See how to use the ex-dividend date in dividend investing strategies
The ex-dividend date is one of the most important markers in dividend investing but also one of the most confusing. It defines who gets the dividend and will also affect the stock price.
In this video, I’ll not only walk you through the dividend calendar dates, I’m revealing three dividend investing strategies you can use to maximize your returns.
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How Does the Dividend Calendar Work?
Now everyone in the community knows I’m a big believer in dividends. These cash-paying investments have been shown to beat the market and at times, that dividend yield is the biggest chunk of market return. You see here a chart of the total market return by decade and that dividends have accounted for about a third since 1926 but in some decades like the 70s it’s been as much as half the total return.
But there’s a very important part of dividends that most investors don’t understand or are a little confused. It’s the process where a dividend is declared by the company and how it’s determined if you get that dividend or not.
In this video, I’m going to show you the important dividend calendar dates to watch then I’ll reveal three dividend investing strategies around these dates and two tips to boost your returns.
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What is the Ex-Dividend Date?
When a company decides to pay a dividend, it’s because the Board of Directors has approved the cash payment and declares the dividend. From this date, the declaration date, you usually have about 30 days before they record who gets the dividend. Whenever you hear that a company has declared their dividend, they’ll also announce what’s called the ex-dividend date.
This ex-dividend date is the first day that the stock trades without the dividend, it’s ex that payment. That means you need to own the shares on the day before to get the payment. It’s not shown here but sometimes investors call the day before the ex-dividend date, they call it the cum-dividend date.
So in our example here, and we’ll cover another example with Apple dividends later, here Microsoft announced they’d pay a dividend on November 29th and that the ex-dividend date would be February 14th. Usually it’s only about a month between the declaration and the ex-date but here it’s longer. If you owned shares of Microsoft at the close on February 13th, you would get the dividend.
When trading in Microsoft opens on the 14th, those shares don’t include the dividend. It usually takes a couple of days for the company to get the books straight to see exactly who owned the shares on the 13th so that’s why the record date is later. Then usually a few weeks later, the actual payment of that dividend goes out on the Payment Date.
Why Ex-Dividend Date is Important for Investors
When a company announces to stockholders that they will be paying a dividend, the record date is set as the day you must have been a shareholder of that company before its ex-dividend date. If you purchase the stock after this date then you will not receive its upcoming dividend payment made by the company. Furthermore, if a stock goes “ex” it means it no longer trades cum-dividend and ceases trading at its current price. After this happens, the next traded share becomes the new ex-dividend date for future dividends unless another trade takes place to reset the cycle again.
For example, let's say you purchased 100 shares of Stock X. on its ex-dividend date three months ago. Stock X has declared a dividend of $1.00 per share and sent out the dividends to all its shareholders of record on October 2nd. You, as a shareholder of this company since September 3rd, would receive the dividend pay in your brokerage account by October 5th at the latest.
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If you purchased another 100 shares on October 7th then you would not receive the upcoming dividend because it will be deemed that you do not own shares before the ex-dividend date since they were already traded on October 2nd/October 3rd depending when they cut off from trading from previous days.
Whether or not it matters for investors whether they need to go ex-dividend is an interesting discussion but most people choose to go ex-dividend because if they are to receive the next dividend then they have to wait for its payout. Also, it is important to be aware that many financial funds have rules that cash dividends or other types of payments will be reinvested in order to buy more shares which means you would once again not receive the next dividend payment.
Another thing to remember is there are also day traders who purchase stocks with the intent on selling them within minutes so being ex-dividend could mean the difference whether or not a stock gets sold immediately into the market. Before purchasing a stock make sure to check its upcoming ex-dividend date and choose one that suits your investment style best.
For this reason, the ex-dividend date is considered to be very important for investors, because it can determine whether they receive dividends or not. And depending on the price of the stock and the value of future dividend payments, it may make sense to purchase a stock ahead of its ex-dividend date in order to ensure that you will get said dividend payment.
What Happens to Stock Price after the Dividend?
An interesting thing usually happens on that ex-dividend date and this is going to feed into our dividend calendar strategies later. Because the company has committed to making that cash payment to investors, and the shares on the ex-dividend date don’t include that cash payment, the company is technically worth less than it was the day before.
If the company pays out $300 million for that dividend, and remember it’s just accounting right now because it hasn’t actually paid the dividend but that money sitting in Microsoft’s bank account doesn’t belong to the company, it belongs to those shareholders, then the company’s value is $300 million less than the day before.
Now it doesn’t always happen exactly, and we’ll get into why, but most of the time you’ll see the share price fall by about the amount of that dividend on the ex-dividend date. This is why it’s so important to know these dates. You might have collected that dividend but now the shares have fallen in value by about the same amount.
Ex-Dividend Date Investing Strategies
Now I want to share those three dividend calendar strategies you can use to take advantage of all this.
Part of understanding these dividend date strategies is understanding the taxes around dividend investing and this is really going to affect your returns. Dividends are taxed in one of two ways. If you own a dividend stock for more than 60 days either before or after that ex-dividend date. So the total time you own the stock has to be 61 days and include that ex-dividend date, then the IRS says that’s a qualified dividend and you get a special lower rate.
If you own the shares for 60 days or less though, you don’t get that special rate on the taxes. You collect the dividend but it goes on your taxes as regular income and you pay those regular income tax rates. So let’s look at a chart here because I know this can be confusing. Let’s just look at the one on the left here for individuals.
If you own a dividend stock for 61 days or more, whether it’s before or after the ex-dividend date, then you pay that capital gains tax rate on when you account for that dividend on your income taxes next year. You can see those tax rates in orange are quite a bit lower than the income tax rates in blue. In fact, for a lot of people, they may not owe any taxes on their dividends if their income is low enough.
If, on the other hand, you hold the shares for 60 days or less, You’ll pay the ordinary tax rate in blue on that dividend. This is important to the dividend capture strategies we’ll talk about next because obviously those higher taxes are going to affect your returns.
Dividend Capture Strategy
Now I’ve got a trick to avoid these higher taxes that I’ll share in a minute but let’s get to that first dividend calendar strategy. This first dividend strategy is called Dividend Capture and is by far the most popular though I’ve got two other strategies that might help you make higher returns.
The dividend capture strategy is buying the shares just before the ex-dividend date, so buying them the day before and then selling on the ex-dividend date. This means you get the dividend but don’t hold the shares very long so you’re not really investing on the price moves. The beauty of this strategy is that it’s so simple. There’s no analysis or stock-picking involved.
Now like we said, a lot of times the share price will fall on the ex-dividend date because new investors don’t get the dividend. So what a lot of dividend capture investors will do is wait during the ex-dividend day to see if the share price rebounds a little. This happens a lot actually, investors get over that knee-jerk reaction of the shares not trading with the dividend and they bid the stock price back up.
So sometimes with this strategy, you won’t see the stock price rise all the way back to where you bought it the day before but it will come up a little. This means some of the dividend gain will be offset with a loss on the stock price but you’ll still have a gain.
The great part about the dividend capture strategy is there is always a stock going ex-dividend on any particular day so you can just roll this one over every day. You buy shares of a stock that go ex-dividend the next day, sell on the ex-dividend day and immediately buy shares of another stock that go ex-dividend the following day.
Let’s look at a real-world example of the dividend capture strategy with Apple dividends then I’ll reveal a couple of secrets to make you more money.
Apple declared a $0.73 per share dividend on January 29th 2019 with an ex-dividend date of February 8th, 10 days away and a payment on the 14th of February. Using the dividend capture strategy, you would have bought the shares on February 7th. Remember you have to own the stock before the market opens on that ex-dividend date, in this case February 8th.
Buying the shares on February 7th would have meant paying $170.94 at the close of trading. Notice that even though the payment date, the day the company disperses the cash dividend, is on the 14th of February, it only goes out to investors that held the stock before that ex-dividend date.
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Now the shares did drop on the next day, the first day the stock didn’t include the dividend. You would have collected that $0.73 per share dividend but the shares opened on February 8th at $168.99 per share, losing $1.95 or about 1.1% of the price you paid.
As is often the case though, the shares rebounded through the day and closed at $170.41 per share or $0.53 below where you bought them the day before. You gained $0.73 on the dividend but lost $0.53 on the price for a net gain of $0.20 per share.
Now that tenth of a percent gain doesn’t sound like much but remember, this is a one-day gain. Even that modest gain, rolled over every day into a new dividend stock would produce a 34% annual return.
Of course the problem here is with those taxes and trading costs. The one-day gain even at the end of the year on that $1,300 portfolio is only $1.57 so not enough to cover a $5 trading cost. To cover the trading cost, you’d need a portfolio value of just under $4,300 to make the tenth of a percent gain cover your cost.
That’s not to say the dividend capture strategy doesn’t work. This was one Apple dividend date. There are others where your return is much more, on the order of a percent a day or more, and there are other days when you might book a loss on the strategy. I have two tips though that are going to help maximize your returns on this strategy.
First is to focus on larger companies that pay dividends of 3% or more. Smaller companies with a market cap under $5 billion tend to have bigger price swings whether it’s related to the dividend payment or not. That’s going to increase the risk that your share price drops greater than the dividend amount on that ex-dividend date.
Getting that higher dividend yield is also going to mean a better chance at collecting more than the shares drop.
The second tip here is to use this strategy in a tax-advantaged retirement account like an IRA or a Roth. That way, no matter how long you own the shares, you won’t pay taxes on the dividends. With a Roth account, you’ll never pay taxes on the dividends you collect.
That dividend capture idea is the main dividend calendar strategy but there are a few others that while they might not be as popular are just as good at producing returns.
Buying Dividend Stocks Cheap
Another strategy is looking for stocks to buy on the ex-dividend date to pick up shares at a discount. The idea here is that investors over-react initially and the stock price usually rebounds from the ex-dividend selloff. So if we look back at our Apple dividend example, we could have gotten the shares for $168.99 at the open on the ex-dividend date and made a 0.84% return by the close.
Now remember, you still have tax problems if you sell immediately. Price gains are taxed at the lower capital gains rates only if you own the shares for a year. If you were to sell your shares that day then you’d pay regular income tax rates on the gain. Still though, this can be a great way to pick up long-term holdings or even on that short-term gain if you hold it in a retirement account so you don’t get hit by the taxes.
Dividend Growth Investing
Another less followed dividend strategy is buying stocks that have recently declared dividend increases, especially if the increase above the normal annual increase. This one is harder to follow because you have to check on the normal dividend increase and compare it after a company makes its dividend declaration. Still though, it’s a fairly simple strategy.
You look for dividends declared on the day and then go to Yahoo Finance to look at dividend history for the company. You can then compare the percentage change from the most recent dividends to see how much they have increased in the past. Yahoo Finance is a good resource for a lot of information so I’m here on the page for Apple stock then come down to Historical Data.
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On this page, you find share price, dividend data and any splits on the stock. So I’ll change the dates to get five years and then go over here to show dividends only and click apply. This shows me all the dividends for Apple over the last five years and I can see when they were increased and by how much.
The idea here is that a dividend increase is a point of confidence in the company and business growth. Management and directors usually take a very conservative look at dividends to make sure they have sufficient cash for growth and yield payments so increasing the dividend means they’re confident in that continued business growth. That confidence should result in a higher valuation for the company and higher dividends in the future.
There are a few dividend funds you can buy that mimic this approach. The Dividend Aristocrats is a special group within the S&P 500 of companies with 25 plus years of consecutive dividend increases and a market cap over $3 billion. There are currently 57 stocks that meet the criteria and it’s tracked by the ProShares S&P Dividend Aristocrats ETF, ticker NOBL. You’ve also got the Vanguard Dividend Appreciation ETF, ticker VIG, which tracks companies with a record of consistently increasing their dividends.
The Vanguard fund doesn’t explicitly invest in the Aristocrats and has a less strict criteria on those consecutive increases but I like it better for the lower expense ratio. You see here that the two funds follow each other pretty closely so that quarter of a percent difference in fund fees each year can really make a difference.
If you love dividends as much as I do, we’ve got another video highlighting dividend stocks that pay monthly, how I find them and some secrets to dividend stock investing. Click here to check out that video and get paid every month!
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