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?
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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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