What Does it Mean To Sell Dividends?

Selling dividends refers to selling shares of a mutual fund right before the fund pays a dividend distribution. We know that when a mutual fund pays a dividend, the NAV price is reduced by the dividend amount (somewhat similar to how a stock price decreases after a dividend payment). Therefor, if you purchased mutual fund shares before a dividend payout, your shares would automatically decrease in value- this is a bad thing. In addition to that, you would have to pay taxes on the dividend you just received. Remember that dividends are a good thing, but only when you also have realized long term gains.

For example, you buy $5,000 of a mutual fund right before the mutual fund pays a 2% dividend. On the dividend payout date the mutual fund's shares are reduced in price by 2%. Your fund account balance is now $4,900 after only one day and you have to pay tax on the 2% dividend you just received. So not only will you lose money, but you will pay taxes on the money you lose- this is bad. After experiencing this you are no so happy with your broker for not informing you of this dividend before you bought the shares. The story ends with two not so happy individuals because theoretically you might just think about suing your broker.


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