We'll also evaluate whether or not it is generally a good idea to try to time your purchase or sales around these dividend dates in a strategy called "dividend capture".
3 Important Dates All Dividend Investors Need To Know
- Date of record: when a company announces a dividend payment, it sets a date of record when you are required to be on its books as a shareholder in order to receive the payment.
- Ex-dividend date: you must be a shareholder prior to a company's ex-dividend date to receive its declared dividend payment. If you buy on or after its ex-dividend date, the seller receives the dividend. Stock exchange rules determine the ex-dividend date, which is usually one business day before the date of record.
- Pay date: the day the dividend actually shows up in your brokerage account.
In order to service the back office needs associated with share ownership (including dividends, tax information, and proxy statements), companies create rosters or lists of shareholders based on the clearing data from brokers and clearing houses.
The dividend pay date is usually a few weeks after the ex-dividend date and represents the time when the dividend is deposited into your brokerage account or you receive your shares via a dividend reinvestment plan.
Simply put, in order to receive a dividend you need to buy the stock the day before the ex-dividend date or earlier. Let's use one of 3M's (MMM) dividend announcements as an example.
- Record date: May 18
- Ex-dividend date: May 17
- Pay date: June 12
On May 17, the ex-dividend date, the share price of 3M would (in theory) be adjusted down by $1.36 per share, representing the decreased value of the cash it just paid out to its shareholders as a dividend.
There are two special exceptions when the ex-dividend date is actually deferred until the first business day after the dividend is paid (well after the record date). This occurs when the dividend is at least 25% of the stock's value, or if the dividend is paid in shares of stock rather than cash.
Where to Find Ex-Dividend Dates
However, it can be a tedious process to find the right dividend page for different companies. To make retrieval of ex-dividend dates easier, a number of financial websites (including ours) aggregate dividend date information across thousands of companies.
You can retrieve any company's latest ex-dividend and pay dates on our website to know exactly when you need to own the stock to receive its next dividend.
Our portfolio tracking tool also makes it easy to pull in ex-dividend dates for all of your holdings to help identify more timely income candidates.
However, due to the mechanics of how dividend payments work, there are some important implications all investors need to understand that pertain to your long-term total returns, special dividends, and an investing strategy known as dividend capture.
Important Implications About Ex-Dividend Dates and Why "Dividend Capture" is a Bad Idea
The theory is that you can quickly "capture" the dividend and thus make a quick and relatively risk-free profit. For example, in our 3M example, if you were to buy 100 shares of the stock on May 16 and sell on May 17, then your account would be credited $136 on June 12 when the company's dividend is paid out.
That's why on the ex-dividend date the share price typically drops by the dividend amount. This is also true for one-time special dividends, which can sometimes be extremely large (10% or more of a company's share price) and can happen after a company completes a major asset sale or has a large one-time windfall.
Many dividend capture investors instead believe that a stock quickly recovers to the level it was trading at prior to the ex-dividend date. To capitalize on this belief, these investors use historical analysis of short-term trade movements called technical analysis. They usually try to devise models that tell them what stocks are hopefully going to recover on the ex-dividend date or within a few days after.
For example, a dividend capture trader might conclude that based on the last 12 months of trading data, 3M usually rallies on and after its ex-dividend date, thus allowing for a quick 1% to 2% profit from the dividend.
There are a number of other issues with the dividend capture strategy, too. For one thing, the investor incurs higher trading commissions and potentially short-term capital gains taxes which eat away at any gains.
Furthermore, no one can consistently predict how a stock will trade on or after its ex-dividend date. Short-term stock price movements are influenced by many different dynamic factors that cannot be reliably forecasted. Perhaps the broader market begins selling off, or maybe a company-specific issue crops up to push the stock lower. No one knows.
A dividend capture strategy is simple to execute and looks appealing in theory. However, as with most things in life, if it sounds too good to be true, it usually is. Given the broad appeal of dividend investing, if this strategy actually had merit, not only would many more investors be doing it, but almost certainly any profitable edge the strategy had would be competed away.
In our opinion, any profits gained from dividend capture are purely due to short-term luck and have nothing to actually do with the dividend itself. Or to put it another way, dividend capture is just another term for short-term trading which studies show almost no investors can do profitably over the long term. Thus we recommend conservative income investors avoid the dividend capture strategy.
Suppose a company pays a $1 per share annual dividend but only generates $0.50 per year in earnings (a 200% payout ratio ). If the stock is trading at $10 per share, then after one year the price will have been reduced to $9 by ex-dividend date adjustments while the book value (a rough tracking measure of intrinsic value) of the company will have only increased by $0.50 (retained earnings per share) to $9.50.
Over several years, assuming no growth in earnings, the stock will actually decline in value since the dividend is what's known as a "destructive return of capital". Book value is declining since the dividends paid out exceed earnings, and the stock price will track it lower.
Quality dividend growth stocks have rising earnings per share over time which is why they can grow their dividends in line with earnings and their share prices tend to rise. This allows you to enjoy capital gains as well as rising passive income.
Not surprisingly, we focus on companies with sustainable and safe dividends and advise against chasing seemingly attractive but actually destructive "yield traps".
Closing Thoughts on Ex-Dividend Dates and Dividend Capture Strategies
Investors should always focus on investing in quality companies that offer safe and steadily growing payouts, supported by: stable business models with solid cash flow generation, sound balance sheets, and good long-term opportunities for profitable growth.
Ex-dividend dates can be viewed as a nice tiebreaker between two companies that meet that set of criteria and have similar valuations. Receiving a dividend sooner rather than later is nice, but it should not drive long-term investment decisions.
Remember that the power of dividend investing, just as with stocks in general, comes from owning a piece of a productive asset that compounds in value over time, paying higher dividends along the way.
While dividend growth stocks are a great way to build and preserve wealth over time, they can't help you "get rich quick". Don't let ex-dividend dates make income investing harder than it needs to be.