Some investors like dividends. They're usually paid quarterly and boost the return of a stock that is going higher. Or they help soften the blow of ones that go lower. In either case, there are some fundamentals about dividends that many investors don't know. If you're one of them, read on.
Dividends have two important dates: the actual dividend date (known surprisingly enough as The Dividend Date). The second and equally important one is The Ex-Dividend Date. Knowing the difference between these two determines whether you receive a dividend this quarter or the next.
Let's start with the Ex-Dividend Date because that's the one that determines if you get paid. The Ex-Dividend date is always before the dividend date. It's the date companies use to determine who will receive the dividend. They go to the records and see who owns the stock on that day. If you own a stock any time BEFORE (not the day of or after) the Ex-Dividend Date, you will get the dividend. For example, if the Ex-Dividend Date is October 15, then you need to buy the stock by October 14. By buying the stock, I mean you must have your buy order filled by October 14. The stock can actually settle (usually 2 business daysafter) at a later date, but the transaction date qualifies you to receive payment.
The next day, on the Ex-Dividend date, the stock will go down by the amount of the dividend. If a stock is trading at $10 a share and pays a quarterly dividend of 10 cents, on the Ex-Dividend Date, it will open trading at $9.90 a share, to reflect the amount paid to shareholders. It may not stay there for very long, especially if it's heavily traded or has news, but it will go down by the amount of the dividend from the closing price of the previous day.
Some investors think they can get something for free on Wall Street by buying a stock the day before the Ex-Dividend Date, then sell it on the day of the Ex-Dividend. That's exactly why the stock drops by the amount of the dividend: there is no free lunch on Wall Street (or anywhere else). It's true they may get lucky and see the stock rise by more than the dividend on the Ex-Dividend Date, but initially, the stock will trade at the previous day's closing price minus the dividend. The stock can also go lower that day.
The Dividend Date is sometime in the future, within a month, most often within two weeks. It's the day the amount of the dividend is deposited in your brokerage account or if you prefer a check sent to you, it's mailed on that day.
The most common dividends are paid quarterly with the Ex-Dividend Date on the 15th and the Dividend Date at the end of the month. Some stocks, mostly Real Estate Investment Trusts, pay monthly. There are also mutual funds and ETF's that pay monthly and quarterly dividends.
To find out the amount of dividend a stock pays and when it goes Ex-Dividend as well as the pay date, look at stock information pages such as Yahoo!Finance's Key Statistics page (http://finance.yahoo.com). The dividend information is in the lower right hand box of the Statistics page. Other Internet providers' quote pages also carry this information.
Dividends are good way to boost returns. Just be sure you buy a stock before it goes Ex-Dividend (Ex comes from the Latin meaning "without" if that helps you remember). If you buy it on the Ex date or after, you'll have to wait another quarter or month (depending on how often it pays) before you'll see the cash.
- Ted Allrich
September 20, 2011