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Buying the Dividend and Dividend Dates

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Dividend InvestingOne once popular way of dividend investing was called “buying the dividend,” where you buy a stock just before the ex-dividend date. The argument was that you could buy a stock just before it would record who it’ll pay a dividend to, pick up the “free” cash, and then sell the stock afterwards. The problem with that strategy is that once the company’s ex dividend date passes, the stock would fall by the same amount on the ex-dividend date. This represented cash leaving the company and going to shareholders, thus making this strategy meaningless. To make matters worse, anyone who employed this strategy would be hit with a tax bill for a dividend.

Is there any logic to buying a dividend? Some would argue that companies often recover some of that dividend difference soon after the ex-dividend date, so this isn’t that bad of a strategy. However, if that’s the case, you might as well buy shares on the morning of the ex-dividend date. You get the stock after the fall, and thus those predicted recovery gains, and you don’t pay taxes on getting your own investment back as a dividend.

Dividends can be a very important part of your portfolio as long as you invest in them carefully, buying dividends is not being careful. :)

I threw out a bunch of dates in the explanation of buying the dividend, and why its a bad idea, so I wanted to explain what all those dates were. There are four important dividend dates:

  • Declaration Date: This is the day the company announces to the public what, if any, they will be paying out as a dividend. For all practical purposes, this date is irrelevant.
  • Ex-Dividend Date: Anyone who buys the stock on this date or later will not be entitled to the dividend payment (it is one day after the in-dividend date). On this day, you will usually see the stock price drop by the amount of the dividend because, in theory, that exact amount of value has just been transferred out of the company and into the pocket of its shareholders. Sometimes this will be abbreviated as “ex-div.”
  • Date of Record: On this day, the company will look its records to see who they are supposed to pay. You have to be a holder of record, that is the registered owner of a security, to be ensured a payout. The Date of Record is typically two days after the Ex-Dividend Date because stocks are settled on a T+3 schedule (meaning when you buy a stock, it takes three days for it to be entered into a company’s records). So when you buy it on the Ex-div date, you won’t be in the books until the day after the Date of Record.
  • Payment Date: Finally, the payment date is the day that checks are mailed to shareholders or funds are deposited into brokerage accounts.

Let’s take a look at an example – Hatteras Financial Corp. They “Hatteras Financial Corp. is an externally managed mortgage real estate investment trust (REIT) formed to invest in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by a United States Government agency (such as the Government National Mortgage Association (Ginnie Mae)), or by a United States Government-sponsored entity (such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac))” according to Google Finance.

On XXX, HTS announced a $1.20 per share quarterly dividend on December 15th, 2009. The dividend will be paid out on January 22nd, 2010 to shareholders of record on December 28th, 2009. They set the ex-dividend date at December 23rd, 2009.

The stock closed at around $30.10 on the 22nd and opened at $28.80 on the 23rd, the ex-div date. While there were certainly other factors involved, the vast majority of the drop can be attributed to the $1.20 dividend. If you bought HTS for the dividend on December 22nd, you secured yourself a $1.20 per share tax liability for absolutely no reason.

(Photo: amagill)

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17 Responses to “Buying the Dividend and Dividend Dates”

  1. ctreit says:

    When you are “buying the dividend” you buy a stock just before it goes ex-dividend not when the company declares its dividends. I have bought dividends many times and it has worked out for me. But I employ this strategy only in my short-term trading account and with a lot of different restrictions. This strategy makes no sense for long term investors.

    • Jim says:

      You are correct, I wrote that first paragraph incorrectly, swapping “declare” with … well, whatever verb you could use for the day before the ex-dividend date. :)

      It might have worked out but the logic of it is faulty, the stock falls by the dividend amount so there’s no gain. Has it worked out because the stock has increased after that date?

  2. Evan says:

    Jim,

    Maybe you or another investment guru could answer this, but…When do the stocks usually bump up after the dividend? How long does it take?
    ****
    Also, you should mention it is illegal (FINRA) for a financial advisor to try and advise someone to buy the dividend.

  3. Chris says:

    Does the market price truly react that quickly to the loss in company value due to dividend payouts?

  4. Soccer9040 says:

    I’ve always wondered about this. Even more so now that its dividend season and all of my ROTH IRA funds are paying out.

  5. It seems to me to make this worth your time you would have to bet a large amount on a given stock. ctreit seems to be a seasoned investor but even he/she admits that there are a lot of other restrictions used to pick a candidate.

    With HTS it would take a $5,000 investment to reap a meager $200 dividend on 166 shares. How much work would go into screening for the right pick?

    It’s always good to learn and understand but I’m not sure an individual should ever be serious about this approach.

    Jim, are you playing the dividends? And if so, how much are you willing to risk on a single play?

  6. pmulroy says:

    I have mentioned this recently in another post but I’ll repeat it here:

    Stock prices do not drop by the amount of the dividend paid. Stock prices are not determined solely by the net asset value (NAV) of the company. There are many other factors besides how much cash a company has on hand that have a larger impact on the fluctuations of a given stocks price.

    “Buying the dividend” refers to mutual funds distributing accumulated dividends. Mutual funds shares are indeed priced by NAV and therefore they will drop by the amount of dividends distributed.

  7. I rarely invest in a company just for it’s dividend but these shares are great for short-term traders because you can make some decent profits buying oversold stocks that are due to pay a dividend in 1 or 2 months time, for instance. They will often increase in price as the dividend day approaches, and often by more than the actual dividend.

  8. Brandon says:

    You neglect the short-term loss aspect of “buying the dividend.” When the stock is sold, there is a short-term loss that is applied. If an individual has short-term gain to offset, the net is a wash. Instead, you have converted a short-term capital gain to dividend income, which if properly structured could be advantageous. Additionally, as several posters have noted, book or asset value of a company is not directly related to stock price. Although stocks generally reflect a drop due to a dividend, this drop is usually negated within a few days although short-term volatility introduces some risk.

  9. Steven says:

    http://beginnersinvest.about.com/od/dividendsdrips1/tp/dividend-investing-guide.htm

    Appears to have a wealth of info on dividends, but haven’t read through it yet. Too much stuff, and brain is like, “I’m too lazy now, shutting down now talk to you tomorrow.”

    • Wilma says:

      Went to that address and Oooo owwwch brain freeze overload. Your right about too much info for now. Will definitely return to peruse that place. Thanks for posting it. =)

  10. Dan says:

    What do you think. Focus on a dividend paying stock in an uptrend. After the dividend Date of Record, and after the price stabilization. Then watch for an upturn. Buy the stock, and hold for a peak ,near, but prior to the ex dividend date, sell. Take your short term capital gains. Then repeat. Base your peak and troughs on history and your chosen indicators.
    Remember capital gains are one of the perks to making a profit.

    • govenar says:

      So you’re saying that because you know a lot of people will “buy the dividend”, their buying will make the price go up, and you can take advantage of that by buying before they do?

  11. FLaDave says:

    I guess I re-entered the market at just the right moment, as I grabbed Verizon at $34+(mid-Mar.), thinking dividend, & then have watched it climb to $37+, before the dividend payout !

    Don’t know how often one can catch a stock in such a position, but I ain’t complainin’, lol !

  12. Anonymous says:

    Dividends can be a very important part of your portfolio.I agree, but it is also important how to choose a winning stock. Thanks.

  13. Tom says:

    Surely you could short the stock just before the ex-dividend date and sell immediatly after, thus collecting the dividend without any risk of future price change. Then rinse and repeated with other stocks expecting dividends?

  14. Late to the party says:

    @Tom ^^^

    If you are holding a short position in a stock on the ex-dividend date, YOU will be liable to PAY the price of the dividend to whoever you are ‘borrowing’ the stock from when you shorted.


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