13:38
  • You have succeeded in proving what most people already know - some web sites adjust price and charts ex-div and some don't. What you have completely failed to address is that in the US, share price for EVERY stock is uniformly reduced on the ex-div date by the EXACT amount of the dividend. – Bob Baerker Aug 10 '18 at 01:06