One of the most confusing concepts of dividend investing is understanding how and when you get paid a dividend. If you’re new to dividend investing, you may have no idea of even where to look. You might think you just get paid a dividend for owning the stock right away, like a gunshot in Call of Duty. In reality, it’s more like Angry Birds, there’s a delay before you get your payout.
So first, let’s start with the vocab lesson.
The 4 terms you will see on these sites are the “Declared Date,” “Exdividend Date” (or Ex Date), “Record Date,” and “Pay Date.” The most important ones to know are the Ex dividend Date and the Pay Date. It’s very simple: if you own a stock when the opening bell rings on it’s Exdividend Date, you will be paid the dividends for each share you own on the dividend Pay Date. So if MCD has an Exdividend Date of 2/27/2014, for you to “Capture the dividend,” you must buy shares on 2/26/2014 or earlier. Then, on their Pay Date, 3/17/2014, you will receive dividends for each share you owned on 2/27/2014.
It should be noted, that for a dividend to be “qualified,” and thus taxed at a lower rate, you must own that stock for 60 days before and after the Exdividend Date.
The “Record Date” is usually a day or so after the Exdividend Date, and this is when the company looks at their records from the Exdividend Date and determines who is eligible to receive a dividend payment. The “Declared Date” is the day the company announces its next dividend. For the most part, these dates are not really relevant to the standard dividend investor, and can thus be ignored.
When I need to find out when a specific stock pays a dividend, I look on either dividend.com or dividata.com. These sites also have features that will let you search for stocks that have upcoming Exdividend Dates.
There is an investing strategy called “Capture the Dividend.” Where an investor purchases the stock the day before the Exdividend Date and then sells afterwards. This allows them to receive the dividend payment and potentially reallocate their cash elsewhere, maybe to capture another dividend. The problem is that on the Exdividend Date, the stock price usually “gaps down” by the amount of the dividend payment. For our example of McDonalds, if their dividend payment is $0.81 per share, and the closing price on the night before the Exdividend Date is $95.00, the opening price will be $94.19 the next morning.
This is not considered a safe or reliable strategy because there’s no guarantee that the price will move back up to or above the price you bought it at before receiving the dividend. Additionally, since this dividend is not “qualified,” you will pay taxes on it as capital gains (which is a higher rate). The most tried and true strategy for quality dividend stocks is “Buy and Hold.”
Well, hopefully you have a much better understanding of what you’re looking at when analyzing a stock.