Buying just before the ex-dividend date does not get you a free dividend
The price opens lower by roughly the dividend, because the buyer no longer gets it. You have not been paid, you have been given change. And the rule that removes the one thing which could have saved the idea was written by people who had already thought of it.
The idea arrives on its own, usually in the first year, and it arrives with the particular glow of something nobody else has noticed. A company is about to pay a dividend. Buy the day before the ex date. Collect the payment. Sell. Do it again next month, and the month after, across the whole calendar, while the rest of the market stands around not thinking of it.
It does not work. The reason is more interesting than the fact, which is lucky, because the fact is very boring.
What happens on the morning of the ex date
The price opens lower by roughly the dividend.
This is not the market reacting. It is not sentiment, or profit taking, or any of the other phrases people reach for when a price moves and they would rather not say they do not know why. Anyone buying from that morning onward does not receive the payment. So they do not pay for it. The price now describes a different thing than it did yesterday, and it has been adjusted to say so.
The exchange does not even wait to find out. It reaches into the order book overnight and marks resting orders down, because a limit order placed last week was placed against a share that included a payment the share no longer includes. Nobody is expressing an opinion. It is bookkeeping.
The arithmetic, which takes one line
A share at A$10.00 is about to pay 30 cents. You buy the day before at A$10.00. The next morning you hold about A$9.70 of share and you are owed 30 cents.
Ten dollars yesterday. Ten dollars today, in two pieces. You have not been paid. You have been given change.
Which points at the thing underneath, the one worth more than the strategy it demolishes. A dividend is not a bonus attached to owning a share. It is a withdrawal from the company that issued it, and the share is worth less afterwards by approximately what left. Everybody nods at that sentence. Almost nobody believes it. Which is precisely why the idea keeps arriving, every year, in good faith, to new people.
Then you pay for things
Breaking even is the best case and you do not get the best case.
Brokerage goes out twice. You cross the spread twice, which is a genuine cost that never appears on a statement and is therefore the only kind most people never count. And you have taken a holding that nobody was taxing and converted it into income, in a year, on purpose.
So the method turns a neutral transaction into a reliably negative one, deliberately, on a schedule, for as long as you keep it up.
Show the numbers
| Value | |
|---|---|
| The dividend | A$300 |
| The price drop | −A$300 |
| Brokerage, twice | −A$20 |
| The spread, twice | −A$20 |
| Tax on the dividend | −A$90 |
| What you're left with | −A$130 |
The sale also books a A$300 capital loss, which can only be used against capital gains, so it sits there until you have some. Meanwhile the dividend was income, taxed this year.
The one thing that could have saved it
Franking. If the payment arrived with credits attached, the arithmetic might have survived the friction, because the gross up is worth real money.
Credits generally require you to have held the shares at risk for 45 days, not counting the day you bought and the day you sold. A trade built on holding for two days across an ex date is precisely the thing that rule was written to describe. There is an exemption where your total credits stay under A$5,000 for the year, which is real, and which is a ceiling rather than a loophole.
The people who wrote it had already thought of this. That is worth sitting with for a moment before the next clever idea.
Why the belief survives anyway
Because the adjustment is invisible inside ordinary movement. A share drops 30 cents for the dividend and rises 40 because the market had a decent morning, and it closes up. The person watching concludes they collected a dividend and a gain and that the whole business is easier than people say.
The drop happened in every one of those cases. It was simply competing with everything else that moves a price on a given day, and it loses roughly half of those arguments, which is more than enough to sustain a belief indefinitely.
A strategy that only works when the market goes up is a bet on the market, carrying two lots of brokerage.
What the date is actually for
It is a deadline. It answers one question, which is whether this particular payment belongs to you or to whoever owns the share tomorrow, and it is not the day the money turns up.
There is a narrow version of the original idea that is true, and it is worth keeping. If you had already decided to buy a company, for reasons that have nothing to do with a date, then buying before the ex date rather than after it brings your first payment months closer. That is a small piece of timing applied to a decision made on other grounds.
Buying because of the date is the error. Noticing it, having bought anyway, is just literacy.
There is no trick in this one either
Dividend Guardian does not time anything and would be worse if it tried. It takes the holdings you actually own, works out what they pay across a year, which months it lands in, and which of your bills that already covers. Unglamorous, and it is the half of this subject that compounds. Start free, with no account and no broker login.
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Build my Dividend PaycheckDividend Guardian provides information and estimates from public data, not personal financial advice, and nothing here is a recommendation to buy, hold or sell anything or to follow or avoid any strategy. The figures above are illustrative arithmetic rather than a real company. Holding period rules, franking and how a sale is taxed depend on your own circumstances, so confirm those with the ATO or a registered tax agent. Guardian reports confirmed changes; it does not predict them.