A stock pays a dividend to shareholders who own the stock by the "record date," which is set by the company. The stock exchange then sets an "ex-dividend" date, usually two business days before the record date. If you jump into the stock on or after the ex-dividend date, you don't get the dividend. You could buy before that date, qualify for the dividend by holding until the record date and then dump the stock, but this can be risky.
Price Drop After Dividend
When a stock hits the ex-dividend date, the price typically drops by the amount of the dividend. For example, a $25 stock that pays a $2 dividend would drop to $23 a share on the ex-dividend date. The stock price could sink even further than the dividend amount. During the ex-dividend period, a stock can be volatile while new buyers try to figure out a good price for the stock without its dividend.
Price Rise After Dividend
Occasionally, a stock shows such promise that the price doesn't drop on the ex-dividend date. In such a case, buyers anticipate even better dividends in the future, so they are willing to pay higher prices for the stock. In other cases, the price may drop a little, but not as much as the dividend, indicating buyers spot potential for higher dividends soon.
When to Sell
If you buy a stock, get the dividend and then unload your shares for a price that has the dividend taken out, you have only broken even. However, if your stock jumps up in price despite reaching the ex-dividend date, you could consider selling it, as long as you hold it through the record date two business days later. If a stock's price neither rises nor falls, you could consider selling just to pocket the dividends and break even on the stock price itself.
You could also consider selling a month or so down the road, when the stock has had more time to recover. However, you pay your broker fees when you buy and sell. If your profit doesn't pay for your fees, you aren't getting anywhere.
Holding the Stock
If you are able to qualify for the dividend and sell the stock for a profit immediately after the record date, you have a dilemma. A stock that is strong could be worth keeping. You could hold onto it and reap future dividends while also seeing a rise in your stock price. In other words, if your strategy of buying before the dividend and then selling works, you could be cheating yourself out of future gains.
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Writer Bio
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.