What happens if you buy a stock between the ex-dividend date and the dividend date?

January 25, 2006 1:36 PM

What happens if you buy a stock between the ex-dividend date and the dividend date?

Ameritrade just issued a $6 per share dividend. The dividend was issued today and the ex-dividend date was like a week ago. Of course, immediately after issuing the dividend, the stock price dropped $6, from $25 to $19. So what happens to the poor guy who bought it yesterday? His share prices drop $6 each and he doesn't get the dividend? Are there any special considerations here to prevent people from taking this loss or is it just a bad idea to buy between the ex-dividend date and dividend date? If it's the latter, why do stocks have any volume at all between these dates?

posted by b_thinky to work & money (8 comments total)

I still don't understand dividends, but you can take a look at an earlier question about MS's dividend last year.
posted by pwb503 at 2:03 PM on January 25, 2006

Stocks typically drop on the ex-div (literally "without dividend") date, not the date the dividend was issued or the record date of the dividend. Stock listings often show this change as an "adjusted closing price", where they list the actual closing price and the price that the stock would be if you added back in the dividend purchasers would not get on that day. The dividend itself may come along more than a month after the ex-div date.

However, stocks don't always drop, and sometimes they drop more than the amount of the dividend. In my time purchasing stocks, I've both bought a dividend (purchased right before ex-div date) and bought right after the ex-div, but before the dividend was distributed. Why shouldn't one buy in that time if they see a good deal? It's the same as purchasing at any other time. You simply consider the dividend as part of the overall stock value equation.

To answer a question you didn't ask, sometimes sellers screw up the idea of the three different ex-div, record, and distribution dates, and on the rare occasion you can take advantage of that. I once sold a stock with a hefty dividend on its ex-div date after the price went up for no apparent reason. Of course, you have a few million other people looking for opportunities like that, so nobody gets rich off a few peoples' misfires. And people who make dividend plays almost always know what they are doing; a lot of the ignorant or stupid stock investors were flushed out of the game when the stock market bubble burst a few years ago.
posted by mdevore at 2:08 PM on January 25, 2006

On the ex-div date the stock drops (approximately) by the dividend amount since, obviously the buyer will no longer be entitled to the dividend. But the physical payment of the dividend should not have any impact on the price itself, why would it? So the buyer that bought it the day before the payment date knows that he will not receive it but is buying at a lower price because of this.

Of course, the markets are not perfect, but in theory nobody loses and you cannot arbitrage with dividend payments.
posted by keijo at 2:15 PM on January 25, 2006

All that makes sense in general but this particular case it is still puzzling. Ameritrade's ex-dividend date was Jan 12th. The stock was adjusted down 6 points today. No confused investors to blame.

The only thing I can think of is that the ex-dividend date is incorrect and that there are special circumstance since this dividend is solely due to an acquisition.
posted by smackfu at 2:27 PM on January 25, 2006

mdevore and keijo, your answers make sense but Yahoo Finance must be screwed up. They list ex-div as Jan 12 and Dividend Date as Jan 24 (today). Looking at the 5 day chart, it shows an instantaneous drop of $6 between yesterday's close and today's open but an adjusted close yesterday of $20.10.

So if Yahoo is to be believed, if I bought a share yesterday I would have paid $25 and today it would only be worth $19 and I'd have no $6 dividend to show for it.

I'm thinking Yahoo just screwed up...
posted by b_thinky at 2:32 PM on January 25, 2006

Well if it is an instantenous drop of the same amount than the divvie, it sounds very strange to me. Prolly a mistake. Check some other source?
posted by keijo at 2:38 PM on January 25, 2006

Simple answer on this one, Yahoo is wrong. They not infrequently are with respect to dividend dates, particularly special dividends like this one. Here's the relevant quote from the Ameritrade press release: "The Company expects the payable date for the special dividend to be on the closing date and the ex-dividend date (the date on and after which the stock trades without the right to receive the dividend) to be the first trading day following the payable date."

Special dividends often have their own ex-div rules and can't be counted on to behave the same as regular dividends.
posted by mdevore at 2:41 PM on January 25, 2006

Trust me, for what it is worth Yahoo screws things up now and then. I've been notified by Yahoo that a stock in my portfolio has had a stock split, nearly a year after the split happened on more than one occasion.
posted by pwb503 at 2:42 PM on January 25, 2006