In this article, I will explain the mechanics of dividend dates and ex-dividend date trading strategies. Dividend dates are important to understand, because they help investors plan their investments and manage their dividend income. Understanding the different dividend dates, namely the declaration date, ex-dividend date, date of record, payment date, and settlement date, can impact the timing of when an investor would choose to purchase or sell a stock, as well as the amount of dividend income they receive.
Understanding dividend dates can also be important for tax planning purposes. Dividend income is typically taxable, and the timing of the payment can affect the tax year in which the income is recognized. In relation to dividend dates and taxable income, the ex-dividend date is also a crucial focus of this article, given the trading strategies that stem from purchasing or selling the stock before or on/after the ex-dividend date.
This article will therefore explain what dividends are, how dividend dates work, the importance of dividend dates, where you can find and track dividend dates, whether to buy stocks before or on/after the ex-dividend date, and the different ex-dividend date trading strategies.
A dividend, with respect to the public stock market, is a payment made by a company to its shareholders as a reward for investing in the business. Dividends can be paid in the form of cash or additional shares of stock, are usually determined by the company's board of directors, and can vary from quarter-to-quarter or year-to-year.
Dividends are typically a portion of the company's profits that are distributed among its shareholders, which usually happens on a quarterly basis. The formula below shows how one can calculate the dividend payment per share, if not explicitly provided by the company:
Dividend payment per share = Total amount of dividends declared / Total number of outstanding shares
For example, if a company declares a total dividend of $1 million and has 10 million outstanding shares, the dividend payment per share would be $0.10.
Given that dividends typically come from a company's profits, companies that pay dividends tend to be more established and profitable businesses with consistent earnings growth. This is also why dividend-paying companies appear to be more stable and less risky for long-term investors, in comparison to non-dividend players in the market.
Although not all companies pay dividends, and the amount of the dividend payment can be affected by various factors such as company performance, economic conditions, and competition, dividends offer shareholders a way to earn returns on their investment without having to sell their shares. For reference, the only other way shareholders are able to make a return without having to sell their shares is through stock buybacks.
Dividend Dates Explained
A dividend is not a legal obligation to the firm, until the board of directors of the company declares the dividend. Once the dividend is declared, then they are obligated to make the payment to their shareholders.
With this in mind, there are five dividend dates that all investors should know:
- Declaration Date: The declaration date is the date on which the dividend is declared by the board of directors. This is also when they declare how much each shareholder will receive per share, which is typically based on their profits and financial goals. The declaration date also serves as an important indicator of a company's financial health and commitment to rewarding its shareholders.
- Ex-Dividend Date: The ex-dividend date is the date that determines who receives the dividend. It takes some time for the dividend transaction to take place, so the ex-dividend date is typically one or two business days before the record date. Note that prior to the ex-dividend date, the stock is said to trade "cum dividend" (meaning "with dividend").
- Settlement Date: The settlement date is the date on which the stock ownership is verified to determine which shareholders are eligible to receive the dividend. On this date, the company will create a list of shareholders who are entitled to receive the dividend. It's possible for this date to occur after the ex-dividend date, and for the investor to still receive the dividend.
- Record Date (aka Date of Record): The record date is the date when the shareholder has to be registered with the company in order to receive the dividend. This date is also announced on the declaration date. Your settlement date must happen on or before the record date the company has set for the dividend, otherwise you won't receive the dividend.
- Payment Date: The payment date, as the name suggests, is the date that shareholders are going to get paid. On the payment date, shareholders can expect to either receive a check in the mail or see their dividend payment deposited directly into their brokerage account. The timing between the record date and payment date can vary depending on the company, from a week to over a month.
An example of how these key dividend dates tie together can be seen in the table below:
The key date here for investors is the ex-dividend date, which is the cutoff date for determining whether you'll receive a dividend or not. To elaborate, if you buy the stock before (not on) the ex-dividend date, you'll receive the dividend. However, if you buy on or after the ex-dividend date, you won't receive the dividend. Whether you'll be able to collect on the dividend or not, is therefore determined by this ex-dividend date.
Note that if you buy a stock before the ex-dividend date and sell your shares on or after the ex-dividend date, you'll still receive the dividend payment, even if you're no longer a shareholder on the payment date.
Where to Find Stock Dividend Dates
Dividend dates for any company are not challenging to find, the key is to search for a dividend calendar. If that fails, you should always be able to find this information on a company's investor relations website, a financial news website (e.g., Yahoo Finance), or often time even your investment brokerage platform. Additionally, investors can check the Securities and Exchange Commission's (SEC) EDGAR database for company filings, including announcements of dividend dates.
An example of a dividend calendar from NASDAQ and some dividend-paying companies is shown below:
Implications of Trading Around the Ex-Dividend Date
A common question when it comes to dividend dates, specifically the ex-dividend date, is whether one should purchase the stock before or after the ex-dividend cutoff date. The example and two scenarios below should help you come to an answer on this question.
For our example, let's say you bought stock of a dividend-paying company at $100/share, and bought 1,000 shares of this company. In this case, the price you paid is going to be equal to $100,000 ($100 * 1,000 shares). Now, follow the two scenarios below to see how this can likely play out.
Scenario #1: Buying Before the Ex-Dividend Date
If you're buying the stock at $100/share and do so prior to ex-dividend date, a part of the price you're paying for the stock includes the dividend.
If the dividend is equal to $2/share, then since you bought 1,000 shares, you'll get $2,000 in dividends ($2/share * 1,000 shares). The price you're paying for the stock can therefore be broken up into two parts. The $98,000 for the stock, and the $2,000 for the dividend (meaning $100,000 in total).
It's important to mention that this $2,000 in dividends is taxable income. If your income tax rate bracket is 20%, for example, then the tax on your dividend income would be $400 ($2,000 * 20%). In this case, you've spent $400 on taxes, so the value of your stock investment is really only equal to $99,600 ($100,000 - $400).
Scenario #2: Buying on or After the Ex-Dividend Date
Now, if you buy the stock at any time on or after the ex-dividend date, what do you pay?
In this case, your price would be equal to the $100 minus the $2 in dividends, because you're not going to receive the dividend income. Theoretically, the price doesn't fall exactly by $2 due to tax consequences and market price fluctuations, but to keep things simple, you'd probably pay close to $98 per share. In total, you'd have $98,000 worth of stock ($98/share * 1,000 shares).
Ex-Dividend Date Scenarios Takeaways
Investors have two choices with dividend dates. You can either buy the stock before the ex-dividend date to get the dividend, or wait until the ex-dividend date or later.
In scenario #1 above, where you purchased the stock prior to the ex-dividend date, you spent $100,000, but only got to keep $1,600 of it because of the $400 tax implication. Further, assuming very little to no trading happened, the day of the ex-dividend date would show $98/share and also a $0 change in the stock price, even though the day before the stock price was $2 higher. This is simply because the dividend gets removed from the price of the stock and gets transferred to your account (with a $400 tax implication in our case).
In scenario #2 above, by just waiting another day until the ex-dividend date, you could've spent only $98,000 for 100 shares, and not received the dividend. This is because, in theory, the stock price should drop by the same amount as the dividend payment. In this scenario, you'd also avoid having to pay taxes on any dividend payment.
The Bottom Line on Trading Around the Ex-Dividend Date
The bottom line is that buying the dividend stock before or on/after the ex-dividend date is not guaranteed to be more profitable than the other.
Over the long-term, choosing to buy before or after the ex-dividend date will likely not make a material difference to your stock's realized returns. However, if you had to choose, and unless you're in a situation where you don't have to pay taxes on dividends, I'd recommend buying the stock on or after the ex-dividend date, because of the tax implications dividends come with.
Ex-Dividend Date Trading Strategies
There are two main short-term trading strategies that aim to capitalize on the price fluctuations surrounding the ex-dividend date, and the opportunity to receive dividend payments from companies that issue them.
Specifically, these strategies are around capturing dividend payments and shorting the dividend stock on the ex-dividend date. The viability of these two ex-dividend date trading strategies and their workings are discussed below.
Dividend Capture Strategy
One common ex-dividend date trading strategy is known as the "dividend capture strategy," a short-term trading strategy where investors attempt to capture the income from dividend stocks through timely entry and exits around the ex-dividend date. More specifically, this is when traders buy the stock just before the ex-dividend date and sell the stock on or shortly after the ex-dividend to capture the dividend payment.
This trading strategy generally does not work for the average investor, due to the five following reasons:
- You'd just be paying taxes on this dividend payment, which reduces your actual realized return.
- Although less likely, you may have to pay taxes on the potential capital appreciation of the dividend stock, which is taxed at a higher rate than long-term stock investments.
- You'd likely sell the dividend stock at a loss, because the stock would typically fall by the amount of the dividend payment on or after the ex-dividend date, thereby resulting in little to no profit for the investor.
- Stock prices are naturally unpredictable and further losses can happen due to market fluctuations.
- Although less common nowadays, you can be exposed to further loss through transaction costs.
Lastly, its worth mentioning that even if you make a realized profit after-tax with the dividend capture strategy, this profit is likely going to be minimal unless you're a large broker dealer executing huge trades with no transaction costs.
Ex-Dividend Date Shorting Strategy
Shorting a stock is the opposite of buying a stock. Short selling is a strategy in which you borrow stocks from your broker and sell them before actually owning/purchasing them. By doing so, you can profit if the stock price decreases
Since we know that the dividend is going to naturally make the stock price lower on the ex-dividend date, in theory, it may also make sense to short the stock right before the ex-dividend date.
However, much like the dividend capture strategy, shorting a stock before its ex-dividend stock is not wise either. When you short a stock, as the seller of the stock, you are required to pay the dividend ($2 from our previous example) to your broker, who will then pass this on to whoever they borrowed the shares from. Therefore, you must have the cash on hand in order to pay this dividend, which is the reason shorting the stock before the ex-dividend date is not an advisable strategy either.
The Bottom Line
In summary, being aware of dividend dates and ex-dividend date trading strategies can help investors make informed investment decision about buying, holding, or selling a dividend-paying company's stock, which can help them manage their investment income and taxes.
Over the long-term, purchasing before, on, or after the ex-dividend date, which is the cutoff date that determines whether an investor will receive the next dividend payment from the company or not, will not make much of a difference towards a dividend investor's long-term success.
What's more important is avoiding the risky dividend capture and shorting strategies around the ex-dividend date. Instead, focus on continuing to reinvest the dividends you receive back into the company (e.g., via a dividend reinvestment plan (DRIP)). This will maximize the capital appreciation and dividend income you'll receive as a long-term dividend growth investor, It's also important to keep track of dividend declaration dates, and to assess the longevity and changes for dividend payments between these declaration dates, given that you want to invest in dividend-paying companies that consistently pay and grow their dividends over time.