Dividend Selling

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
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