A:

Many years ago, unscrupulous brokers would use the same logic on their clients as a sleazy sales tactic. These brokers would tell a customer to purchase shares in a particular investment that would supposedly offer profits from an upcoming dividend.

In theory this may seem like a sound investment strategy, but it is nothing more than an illegal marketing scheme. For example, if Company A is trading at $20 a share and is about to offer a $1 dividend and you hurry to buy the stock before the ex-dividend date, you would receive the dividend and make an easy 5% return.

In actuality, however, the company's stock price would decrease on the ex-dividend date by about the same amount of the dividend to eliminate this form of arbitrage. So, if you purchased stock before the ex-dividend date you would get the $1 cash dividend, but this would be offset by the simultaneous $1 drop in the stock price. Thus, buying a stock before a dividend is paid and selling after it is received has absolutely no value except a partial return of the capital invested in the stock in the first place.

To make things worse, dividends create a tax liability, meaning you'll have to claim the dividends as taxable income on the following year's income tax return. Waiting to purchase the stock until after the dividend payment may be a better strategy because it allows you to purchase the stock at a lower price without incurring taxes.

To read more on dividend dates, see our article Declaration, Ex-dividend, and Record Date Defined.

RELATED FAQS
  1. With an ex-dividend, why does the dividend go to the seller rather than the buyer?

    Find out why ex-dividend payments are sent to the seller of a stock rather than the purchaser and how ex-dividends can create ... Read Answer >>
  2. If a company moves its dividend record date forward, does the ex-dividend date change ...

    When a dividend is declared, there are three important dates for investors: the dividend payable date, the dividend date ... Read Answer >>
  3. Where can I find the past record dates for a company's cash or stock dividend?

    Learn more about dividend record dates and how they are used to determine the recipient of dividends. Find out how to locate ... Read Answer >>
  4. How is the ex-dividend date for a dividend on a stock determined?

    Review the important dates concerning dividend payments and learn how the ex-dividend date is determined when a company declares ... Read Answer >>
  5. How do I use the dividend capture strategy?

    Learn how to implement the dividend capture strategy, an aggressive, income-focused stock trading strategy investors can ... Read Answer >>
  6. Is it a good idea for a beginning investor to arbitrage the dividend calendar?

    Learn the trading strategy used for arbitraging the dividend and understand why this complicated, high-risk strategy is not ... Read Answer >>
Related Articles
  1. Investing Basics

    Dissecting Declarations, Ex-Dividends and Record Dates

    Understanding the dates of the dividend payout process can be tricky. We clear up the confusion.
  2. Trading Strategies

    Introduction To Dividends: Dividend Dates

    A corporation's Board of Directors must declare all dividends. Four dividend-related dates are important to this process: Declaration DateThe declaration date is the date that the dividend ...
  3. Investing Basics

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  4. Markets

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  5. Trading Strategies

    Introduction To Dividends: Terms To Know And Other Basics

    Cash DividendCash payments made to stockholders, paid on a per share basis, quoted as a dollar amount or as a percentage of the current market value. Cash dividends are typically paid out of ...
  6. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  7. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  8. Options & Futures

    Stock-Picking Strategies: Income Investing

    Income investing, which aims to pick companies that provide a steady stream of income, is perhaps one of the most straightforward stock-picking strategies. When investors think of steady income ...
  9. Investing Basics

    Are You Too Young To Care About Dividends?

    Find out why it's never too early to begin thinking about dividends and how dividend-bearing stocks and funds can grow your investment account effortlessly.
  10. Mutual Funds & ETFs

    How Dividend-Paying ETFs Work

    Understand how ETFs that hold dividend-paying securities collect and pass along those dividends proportionally to the shareholders of the ETF.
RELATED TERMS
  1. Ex-Dividend

    A classification of trading shares when a declared dividend belongs ...
  2. Dividend Rollover Plan

    An investment strategy in which a dividend-paying stock is purchased ...
  3. Unpaid Dividend

    A dividend that is owed to stockholders of record but has yet ...
  4. Dividend Arbitrage

    An options trading strategy that involves purchasing put options ...
  5. Payment Date

    The date on which a declared stock dividend is scheduled to be ...
  6. Record Date

    The cut-off date established by a company in order to determine ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center