Making money from stock dividends takes a little time

By
USA Today
September 11, 2008, 5:54 PM ET
2 min read

— -- Q: Couldn't investors just buy a stock when a dividend is declared, sell the stock, keep the dividend and make an easy profit?

A: Talk about free money. That would be a great if it worked.

Find a stock that has declared a dividend, buy it just in time to become entitled to the dividend and then sell the stock the next day. All that's left to do is wait a few weeks for the dividend check to arrive. Now, wasn't that easy?

In practice, it doesn't work that way. Here's why: All things being equal, the price of the stock will fall by roughly the value of the dividend when the stock goes "ex-dividend." That is, when a buyer of the stock is no longer entitled to the dividend.

Buyers are well aware of a stock's ex-dividend date, and will knock down the value of the stock accordingly if they can't claim the dividend.

For example, look at KBW Regional Banking exchange-traded fund kre. The ETF declared a dividend of 16.44 cents a share, payable to shareholders of record before June 20, 2008. The stock closed June 19 at $28.62. To get the dividend, you would have had to buy the stock before the close of trading June 19.

Now, here's why your plan wouldn't work. The next day, when the stock went ex-dividend, the share price fell 15 cents to $28.47. That means if you sold the stock the next day, as you propose, the price decline would have eaten nearly all the dividend. Plus, you would have broker commissions and fees to pay.

In many cases a stock falls by more than the value of the dividend. Let's say the market was down sharply June 20, and your ETF shares crumbled by 50 cents a share. You'd end up losing money.

Great idea, but the market doesn't let investors take profits that easily.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.