Dividend Selling

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DEFINITION of 'Dividend Selling'

A dishonest broker tactic that involves convincing a client to purchase a stock because it's about to pay a dividend. The broker pretends that this recommendation is in the client's best interest because the dividend will supposedly generate instant returns for the client. In reality, the trade is in the broker's best interest because of the commissions it will generate. The recommendation is dishonest because once a stock is trading ex-dividend, its price decreases by the amount of the dividend, and the investor does not come out ahead.

BREAKING DOWN 'Dividend Selling'

Dividend selling makes the investor worse off for two reasons. First, he has lost the commission he paid, and commissions to full-service brokers who make stock recommendations are expensive. Second, he may have a short-term tax liability because of the dividend. An honest broker would advise the client to buy the stock after the dividend had been paid to avoid the tax liability, and the broker would only suggest the stock if its fundamentals recommended it for purchase.

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RELATED FAQS
  1. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
  2. Is dividend income taxable?

    Dividend income is taxable but it is taxed in different ways depending on whether the dividends are qualified or nonqualified. ... Read Full Answer >>
  3. How do dividends affect net asset value (NAV) in mutual funds?

    Distribution of dividends reduces the net asset value (NAV) of mutual fund shares. However, this doesn't mean that fund investors ... Read Full Answer >>
  4. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  5. Who actually declares a dividend?

    It is a company's board of directors who actually declares a dividend. The declaration date is the first of four important ... Read Full Answer >>
  6. Where exactly do dividends come from?

    Companies pay dividends in cash, which typically come from the companies' cash flows from operations by selling goods and ... Read Full Answer >>

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