Welcome to Money for the rest of us. This is a personal finance show on money, how it works,

how to invest it, and how to live without worrying about it. Remember host, David Stein, today is episode

557. It's titled, Don't Fall in to the Dividen Trapp. Now, what do I mean by Dividendant Trap?

Well, there's something called the free dividend fallacy.

At times, individual investors, even institutional investors, they forget that dividends aren't free money.

For example, when I was an institutional investment advisor, this was in the early days we would

pull together performance reports for our institutional clients.

And one of the things you learned as an analyst is that when a mutual fund pays a dividend,

the price drops because it has cash that makes up its net asset value.

And then when it pays the dividend, you see the drop. And sometimes

someone, an entity like Morningstar, they might not pick it up right away and often get emails

from listeners like, how did this ETF lose so much money today? When in fact, what happened was

whatever service they were using didn't pick up the dividend. And so it looked like

there was a bigger loss because the price dropped because of the dividend payout. And that's just

how the math works. And so as an institutional advisor, sometimes we would be calling up the mutual

fund company and say, did you pay a dividend? Because we're trying to figure out why it was a loss.

So there are some traps when it comes to dividends. The other dividend trap is not recognizing

that the dividends are not separate from capital gains. For example, there's surveys where

70% of individual investors in this survey didn't realize

with an individual stock when it paid a dividend, in theory, the stock's price should drop.

And sometimes it does. It doesn't always. But if they've just given away a bunch of money,

cash and dividend, then the stock should be worth less based on financial theory.

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