The Hidden Stock Market Price of Falling for the Dividend Ruse
- Free-money fallacy can end up being costly, study finds
- Investors tend to use payouts to buy non-dividend stocks
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A favorite theory of financial economists is that stock dividends are a mirage, bait conjured by companies to create the illusion of free money. Research from the University of Chicago and Boston College says almost everyone falls for it.
Consider a $100 stock that pays a $10 dividend -- it falls to $90, just as if it paid nothing and the owner sold 10 percent of his shares in the market. Same difference, and yet the study found the allure of the corporate payout incites all kinds of costly behavior among investors.