Dividend Arbitrage

If the stock market were perfectly efficient, the share price of a dividend paying stock would rise gradually over the quarter by the amount of the dividend, then drop overnight as the stock goes ex-dividend. As an example, a stock that pays a $0.25 dividend and trades at $50.00 (after paying the dividend) would gradually rise $0.004 per day until it’s worth $50.25 on the record date. It would then fall back to $50.00. The market is not efficient, and stock prices are erratic. Is there an opportunity for arbitrage?

Various stocks that pay quarterly dividends have a variety of payment dates. It is possible to collect a number of divdends by buying stocks before the record date and selling after the ex-dividend date. This would only make sense if the value that was gained in dividends were not lost in market value. After a summary review, I found 20 stocks with different dividend dates and an average annual yield of 4%. If an investor bought each stock in turn and experienced no capital loss, over four quarters he would earn 80% in a year. That is, of course, unrealistic.

There’s a mutual fund that does this, getting 5 dividends per year. That would boost the income from 4% to 5%, which may not be worth the cost. First, it would require very liquid stocks, in order to be able to quickly buy and sell a large amount. Second, it would require low transaction costs. If an investor tried to get 12 dividends a quarter, she would place 24 transactions (12 buys and 12 sells). This must not cost more than the expected benefit. Third are tax implications. Dividends are taxable, as are capital gains, so this strategy would work best in a tax-sheltered account.

Here are a few examples from the recent past:

  • TD paid a $0.61 dividend Jan 4 and the share price dropped $0.25. It recovered in three days.
  • RET.A paid a $0.20 dividend Jan 5 and the share price dropped $0.10. It was trending downward.
  • AGF.B paid a $0.26 dividend Jan 7 and the share price dropped $0.32. It recovered within two days.
  • RY paid a $0.50 dividend Jan 24 and the share price dropped $0.53. It recovered within four days.
  • BMO paid a $0.70 dividend Jan 28 and the share price dropped $1.50. It recovered within four days.

This is an idea that I’m going to look at closer. It is my goal to find 12 stocks paying a quarterly dividend, each in a different week, and track the performance of fantasy trades. As a note, this could work with preferred shares, but I believe those are much less liquid.

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One thought on “Dividend Arbitrage

  1. To really be sure you would need to look at the opposite case as well – for example how frequently does TD jump $0.36 in one day (which is effectively what happened when it didn’t adjust by the dividend amount)? A quick scan shows several instances in the last 2 weeks.

    Any effect that’s smaller than the buy and sell commissions could persist for a long time. To be profitable this needs to average a difference significantly greater than the impact of commissions although even a small difference could add up to a reasonable percentage gain if it only takes a day to do.

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