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The problem with dividend selling

On Behalf of | Jul 26, 2019 | Representing Investors |

One potential issue you could run into with your broker is if they tell you to quickly buy a specific stock because the company is about to pay out a dividend on that stock. Brokers will sometimes act as if this gives you a fast, easy way to make money, or they’ll even present it as an upcoming gain — saying you can get a fast 5% return, for instance.

The practice of dividend selling typically only benefits the broker. They get a commission because of the sale.

The problem is that you’re not going to see that 5% return. You’re just going to get the dividend. After you do, because of that very same dividend, the stock falls. The drop is equal to the dividend, directly taking away from the current stock trading price.

If you bought it at $50, for instance, and the dividend was $1, you now own a $49 stock and you have one dollar in return. Your stock instantly lost value. You would have potentially made more if you waited for the dividend payout and then bought the stock, anticipating a correction to its original value over time.

Another problem is that getting a dividend can create a tax liability. Not only are you buying just before the stock falls, but you have to pay income taxes on the dividend, so your “return” is even lower than it appears to be.

Of course, the broker still gets their commission, and they may have been dishonest with you for that purpose. If so, make sure you understand your legal options.

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