Is it better to miss the dividend and buy the undervalued stock?
The stock tends to drop by the amount of the dividend -- or if you prefer to think of it this way, the stock price has been pushed up by the amount of the dividend before it was paid out. Really, all this shift does is factor out the impending dividend's effect on the real purchase cost of the stock. As such it's pretty much irrelevant except that, of course, the dividend is short-term gain that you have to pay taxes on almost immediately. Which also tends to get figured into the price folks are willing to pay for the stock. Conclusion: no, there's no real opportunity here. There's a slight tax reason to avoid buying right before dividends are paid, but that's about it. Basic principle: If it's simple and obvious,the market has already accounted for it. I guess the answer lies in your tax jurisdiction (different countries tax capital gains and income differently) and your particular tax situation. If the price of the stock goes up or down between when you buy and sell then this counts for tax purposes as a capital gain or loss. If you receive a dividend then this counts as income.  So, for instance, if you pay tax on income but not on capital gains (or perhaps at a lower rate on capital gains) then it would pay you to sell immediately before the stock goes ex-dividend and buy back immediately after thereby making a capital gain instead of receiving income. As yet another explanation of why it does not really matter, you can look at this from the valuation point of view. Stock price is the present value of its future cash flows (be it free cash flow of the firm or dividends, depending on the model). Let's have a look at the dividends case. Imagine, the price of the stock is based on only three dividends streams $5 dollars each: dividend to be paid today, in year 1, and in year 2. Each should be discounted back to today (say, at 10%), except today's dividend, since today is now.  Once that dividend is paid, it is no longer in the stream of cash flows. So if we just delete that first $5 from the formula, the price will adjust itself down by the amount of the dividend to $8.68. NOTE that this is a very simple example, since in reality cash flows streams are arguably infinite and because there are many other factors affecting stock price. But simply for your understanding, this example should provide you with the reason simply from the valuation perspective.
It depends how deep in the money it is, compared to the dividend.  Even an in the money call has some time premium. As the call holder, if I exercise instead of selling the call, I am trading the potential for a dividend, which I won't receive, for getting that time premium back by selling.  Given the above, you'll notice a slight distortion in options pricing as a dividend date approaches, as the option will reflect not just the time premium, but the fact that exercising with grab the dividend.  Edit to address your comment - $10 stock, $9 strike, 50 cent div. If the option price is high, say $2, because there's a year till expiration, exercising makes no sense. If it's just $1.10, I gain 40 cents by exercising and selling after the dividend. "A dividend is one method of returning value to shareholders, some companies pay richer dividends than others; some companies don't typically pay a dividend.  Understand that shareholders are owners of a company.  When you buy a stock you now own a portion (albeit an extremely small portion) of that company. It is up to you to determine whether holding stock in a company is worth the risk inherent to equity investing over simply holding treasury notes or some other comparable no risk investment like bank savings or CDs.   Investing isn't really intended to change your current life.  A common phrase is ""investing in tomorrow.""  It's about holding on to money so you'll have it for tomorrow.  It's about putting your money to work for you today, so you'll have it tomorrow.  It's all about the future, not your current life." "If a stock is trading for $11 per share just before a $1 per share dividend is declared, then the share price drops to $10 per share immediately following the declaration. If you owned 100 shares (valued at $1100) before the dividend was declared, then you still own 100 shares (now valued at $1000). Generally, if the dividend is paid today, only the owners of shares as of yesterday evening (or the day before maybe) get paid the dividend. If you bought those 100 shares only this morning, the dividend gets paid to the seller (who owned the stock until yesterday evening), not to you. You just ""bought a dividend:"" paying $1100 for 100 shares that are worth only $1000 at the end of the day, whereas if you had just been a little less eager to purchase right now, you could have bought those 100 shares for only $1000. But, looking at the bright side, if you bought the shares earlier than yesterday, you get paid the dividend.  So, assuming that you bought the shares in timely fashion, your holdings just lost value and are worth only $1000.  What you do have is the promise that in a couple of days time, you will be paid $100 as the dividend, thus restoring the asset value back to what it was earlier.  Now, if you had asked your broker to re-invest the dividend back into the same stock, then, assuming that the stock price did not change in the interim due to normal market fluctuations, you would get another 10 shares for that $100 dividend making the value of your investment $1100 again (110 shares at $10 each), exactly what it was before the dividend was paid. If you didn't choose to reinvest the dividend, you would still have the 100 shares (worth $1000) plus $100 cash. So, regardless of what other investors choose to do, your asset value does not change as a result of the dividend.  What does change is your net worth because that dividend amount is taxable (regardless of whether you chose to reinvest or not) and so your (tax) liability just increased." "Your chance of even correctly recognizing the actual lowest point of a dip are essentially zero, so if you try to time the market, you'll most likely not get the ""buy cheap"" part perfectly right. And as you write yourself, while you wait for the dip, you have an ongoing opportunity cost. Cost averaging is by far the best strategy for non-professional and risk averse investors to deal with this. And yes, over the long run, it's far more important to invest at all than when you do it." If a company is valued correctly, then paying dividends should lower the share price, and buying back shares should leave the share price unchanged.  If the share price is $100, and the company pays a $10 dividend, then either its cash goes down by $10 per share, it is has to borrow money for the same amount, or some mixture. Either way, the value of the company has gone down by $10 per share.  If the share price is $100, and the company buys back 10 percent of its shares, then it also has to find the money, just as for the dividend, and the value of the company goes down by 10 percent. However, the number of shares also goes down by 10 percent, so the amount of value per share is the same, and the share price should stay unchanged.  Now there are psychological effects. Many people like getting paid dividends, so they will want to own shares of a company paying dividends, so the share price goes up. Similar with a share buyback; the fact that someone buys huge amounts of shares drives the price up. Both effects are purely psychological.  A buyback has another effect if the shares are not valued correctly. If the company is worth $100 per share but for some reason the shareprice is down to $50, then after the buyback the value per share has even gone up. Basically the company buys from stupid investors, which increases the value for clever investors holding on to their shares. If the shareprice were $200, then buying back shares would be a stupid move for the company. "The stock should fall by approximately the amount of the dividend as that is what is paid out. If you have a stock trading at $10/share and it pays a $1/share dividend, the price should drop to $9 as what was trading before the dividend was paid would be both the dividend and the stock itself. If the person bought just for the dividend then it would likely be neutral as there isn't anything extra to be gained. Consider if this wasn't the case. Wouldn't one be able to buy a stock a few days before the dividend and sell just after for a nice profit? That doesn't make sense and is the reason for the drop in price. Similarly, if a stock has a split or spin-off there may be changes in the price to reflect that adjustment in value of the company. If I give you 2 nickels for a dime, the overall value is still 10 cents though this would be 2 coins instead of one. Some charts may show a ""Dividend adjusted"" price to factor out these transactions so be careful of what prices are quoted." "Their is no arbitrage opportunity with ""buying dividends."" You're buying a taxable event. This is a largely misunderstood topic. The stock always drops by the amount if the dividend on the ex date. The stock opens that day trading ""ex"" (excluding) the dividend. It then pays out later based in the shareholders on record.  There is a lot of talk about price movement and value here. That can happen but it's from trading not from the dividend per se. Yes sometimes you do see a stock pop the day prior to ex date because people are buying the stock for the dividend but the trading aspect of a stock is determined by supply and demand from people trading the stock.  The dividends are paid out from the owners equity section of the balance sheet. This is a return of equity to shareholders. The idea is to give owners of the company some of their investment back (from when they bought the stock) without having the owners sell the shares of the company. After all if it's a good company you want to keep holding it so it will appreciate.  Another similar way to think of it is like a bonds interest payment.  People sometimes forget when trading that these are actual companies meant to be invested in. Your buying an ownership in the company with your cash.  It really makes no difference to buy the dividend or not, all other things constant. Though market activity can add or lose value from trading as normal." Stephen's answer is the 100% correct one made with the common Economics assumption, that people are rational. A company that never has paid dividends, is still worth something to people because of its potential to start paying dividends later and it is often better to grow now and payoff later. However, the actual answer is much more disapointing, because people are not rational and the stock market is no longer about investing in companies or earning dividends. Most of the value of a stock is for the same reason that gold, stamps, coins and bitcoins, and Australian houses are worth anything, that is, because enough people say it is worth something*. Even stocks that pay dividends, very few people buy it for dividends. They buy it because they believe someone else will be willing to buy it for slightly more, shortly after. Different traders have different timeframes, ranging from seconds to months. *Houses and stock are of course partially valuable due to the fundamentals, but the major reason they are purchased is just to resell at a profit. You should never invest in a stock just for the dividend. Dividends are not guaranteed. I have seen some companies that are paying close to 10% dividends but are losing money and have to borrow funds just to maintain the dividends. How long can these companies continue paying dividends at this rate or at all. Would you keep investing in a stock paying 10% dividends per year where the share price is falling 20% per year? I know I wouldn't. Some high dividend paying stocks also tend to grow a lot slower than lower or non dividend paying stocks. You should look at the total return - both dividend yield and capital return combined to make a better decision. You should also never stay in a stock which is falling drastically just because it pays a dividend. I would never stay in a stock that falls 20%, 30%, 50% or more just because I am getting a 5% dividend. Regarding taxation, some countries may have special taxation rules when it comes to dividends just like they may have special taxation rules for longer term capital gains compared to shorter term capital gains. Again no one should use taxation as the main purpose to make an investment decision. You should factor taxation into your decision but it should never be the determining factor of your decisions. No one has ever become poor in making a gain and paying some tax, but many people have lost a great portion of their capital by not selling a stock when it has lost 50% or more of its value. "Share prices change (or not) when shares are bought and sold. Unless he's sitting on a large percentage of the total shares, the fact that he isn't selling or buying means he's having no effect ar all on the stock price, and unless there's a vote war going on in the annual meeting his few stockholder votes aren't likely to have much effect there either (though there's always the outside chance of his being a tiebreaker). On the other hand, there's nothing inherently wrong with holding shares for a very long time and just taking the dividends (""clipping coupons""). Buy-and-hold is a legitimate strategy. Basically: His reason is wrong, but his action may be right, and you should probably just not ask." It is a bit more complicated than whether it pays more or less dividends. You should make your decision based on how well the company is performing both fundamentally and technically. Concentrating mainly on the fundamental performance for this question, most good and healthy companies make enough profits to both pay out dividends and invest back into the company to keep growing the company and profits. In fact a good indication of a well performing company is when their dividend per share and earnings per share are both growing each year and the dividends per share are less than the earnings per share (that way you know dividends are being paid out from new profits and not existing cash holdings). This information can give you an indication of both a stable and growing company. I would rather invest in a company that pays little or no dividends but is increasing profits and growing year after year than a company that pays higher dividends but its profits are decreasing year after year. How long will the company continue to pay dividends for, if it starts making less and less profits to pay them with? You should never invest in a company solely because they pay dividends, if you do you will end up losing money. It is no use making $1 in dividends if you lose $2+ because the share price drops. The annual returns from dividends are often between 1% and 6%, and, in some cases, up to 10%. However, annual returns from capital gains can be 20%, 50%, 100% or more for a stable and growing company. You should not buy soley for the dividend. The price of BHP is going down for a reason. If you hold until the full years dividend is paid you will make 11% (which is $110 if you bought $1000 worth of shares), but if the share price keeps dropping, you might lose 50% on the stock. So you make $110 on dividends but lose $500 on stock price drop. A perfect way to lose money. Your strategy of longing company(a) and shorting company(b) is flawed as the prices of company(a) and company(b) can both increase and though you are right , you will lose money due to the shorting strategy. You should not engage in pair trading , which is normally used for arbitrage purposes You should just buy company(a) since you believed its a better company compared to company(b) , its as simple as that You might be right about that, but your previous posts don't say that.  In just the last one you said:  &gt;Because buyback decreases shares outstanding it **also decreases the company's total future dividend payouts as well**  This is indicating that you believe there is a difference somehow, no? Yes, the Fed has made a point of buying up longer-term bonds to push down rates on that part of the curve.  That's not an indication that they're having problems selling Treasuries, in fact far from it.  But apparently there's no demand for Treasuries and Bloomberg is just making up lies to help get Obama reelected?  &gt;Investors are plowing into Treasuries (USB2YBC) at a record pace as the supply of the world’s safest securities dwindles, ensuring yields will stay low regardless of whether the Federal Reserve  undertakes more stimulus to fight unemployment. Buyers bid $3.19 for each dollar of the $538 billion in notes and bonds sold this year, the most since the government began releasing the data in 1992 and on pace to beat the high of $3.04 in 2011. The net amount of Treasuries available will decline by 30 percent once proceeds from maturing securities are reinvested, according to data from CRT Capital Group LLC.  http://www.bloomberg.com/news/2012-04-09/record-treasury-demand-keeps-yields-low-as-supply-shrinks.html