Dividend Selling
What Is Dividend Selling?
Dividend selling alludes to an unscrupulous sales strategy utilized by some deceptive brokerage firms. It comprises of suggesting the purchase of a dividend-paying company to a client, in practically no time before the payment date of that dividend.
This sales pitch, which would normally be made to financially unsophisticated clients, includes conveying the impression that the dividend payment comprises a form of free income for the client. In reality, this impression is profoundly deceptive on the grounds that the market price of dividend-paying shares generally diminishes by an amount equivalent to the dividend payment not long from now following the payment date.
According to the broker's point of view, such transactions can be a simple approach to over and again create commission revenue — regardless of the way that they are not in the client's best interest. As needs be, dividend selling is disliked by those in the investment management industry.
How Dividend Selling Works
Dividend selling is an exploitative sales strategy that includes persuading a client to purchase a stock because it will before long pay a dividend. While speaking with the client, the broker persuades them to think that such a purchase would be to their greatest advantage in light of the probably free income that the dividend would give. In practice, notwithstanding, this is basically false.
Generally talking, financial markets are very efficient at re-valuing the shares of dividend-paying companies once their dividend has been paid. Since the price of a stock is generally seen as mirroring the present value of its future cashflows, it's a good idea for investors to discount its shares once one of those future sources of income — the dividend being referred to — has previously been paid to investors.
Albeit most investors will be know about this reality, and would subsequently not be convinced by the dividend selling sales pitch, this may not be true for moderately unsophisticated investors who are depending on their brokers as investment advisors. The risk might be especially articulated for elderly investors who are depending on their stock portfolios for retirement income. For such investors, the commitment of a free dividend could be particularly tempting, making them powerless against exploitation from deceitful brokers. To exacerbate the situation, the dividend income could produce a tax liability, further hurting the investor being referred to.
Example of Dividend Selling
Emma is a retired person who has invested her retirement savings into a stock portfolio. In dealing with her portfolio, she is profoundly dependent on the counsel of her broker.
At some point, Emma's broker contacts her to suggest that she purchase shares in XYZ Corporation — a company right now trading at $50 per share and which is going to pay out a $1 dividend to its shareholders.
Emma's broker tells her that, on the off chance that she acts rapidly, she can receive the $1 dividend and basically sell the shares to recover her investment. Like that, she can acquire extra income to fund her retirement, with next to no risk to her retirement savings. Thankful for the opportune guidance, Emma agrees to the transaction.
On the ex-dividend date, XYZ's stock declines to $49 per share, as investors change their valuation of the company to mirror the way that its future income stream has declined by $1 per share. This was an anticipated occurrence, which any informed investor would have anticipated. Tragically for Emma, she was the survivor of a deceptive broker who exploited her trust and lack of information.
Features
- Dividend selling is an exploitative sales strategy utilized by certain brokers.
- Dividend selling includes empowering a client to invest in a dividend-paying company deceptively, as a rule to create commission revenue for the broker.
- Elderly investors who depend on their portfolios for retirement income might be particularly helpless against this practice.
