Take the dividend and run?Buy a stock, collect the dividend, dump the stock, make some money. Oh, if it were that easy, says Money Magazine's Answer Guy. NEW YORK (Money Magazine) -- Question: Does it make sense to buy a stock just before it pays a dividend, get the dividend, then sell? Assuming no decline in value, wouldn't that yield a nice quick return? - Richard Ermolovich Answer: If only it were that easy to make a buck on Wall Street.
CDs & Money Market
The problem lies in your assumption that a stock wouldn't decline in value upon paying a dividend. In fact, stocks generally do fall because people are well aware that a shareholder's gain (in the form of dividends) is a company's loss. "The value of a company drops by the amount of cash the company no longer has," explains Barry Ritholtz of research firm Fusion IQ. For example, on the last day in July that you could buy Verizon Communications (Charts, Fortune 500) stock and receive its scheduled 40.5-cent dividend, Verizon shares closed at $41.98. The next morning they opened at $41.54 - 44 cents lower. If you had sold at the opening, you'd be down 3.5 cents a share on the deal (not to mention the tax you'd owe on your dividends, plus your brokerage commissions). In other words, if you're looking for a quick return on your money, keep looking. Question: Why don't you list interest rates for credit union CDs? Is it because account insurance from credit unions isn't as reliable as insurance you'd get from a bank? - Jay Vance, Santa Barbara Answer: The issue here isn't safety. It's that individual credit unions, which can be excellent alternatives to banks, don't let everyone in the door. To make Money Magazine's Savings and Credit listings, a bank must be willing to sell CDs to anybody. But credit unions - member-owned, nonprofit institutions chartered by a state or the federal government - limit their membership to certain populations. Some serve people who live or work in a particular area, such as Mission Fed in San Diego. Others, like Navy Federal, focus on employees of a particular institution and their families. (Go to the Credit Union National Association for help finding a credit union.) In any case, insurance on credit union CDs and other deposits is as good as or better than what you'd get through the FDIC. And credit unions often beat your neighborhood bank on the rates they pay on deposits (or charge for loans). Recently the average annual percentage yield on a one-year CD from large credit unions was 4.98 percent, according to Bankrate.com, compared with 3.35 percent for big banks in major markets. That's quite a difference. Looking for some answers? Send us your questions about investing. E-mail answer_guy@moneymail.com. |
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