Dividend Arbitrage?
Waste Management announced a quarterly dividend of $0.375/share to shareholders of record 6/6/14 to be paid on 6/20/14.
Can’t I buy WM on 6/5/14, collect the dividend, sell on 6/21/14, and collect a ~0.85% profit? Annualized, that’s an ~18% return. I can do that routinely whenever companies issue a dividend.
What am I missing here?
Implied stock price drop on the ex-date
@HFer_wannabe: It's the exchange that does that? I thought that's what's supposed to happen under the efficient market hypothesis.
If you are short the stock they day before ex, then you will owe the cash dividend out of your account
You would think that, but I remember reading in some Series prep saying that the exchange adjusts the stock. Someone might need to confirm that tho
Yep, exchange adjusts stock for the price of the dividend
So easy a monkey could do it... no actually as mentioned the price drops on ex date and you are forgetting the tax claim on the dividend.
easiest way understand this is take a look at a company that had a large (10-20%) one time dividend. Look at the chart of what happened on ex-date.
You are making a couple incorrect assumptions. First, if you bought the stock on 6/5 you wouldn’t even be entitled to collect the dividend in the first place. If the record date is 6/6 then the ex-dividend date is most likely 6/4, which means you would need to own the stock at the close on 6/3. You can then sell the stock on the ex-dividend date or anytime thereafter and you will collect the dividend on 6/20 (no need to hold the stock until 6/20 as your post implies).
Second, at the open of the ex-dividend date, the stock price will drop $0.375/share to adjust for the dividend. It is not the exchange that does this but the supply/demand of the market participants. If the value of an asset is worth the present value of its future cash flows, a buyer on the ex-dividend date is no longer entitled to the dividend cash flow, so he would correspondingly pay $0.375/share less than he would the day before.
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