Knowing your stock dividend dates will help you get full value from your dividends, but trying to make a quick buck with them is not worth the risk.
Dividend stocks are an essential part of a good conservative investing philosophy. But there are certain details you should know about the way dividends are paid out.
Every company that pays a dividend has a “record” date. This prompts two questions we hear often from investors.
Does the record date determine who owns the stock on that day and who gets the dividend? If so, why wouldn’t you buy the stock the week before the day of record, collect the dividend and then sell the stock? Here is what you must know about stock dividend dates.
Get Paid More with Dividends
Dividends add up more than ever these days. Low interest rates and volatile markets both push more investors to seek dividend stocks for income. And many companies are raising their payouts. This is the right time to build more strength into your portfolio with Pat McKeough’s “How High Dividend Stocks Can Supercharge Your Income Investing.”
There are 4 key stock dividend dates that are involved with dividend payments:
- Declaration Date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.
- Payable Date: is the date set by the board on which the dividend will actually be paid out to shareholders.
- Record Date: Only shareholders who hold the stock before the payable date will receive the dividend payment. That date is known as the record date, and is set any number of weeks before the payable date.
- Ex-dividend Date: Two business days before the record date, the shares begin to trade without their dividend. This date is the ex-dividend date. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade cum-dividend. If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle.
What are dividends?
Dividends are typically cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. These payouts are drawn from earnings and cash flow paid to the shareholders of the company. Commonly these dividends are paid quarterly, although they may be paid annually as well as monthly. Most important, dividends can produce up to a third of your total return over long periods.
Here’s a historical example: A company’s dividend of $0.46 a share was payable on Friday, January 31 to shareholders of record at the close of business on Tuesday, December 31 of the previous year.
Two business days before the record date, the shares began to trade without their dividend, that is, on the ex-dividend date of December 27 of the previous year. If you had bought a dividend-paying stock one day or more before the ex-dividend date, you would have still gotten the dividend (because the shares were trading cum-dividend). But if you were to buy these shares on the ex-dividend date or later, you would not have gotten the dividend.
The odds of a “dividend capture” strategy paying off are not high
“Dividend capture” is the trading technique of buying dividend stocks just before the dividend is paid, holding it just long enough to collect the dividend, then selling it. If you can sell it for as much as you paid for it, you have “captured” the dividend at no cost, other than the transaction costs.
To do this, you would buy shares in stocks just before the ex-dividend date (see above), so that you would be a shareholder of record on the record date, and would receive the dividend. Because the stock falls by the amount of the dividend on the ex-dividend date, the strategy then calls for you to wait for the stock to move back to the price where you bought it before the ex-dividend date. At this point, you sell the stock for a break-even trade.
This can pay off when stock markets are rising. Of course, any strategy that leads you to buy can pay off when stock markets are rising. However, you have to pay a brokerage commission to buy the shares, and a commission to sell. The commissions can eat up much of the dividend income. They may even exceed the dividend income.
In the end, dividend-capture strategies may have appeal for securities dealers or brokers who are executing huge trades with very low transaction costs. They may also have tax benefits, particularly for corporations. But the average investor doesn’t have much chance of making a significant profit.
Do you regard dividends as a nice supplement to your investments or as an essential part of your investment strategy? Do the majority of the stocks you own pay dividends? Have you changed the weighting of dividend stocks in your portfolio over the years?
This article was originally published in 2014 and has been updated.