Four Dates Every Dividend Investor Should Know

Photo courtesy Dafne Cholet/flickr.com.

Photo courtesy Dafne Cholet/flickr.com.

So maybe you’ve found the perfect dividend growth stock to buy – it has good growth prospects, pays a respectable dividend, and fits into the rest of your portfolio nicely. Better yet you’re ready to buy and the stock is about to pay its dividend – at least you think it is. Here are the four dates that you need to know if you plan on investing in dividend stocks:

The Declaration Date

This is the date that the company issues its press release, notifying the public that the company’s Board of Directors has decided to issue a dividend. When a company is dedicated to growing its dividend, this is how they notify investors and the media. While the price of a company’s stock usually isn’t affected by the announcement, it certainly can be – particularly if the dividend is significant and drives up demand for the stock. Most of the time, however, there’s very little effect on a stock from the announcement of a dividend, especially when a company has established a tradition of paying dividends.

Part of the press release usually includes information on at least two of, if not all three of the other dates:

The Date of Record

Most press releases announcing dividends also announce that the company will pay a dividend to “shareholders of record” on such-and-such date. It isn’t enough to have bought the stock by the “record” date, it needs to be recorded in your account and the trade settled by the exchange. Which leads to the next and probably the most important date….

The Ex-Dividend Date

Stock exchanges in the United States have three days to settle trades. So in order to officially own a stock and be recorded as owning a stock by a given date, you need to actually purchase the stock three days earlier. That date, three days before the date of record, is called the ex-dividend date. You’ll also hear it referred to as the date that the “stock goes ex-dividend”. To determine the ex-dividend date, count three trading days back from the date of record, with the date of record being the first day. So if the date of record is a Friday, then the ex-dividend date is the previous Wednesday (assuming there are no trading holidays in between) and you need to buy the stock by close of trading on Tuesday to get the dividend. If the date of record is a Monday, the ex-dividend date is the previous Thursday and you need to buy the stock by Wednesday to get the dividend.

Another way of thinking about this is that since the ex-dividend date is the first day that new investors won’t get the dividend, the value of the stock is reduced by the amount of the dividend. On the ex-dividend (“excluding dividend”) date, the value of the company (and its stock) is reduced by the amount of cash paid in the dividend. Theoretically, the stock price should immediately decrease by the amount of the dividend to be paid. Realistically, the value of the dividend is usually small relative to the value of the stock and investor sentiment matters more in the short term so the stock price won’t be affected very much. You’re more likely to notice an effect when there’s a special dividend payment that’s pretty big compared to the stock price.

The Payout Date

The final date – which can be very important if you need the dividend income – is the payout date. This date, like the “shareholder of record” date is chosen by the dividend company’s Board of Directors and usually occurs at roughly the same time each year for regular dividend payers. This is the date that the company sends you your dividend payment, either electronically or by check.

This date also matters for tax purposes and as the tax rate on dividends varies, most dividend companies will adjust the payout date of their last dividend of the year to either push it to the next calendar year (if dividend tax rates are going down) or pull it forward to the current year (if dividend tax rates are going up) in order to reduce shareholders’ taxes.

The Bottom Line

If you’re buying a stock to capture an upcoming dividend, make sure that you know when the dividends being paid and – more importantly – when you need to buy the stock.

There are over 50 S&P 500 companies that have increased dividends for more than a quarter century.  See the full list of S&P Dividend Aristocrats.

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