Testing Whether You Can Buy Shares the Day Before A Dividend is Earned and Sell the Day After

A few months ago I pompously dismissed the suggestion that you can buy a stock the day before the dividend is earned and sell the day after without ever testing the idea. Recently I ran a test.

How I Got Suckered

I made the mistake of looking at the ex-dividend dates of several reliable, high paying, blue chip stocks at the same time. They were all spaced 5 or more days apart. So in theory, you could buy one stock, hold till it went ex-dividend, sell, buy the next, rinse and repeat. You could invest the same money about 4 times in one month and pick up 4 quarterly dividends ranging from 3.5%-5%. Sounds cool right?

Now of course the price for a stock will drop by the same amount as the dividend payment as soon as it goes ex-dividend. But these stocks, though blue chip, are highly traded. You could see that historically they bounced around more on a weekly basis than the amount of the dividend.

So they should bounce right back up in price, right?


Where I Went Right

I chose to make the test using BCE. Ma Bell pays a dividend of over 5% and is a strong large blue chip company. (So was Nortel.) If the market was to collapse tomorrow, BCE would probably recover within 5 years, which is before I need the money from the test account.

Where I Went Wrong

I got greedy. I bet the farm, the wood lot, the mineral rights, and the guinea pigs.
Instead of running the test with one share or even one hundred shares, I bet 1035 shares.
Between the two sales commissions and the fact you’d only get a quarterly dividend it didn’t seem practical to invest a small amount for the test.

And yes, I could have just kept track of the stock price on paper. In fact, that’s what I really did. Honest. I didn’t try to juggle acetone peroxide detonators with my bare hands. What’s that? Oh I’ve always been short a finger on that hand.

So when the shares tanked I had no cash to play with in the account. If a harsh market correction had occurred, if I’d had a good chunk of cash, I could have bought shares in defensive stocks (or a low MER full-market ETF) and as it rose in value again, I would have had something to counterbalance the massively overpriced BCE shares.

Like many people who lost their savings when bubbles popped, however, by buying all at once near the top, I risked having to try to hang tight for years with no profit hoping for a rebound. Not a way to sleep comfortably at night—for years.

Where I Got Lucky

It is purely luck that the stock market headed the direction it did and within two months brought the BCE share price back up to the price at which I made the purchase. If I had bought these shares in say early 2008, I could have had a very long wait to see the numbers flip back into the green on my investment.

Remember, people in 2008 didn’t see the market crash coming either. It’s like when a transport crosses the grassy median between the lanes on the 401 on a foggy morning: You can’t see a market collapse coming before you’re staring into the headlights of a big rig coming straight at you out of the gloom at 110 km/h.

I was very lucky. Like Lucy, I nearly had some s‘plainin’ to do to my husband. (I did confess, of course, already. What can I say? He plied me with chocolate.)

Unfortunately, most of us are not lucky all the time. Or even more than half the time. (I do know some people who are unlucky more than half the time, though.) I don’t think I’ll push my luck and try this ever again. Even if BMO is about to go ex-dividend April 29…..

What Happened to the Share Price?

  • I bought on March 10.
  • On March 12 BCE went ex-dividend.
  • Then it began to plummet.
  • On April 2, I gave up and sold half of my position for an overall profit but at a price per share lower than I had paid for the stock. (e.g. the dividend for those shares would offset the capital loss)
  • On April 15 the stock returned, very briefly, to the price I had purchased it at.
  • On April 16, I received the dividend payment.
  • On April 17, the stock climbed enough above the purchase price to sell the rest of my position and break even on the capital cost plus the trading commissions. I ended up with a total event capital gain of $0.20 and the entire dividend.

Was It Worth the Stress for Over a Month?

No. There are much calmer ways to make $600. Like working as a pothole repair person on the 401 in the middle lanes near Toronto.

Is Any of This True?

Right now you may be wondering whether this article was posted on April 1.

All I’ll say is it should have been.

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Have you ever invested way too much in one stock only to live the life for the next few weeks of the 12-cups-a-morning caffeine addict who can’t get anything stronger than a cup of herbal tea? Please share your words of financial hindsight wisdom with a comment.

2 thoughts on “Testing Whether You Can Buy Shares the Day Before A Dividend is Earned and Sell the Day After

  1. The difference between trading and investing could perhaps be explained with the use of this example… Nice event accounting – Cheers.

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