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One of the more recurrent questions I receive from High Yield Wealth readers is “When should I buy a stock to ensure I capture the dividend?” I understand why this question regularly appears in my email: it’s unclear to when you need to own a stock in order to capture an upcoming dividend payout.
Confusion arises because investors are faced with four dates, and none of the dates actually states when you need to buy. Adding to the confusion, you don’t actually buy on any of the dates to capture the dividend.
Clear as mud, to be sure, so let me explain the four dividend dates and what they mean. Most important, I’ll tell you the not-so-trivial date when you actually need to buy so you can capture an upcoming dividend payment.
- Declaration Date –This is the first dividend date you’ll encounter. After a company’s board of directors approves a dividend, it announces its intentions to the public. The accompanying press release will include the dividend amount, the ex-dividend date, and the payment date. Most companies follow a fairly predictable schedule, so investors can anticipate when a dividend will be declared, and it’s usually around quarterly earnings announcements. This date varies little from year to year.
- Ex-Dividend Date –This is the most important date to remember. This the date you need to focus on, and many investors get it wrong. This is the date that the stock begins trading without its dividend. Many investors believe if they buy on the ex-dividend date they will capture the upcoming dividend. They’re wrong. To capture the upcoming dividend, you need to buy no later than the day before the ex-dividend date. You could actually buy before the ex-dividend date and sell on the ex-dividend date and still capture the dividend. So remember: To collect an impending dividend, the stock must be bought no later than the day before the ex-dividend date.
- Record Date –This is the date the company fixes to determine who will be paid the dividend. The record date is two days after the ex-dividend date, but settlement actually takes three business days. You have to be the owner of the date of record, which is why you need to buy the day before the ex-dividend date. For example, if a stock goes ex-dividend on Thursday, the record date would be the following Monday, but you would have to buy the stock no later than the previous Wednesday (the day before the ex-dividend date) to capture the dividend.
- Payout Date –This the date we all anticipate. It is the date when investors who owned the stock on the record date should expect to see the dividend credited to their brokerage account. On this date, the investor now actually has the cash to use as he or she sees fit.
So, here’s the progression in a nutshell: The board of directors declares the dividend. The ex-dividend date follows, and it’s usually three to four weeks after the declaration date. The record date is two business days after the ex-dividend date, but three business days after the important buy-in date. The actual payout occurs two to three weeks after the ex-dividend date. The whole process – declaration date to payout date – takes roughly 45 days.
And I’ll say it one more time: The ex-dividend date is key. If you want the dividend, plan your purchase no later than the day before the ex-dividend date.
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