Many new income investors are confused about when they need to hold stocks to collect dividends. Either they end up missing the dividend because they bought too late, or on the other side, they sold too early.
Ongoing dividends from any stock are not guaranteed. A company’s board of directors will review the financial results of the business each quarter and then announce the next dividend or distribution. Monthly dividend stocks may or may not announce three monthly payments at a time. Sometimes – and this is particularly true for some ETFs – they may not make an announcement until right before the ex-dividend date. Each new dividend announcement will include at least three pieces of information:
The amount of the dividend payment per share.
You are entitled to, and will receive, a dividend payment if you are a shareholder of record on the record date. To be an owner of record, you must have purchased the shares with a trade or trades that settled on or before the record date. Settlement is the period it takes for a stock trade to become official. When you buy shares through your brokerage account, the trade officially settles the next business day. In earlier times, the markets had two or three-day settlements, which made determining the ex-dividend date a little trickier. The extra days were to give you time to deliver the money to your broker and the seller to deliver the shares. In the modern world, transactions happen electronically, and your broker shows results in your account almost immediately. Yet, under the SEC rules, you are not officially a share owner until the next day after you get a filled buy order in your brokerage account.
Since we know it takes one day for a stock purchase to settle and become official, someone who buys shares on the record date will not become a shareholder of record until one day after the record date and will not receive the dividend. Thus, a stock goes “ex-dividend” on the record date. You need to know several facts about the ex-dividend date.
If you buy shares the day before the ex-dividend date (one day before the record date) and sell on the ex-dividend date, you will be a shareholder on the record date and earn the dividend.
On the ex-dividend date, the share price is adjusted and usually starts trading at the previous closing price minus the dividend amount. For example, if a stock closed at $25 the day before the ex-dividend day and a $1.00 dividend was declared, the stock will open on the ex-dividend date at $24 per share. The financial websites will show this as no change in share price. If the stock is at $24.10, the change would show as up $0.10 for the day.
The share price drop keeps traders from taking advantage of the first point, i.e., if you buy the day before ex-dividend and sell the next day, you will get the dividend, but a lower share price will offset that amount.
I often like to buy shares to add to a position after a stock goes ex-dividend. It feels like a deal to purchase shares at a lower price.
Dividend-paying companies transfer the money to your broker on the payment date listed in the dividend announcement. Your brokerage account may show the deposit on the declared payment date or one day after.
To recap the order of occurrence, the timing starts with a dividend announcement, then the ex-dividend and record date a couple of weeks later, and the payment after another two weeks, resulting in about a month between the dividend announcement and when the cash distribution lands in your brokerage account.
Be aware, however, that this is just the average, and the spread between dates can vary significantly. One of our long-term Dividend Hunter portfolio stocks announces a dividend up to seven weeks before its ex-dividend date. Meanwhile, another portfolio stock that happens to be one of my favorites for high-yield investors pays the dividend a whole month after the record date.
Dividend announcements for ETFs have a very compact schedule. As mentioned earlier, the announcement will come a day or two before the record (also ex-dividend) date, with payment a day or two after the record date.
Dividend announcements may be separate news releases or included in a quarterly earnings press release.
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