Everything You Need To Know About Dividends
Investing in dividend paying stocks is a sure fire way of creating long-term wealth. Money will keep coming in every quarter and eventually your money will start growing exponentially due to compounding interest.
As the writer/editor of a couple of dividend focused newsletters, I probably get the highest number of questions about stocks going ex-dividend. For as much as investors own and want to own high-yield stocks, the mechanics of ex-dividend, record, and payment dates are often not well understood. I will cover this and also some smart tactics as you accumulate a portfolio of high-yield stocks.
The Basics – Dividend Dates
When a company declares a dividend, the announcement will include the amount of the dividend, a record date, and the payment date. As an example, TCP Capital Corp(Nasdaq:TCPC) recently announced its next dividend payment this way:
“On May 7, 2015, our board of directors declared a second quarter dividend of $0.36 per share payable on June 30, 2015 to shareholders of record as of June 16, 2015.”
A point to understand: future dividends are not guaranteed, and you cannot be assured of earning a dividend until the official announcement as shown above. Most companies make quarterly announcements, and any changes to the dividend amount will hit the news at that time.
Back to the other dates.
The payment date is the day (or possibly the next day) that the dividend amount will show up in the cash balance of your brokerage account. That is the “payable on” date in the example above. To earn and receive the dividend, you must be an officially recognized owner of the shares on the record date or be a “shareholder of record”. The record date leads to the ex-dividend date. To own shares on the record date, your share purchase must have finalized or “settled” by that day. The U.S. stock market settlement process takes three business days. If you buy shares today, you buy at today’s share price but your purchase does not become official, or settled, until three business days from now. An investor who buys shares two business days or later before the record date will not be a share owner of record and will not receive the dividend. Thus, a stock goes “ex-dividend” two business days before the record date. In the case of the TCPC dividend announcement, the record date of June 15th is on a Monday, so the ex-dividend date was the preceding Thursday, June 11th.
The time span between a dividend announcement and the payment date can range from as short as a few days out to as long as two months. Each company sets its own policy concerning dividend dates. Some companies announce dividends along with quarterly earnings reports and others make dividend news only announcements between the earnings dates.
To recap: If you buy shares up to three days before the record date, you will be a shareholder of record and receive the dividend. In other words, up to the day before the ex-dividend date. Buy on the ex-dividend date or later and you will not earn the upcoming dividend payment. You will get future dividend payments for as long as you continue to own the shares, but not the just-announced dividend.
Buyers on the ex-dividend date are not entitled to the upcoming dividend, so the share price will open trading at the previous day’s closing price minus the dividend amount. For example, If TCPC closes at $16.30 three days before the ex-dividend date, to start the next day –ex-dividend day– the shares will open trading at $15.94, the previous close minus the $0.36 dividend. Most stock quote services would show $15.96 as an unchanged from the previous day’s price. If TCPC was at $16.00, the quote would show up 4 cents for the day. If you invest in high-yield stocks, you get big dividends and the ex-dividend price drop can be notable. This is natural and you should not worry when the share price is lower on the ex-dividend date. In a reasonable world, the share price would recover the dividend amount over the next three months up to the day before the next ex-dividend date. Of course, we all know that share prices fluctuate for a variety of reasons, most of which boil down to how many investors want to buy vs. the number looking to sell a particular stock.
Smart Dividend Investing – Playing the Share Price Swing Game
When the investing public becomes aware of a dividend announcement, the thought process goes something like this: “Hey, TCPC goes ex-dividend on June 11th. I need to buy shares before that day to get the dividend!” A lot of investors think this way, so there is significant buying pressure in the week before the ex-dividend date, and often that buying interest will drive up the share price. There are also traders attempting to “dividend capture”, buying before a stock goes ex-dividend and then selling shortly after becoming an owner of record on the record date. These traders add to the upward pressure on the share price leading up to the ex-dividend date.
After a stock goes ex-dividend, or sometimes after the payment date, interest in the high-yield stock will drop. Lower investor interest means fewer buyers in relation to sellers. The hapless dividend capture crowd also wants to get out of their shares, increasing the sellers vs. buyers imbalance. As a result high-yield share prices have a tendency to decline in the two to six weeks after an ex-dividend and dividend payment dates.
The Monthly Dividend Paycheck Calendar is set up to make sure you’re getting ...
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