Recently I’ve seen some spam related to individual stocks saying things like “Should you buy XYZ Corp for their upcoming dividend?”. Well it’s frankly a silly idea. Here is why.
Let’s say XYZ Corp is going ex-dividend on Monday (ex-dividend means without the current dividend). XYZ’s dividend is .25 cents a share. It closes on Friday at $20. And then weirdly it opens unchanged on Monday at 19.75. What happened to the stock you so cleverly purchased for the dividend?
What happens, is that the stock is considered to be worth .25 cents a share less on Monday then on Friday, so the price is automatically adjusted downward. So there is no way to purchase a stock just to capture one dividend. The price will adjust out your gain.
Now purchasing stocks for dividends (plural) is a really good idea. But since you’re looking forward to many years of dividends, you ignore the dividend date. Instead of course you want to buy that stock at a great price.
One quirk of buying dividend paying stocks. If you place a limit order to buy or sell a stock that might be outstanding through the dividend period, you have to decide if you want the price adjusted or not. If you place a limit order to buy XYZ at $19.90 on Friday, on Monday the price is adjusted down to $19.65 because the dividend is paid out. If you don’t want that adjustment, you need to place a DNR (do not reduce) limit order.