Wednesday, September 13, 2017

About ex-Dividends Revisited

Several years ago, I wrote a post about dividends and ex-dividends. Due to the change to T+2 settlement time, that article needs to be revised. Here, I will discuss the mechanics of dividends. Basically, stocks could be classified into two categories: those that pay dividends, and those that don't. A lot of smaller, growth companies do not pay a dividend. Companies are not required to pay dividends, and each dividend is declared by the company (usually at a board of directors meeting) before it is paid.

In the United States, most companies that pay a regular dividend do so every quarter. There are exceptions, for example some companies pay their dividends only once or twice a year. Most of the time, when looking at a financial website, the dividend is listed with the company stock quote. I estimate that 95% of the time this data is correct. However, sometimes it is inaccurate or outdated, so it is a good idea to confirm this information against another source.

Typically, when dividends are announced, the company will usually issue a press release that says something like this:

DALLAS, Aug. 1, 2017 /PRNewswire/ -- The board of directors of Kimberly-Clark Corporation (KMB) has declared a regular quarterly dividend of $.97 per share. The dividend is payable on October 3, 2017, to stockholders of record on September 8, 2017.

Let's dissect this statement. In 2017, Kimberly-Clark (NYSE: KMB) paid dividends of 97 cents per quarter (equivalent to $3.88 for the year). The dividend is paid on October 3 to "shareholders of record" on September 8. In order to be a "shareholder of record" one has to own the stock 2 business days before the record date. (This is a change from the previous 3 business day requirement.) In this case, that date is September 6. On September 7, the stock goes "ex-dividend". What that means is that if you buy the stock on September 7 or later, you are not entitled to this particular 97-cent dividend. The term "ex-" in this case means "without". So as of September 7, the stock trades without the current dividend.

A common question about dividends is "What happens if you sell the stock on September 7 or later, but before the October 3 date when dividends are paid?" In this case, you would be entitled to the dividend, even though you don't own the stock on the pay date. This has happened to me several times where I've received dividends on stock that I no longer own.

Another more involved question that people sometimes ask is "What if you bought the stock on September 6 and sold the stock on September 7. Does that qualify you as a "shareholder of record" for September 8?"

Looking at a calendar, if you buy the stock on Wednesday, September 6 (trade date), it will settle in your account T+2 days later, on the morning of Friday, September 8 (settlement date). On the settlement date, the brokerage deducts cash from your sweep account in exchange for the stock. If you sell the stock on Thursday, September 7, the sale will settle in your account on the following Monday, September 11.

In this example, you are the "shareholder of record" from the morning of Sept 8 until the morning of Sept 11. This sounds strange because you have already traded away the stock. Nevertheless, you "own" the stock at the close of business of Sept 8, so you are entitled to the dividend. Some investors actually use this method, which is known as a "dividend capture" strategy, to invest in stocks.


1 comment:

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