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Investors, Keep Your Cool About Special Dividends

In theory, once a stock trades ex-dividend, its price should adjust downward to account for the dividend. We rarely notice this adjustment with ordinary dividends, because the dividend amounts are relatively small, and the adjustment is often obscured by other factors affecting the stock.

But with the size of some of the special cash dividends, you should see a noticeable decrease in stock prices on the ex-dividend date. In Electro Scientific Industries' case, all else being equal, this will be a $9 stock ex-dividend. (Shares were trading Wednesday morning at $11.36, up 15 cents on the session.)

All the fervor about these special dividend-paying stocks and the price jumps due to the dividend announcements suggest to me that there is a new inefficiency being created, and that there is money to be made on the short side of the equation.

I am not a short-seller, but those who are may have found a new way to exploit this potential inefficiency over the next couple of weeks. Find a stock that jumps purely due to a special cash dividend announcement; if the market appears to overreact to the plus side, there may be opportunity. Certainly not my cup of tea, but I would not be surprised if it's already being done.

At the time of publication, Heller was long ESIO.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.
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