Dividend Selling Definition

What Is Dividend Selling?

Dividend selling refers to a unethical product sales tactic used by some unethical brokerage firms. It’s composed of recommending the purchase of a dividend-paying company to a client, shortly quicker than the fee date of that dividend.

This product sales pitch, which would possibly typically be made to financially unsophisticated consumers, involves conveying the affect that the dividend price constitutes a kind of free income for the client. If truth be told, this affect may be very misleading because the market price of dividend-paying shares generally decreases thru an amount similar to the dividend price shortly following the fee date.

From the broker’s standpoint, such transactions can also be a very easy option to over and over generate price source of revenue—although they don’t seem to be inside the consumer’s highest pastime. Accordingly, dividend selling is frowned upon throughout the ones inside the investment keep watch over industry.

How Dividend Selling Works

Dividend selling is a unethical product sales tactic that involves convincing a client to shop for a stock on the grounds that it’s going to temporarily pay a dividend. When talking with the client, the broker leads them to believe that this type of achieve may well be in their highest pastime because of the supposedly free income that the dividend would provide. In apply, however, this is simply false.

Typically speaking, financial markets are very surroundings pleasant at re-pricing the shares of dividend-paying firms once their dividend has been paid. On account of the price of a stock is generally thought to be as reflecting the present price of its longer term cashflows, it’s sensible for consumers to discount its shares once a type of longer term cashflows—the dividend in question—has already been paid to consumers. 

Despite the fact that most consumers it will be aware of this fact, and would because of this reality not be persuaded throughout the dividend selling product sales pitch, this will not be true for relatively unsophisticated consumers who are relying on their brokers as investment advisors. The chance is also particularly pronounced for elderly consumers who are relying on their stock portfolios for retirement income. For such consumers, the promise of a free dividend could be in particular enticing, making them susceptible to exploitation from unscrupulous brokers. To make problems worse, the dividend income might simply generate a tax prison accountability, further harming the investor in question.

Example of Dividend Selling

Emma is a retiree who has invested her retirement monetary financial savings proper right into a stock portfolio. In managing her portfolio, she may be very reliant on the advice of her broker.

Someday, Emma’s broker contacts her to suggest that she achieve shares in XYZ Corporate—a company this present day purchasing and promoting at $50 in keeping with share and which is about to pay out a $1 dividend to its shareholders.

Emma’s broker tells her that, if she acts quickly, she’s going to download the $1 dividend and then simply advertise the shares to recover her investment. That way, she’s going to obtain additional income to fund her retirement, without any likelihood to her retirement monetary financial savings. Grateful for the neatly timed advice, Emma sees eye to eye to the transaction.

On the ex-dividend date, XYZ’s stock declines to $49 in keeping with share, as consumers keep watch over their valuation of the company to reflect the fact that its longer term income flow into has declined thru $1 in keeping with share. This was once a predictable incidence, which any an expert investor would have anticipated. Unfortunately for Emma, she was once the victim of an unethical broker who exploited her consider and lack of information.