There are four important dates to know and understand with regard to dividends and investing in stocks and mutual funds: 1) The Declaration Date, 2) The Ex-Dividend Date, 3) The Record Date, and 4) The Payment Date.
The Basics of Dividends
Dividends are payments by corporations to their shareholders. These payments, usually made on a quarterly basis, can be in the form of cash or shares of stock. When a corporation is profitable, it can either retain earnings to reinvest in the corporation or it can share profits with the owners (the shareholders, aka the investors) in the form of dividends.
Investors often have the option of receiving the dividends in their brokerage accounts as cash payment (for income objectives) or to reinvest and buy more shares of the security (for growth objectives).
Dividend Dates Explained
- The Declaration Date is the day that the corporation's Board of Directors announces its approval of a dividend payment. The Board will also announce the Record Date and the Payment Date of the dividend.
- The Ex-Dividend Date is the first day in which new buyers of a stock will not receive the dividend. This day is usually two trading days before the Record Date because stocks settle three days after the trade date (referred to as a 'T + 3' settlement period for 'Trade date plus three'). For greater understanding, any owners of the stock on the day before the Ex-Dividend Date will receive the dividend. This day prior to Ex-Dividend is referred to as an In-Dividend date. For example if the Ex-Dividend Date was today and you sold your shares today, you would still receive the dividend even if you sold it tomorrow. Note: A stock's share price usually decreases on the Ex-Dividend date by an amount roughly equal to the dividend paid because a dividend is a decrease in the company's assets and the adjusted share price will reflect this.
- The Record Date is the date after which new buyers of the shares will not qualify for the pending dividend payments. Remember, this date is a formality because an investor must buy shares prior to the Ex-Dividend Date to own them buy the Record Date because of the 'T + 3' settlement period. What investors need to know is that if you sell a shares just one day before the Record Date, you won't receive the dividend (although your new shares may drop in price, depending upon your timing).
- The Payment Date is the date that the dividends are actually paid in the form of checks or credited to shareholders investment accounts.
Strategies and Cautions of Timing Dividend Dates
As you can imagine, some investors attempt market timing strategies with stocks or mutual funds by purchasing shares just prior to the ex-dividend date to receive the dividend. They may then sell shares shortly thereafter. In other words, the investor "buys the dividend." This strategy is risky, especially if you believe markets are relatively efficient (see Efficient Markets Hypothesis) because share prices can be pushed higher prior to the ex-dividend date in anticipation of the dividend and the price normally falls on or around the payment date. Therefore the market has "priced in" the dividend and no real advantage can be gained by an investor's timing.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as tax advice or investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.