OAP 062: Dividend Stocks – Can You Buy Stock Just For The Dividend?

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At least 2-3 times per week I’ll get an email from someone along these lines; “Kirk, why can’t we just buy the best dividend stocks right before the company pays the dividend, and then sell the stock the next day and keep the profit?” Seems like a cool idea, and I’ve definitely seen many smaller blogs peddling this idea to investors, but it might easier said than done.

In today’s show I’ll help you understand the four most important dates you need to know when it comes to dividend investing, including a complete rundown of the fictional arbitrage opportunity that dividend investors are continuously searching for during the ex-dividend date. Plus, I’ll give you an alternative strategy for purchasing the stock at a discount, while reducing your tax liability, as well as the impact of dividend payments on options pricing.

If you’ve got a friend or trading buddy who hasn’t made the jump to options yet and is still cashing “dividend stocks” and “dividend strategies” then this show might be the kick in the butt they need to start options trading. And of course, if you’d share it with them I’d be incredibly thankful!

Four Major Dividend Payout Dates

1. Declaration Date

  • The date on which the board of directors for the company announce to shareholders and the market that the company will pay a dividend.
  • Statement includes how much the dividend is, as well as when all the subsequent dates are going to follow.

2. Ex-Dividend Date

  • The date that the security trades without the influence of the dividend that is going to be paid. Usually it occurs on or after this date.
  • If you buy a dividend stock one day before the ex-dividend date, then you get the dividend. If you buy on the ex-dividend date, then you do not get the dividend.
  • When selling stock, you need to sell on or after the ex-dividend date to collect the dividend payment.

3. The Date of Record

  • The date that the company looks at it's records to see who the shareholders are that are going to be allowed to receive the dividend payout.
  • This happens three days after the Ex-Dividend Date. An investor must be listed as a holder of record to ensure for a dividend payout.

4. Date of Payment/Payable Date

  • The date that the company mails out the dividends or disperses them electronically.
  • This is a week or more after the date of record, which gives the company enough time to make sure they are accurately paying out to all of the appropriate shareholders listed.

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  • Dividend payment announcements come out in the form of press releases to announce the payment dates to both shareholders and the market.
  • Stocks are processed on a T+3 process, which means that when you actually buy a stock it takes three days from the date of transaction for the company to enter you as a shareholder in the record books.
  • Companies want to always make sure that they have the right information on record when making a dividend payment.
  • The company stock decreases by the amount of the dividend on the ex-dividend date. This eliminates the arbitrage opportunity or the free profit opportunity that people think they will get by just purchasing the stock for the dividend.
  • When you take in a dividend payment it creates a tax liability for you. Dividend income is taxable income the following year.
  • As you start trading more and if you have trades that are in the money or very close to being out the money as far as contracts go, it is important to understand what the impact is on the ex-dividend date.

Example:

If a stock is trading at $20 and is going to pay a $1 dividend, that means that the next day the stock should theoretically open around $19 to capture the difference in $1 premium that was paid. So if you bought the stock the day before ex-dividend (which is when you have to buy it if you want to collect the payment) you bought the stock for $20, you collected the $1 premium/dividend that is paid out on the ex-dividend date and then the stock opens at $19. If you sell your stock immediately, you really have no arbitrage opportunity. So buying the stock before the dividend is paid and selling it after gives no value because of this differential in the price of the dividend and the opening price on the ex-dividend date.

Alternative Strategy: 

  • An alternative strategy is to wait to purchase the stock until after the dividend is paid because then you will get in at a lower cost basis in purchasing the stock.
  • It will account for the fact that a dividend is paid, but just wait to purchase the stock the day after the ex-dividend date, after the drop has already happened, and you'll get in on a lower cost basis.
  • If you truly want to hold this stock long term, waiting for one day will get you into it at a lower cost basis and then you can potentially have a higher profit if you are holding it for a longer period of time.

Impact on Options:

  • Call options become less expensive leading up to the ex-dividend date because the expected price drop is going to happen in the amount of the dividend.
  • Call options that are out of the money, are generally going to be a little bit less expensive because they know that they are already pricing in the fall in the underlining stock by the amount of the dividend.
  • As you get closer to the ex-dividend date, the price of put options increase again to price in the expected fall by the amount of the premium/dividend paid.
  • On both sides of the market, the market is effectively and efficiently pricing in this future expectation of this price drop.
  • End result: in the simplest terms, there is no arbitrage opportunity that can be derived from buying stock options for the dividend.

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2. Are most of the Option Alpha strategies that we learn and apply on a stock or ETF, also applicable on indexes or futures?

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  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.