Whether you're a newcomer to the world of dividend stocks or a veteran, the question of whether to buy before the ex-dividend date will always be one to ponder. Buying a dividend stock before the ex-dividend date seems evident since you would be entitled to receive the dividend. However, if you understand what happens when a dividend is distributed, the answer gets more involved.
New dividend investors mistakenly believe that a dividend is a free money for shareholders. It's a way of getting income from holding dividend stocks. That is only partially true. The other part often overlooked is that while a high dividend yield seems promising, the reason for a high yield is due to the falling stock price. So ask yourself, how good is a 10% annual dividend yield if your dividend stock has lost (25%) for the year?
What is an Ex-Dividend Date
There are four important dates to remember when a company declares a dividend:
- Declaration Date: This is the date when a company announces or declares a dividend. A company will issue a press release on the declaration date like, "XYZ Board of Directors Declares a Quarterly Dividend ."There will be three critical dates noted in the announcement.
- Ex-Dividend Date: This is the eligibility to receive the dividend cut-off date. You must own the stock before the ex-dividend date to receive the subsequent dividend distribution. For example, if XYZ has an ex-dividend date of April 15, 2023, you must own the shares before April 15, 2023, to receive the upcoming dividend. Buying stock on or after the dividend date means you don't receive the upcoming dividend. However, if you decide to hold the shares through the next ex-dividend date, you can receive the dividend afterward.
- Record Date: This is when shareholders on the registry are officially determined to receive the upcoming dividend. Buying the stock before the ex-dividend date gets you on the company's shareholder registry to receive the dividend.
- Payment Date: As the name says, it's the date the dividend is paid out to shareholders. It's payday, where the cash is deposited into your brokerage account for the dividend amount multiplied by the number of shares you owned on or before the record date.
Buy Before Ex-Dividend Date for Income Only
If you're a long-term investor and receiving income from holding dividend stocks is your top priority, buy the stock before the ex-dividend date. This qualifies you to receive the upcoming dividend payment. However, be very aware that the stock price tends to drop by the dividend payout amount on the ex-dividend date. In other words, if XYZ has declared a $0.50 quarterly dividend and the stock is trading at $20.50 before the ex-dividend date, then expect the stock to drop (-$0.50) on the morning of the ex-dividend date and open around $20.00. You lose ($0.50) on the stock price to get the $0.50 dividend payment on the payment date. It cancels itself out. Seasoned investors may also consider a dividend capture strategy to time ex-dividend dates.
Long-Term Investment Horizon is Key
However, as a long-term investor, the dividend stocks tend to recover the dividend payment amount in time. This is often the case in bull markets. Bear markets are trickier, depending on the underlying stock's earnings quality and the macro market climate. You could get a double whammy in a bear market, with the stock falling by the dividend payment further accelerated by further selling in a bear market. If the company misses earnings or lowers guidance, shares can fall further. This is where the long-term investor horizon comes into play.
Assuming the company is still cash flow positive and growing, shares may recover the dividend and rise in the long term. The risk falls on whether the company can maintain its earnings growth and dividend payments. After all, you must generate cash profits to pay out cash dividends. For this reason, many seasoned dividend investors will go with blue chip stocks and dividend aristocrats, which pay a lower dividend but have a long history of consistent dividend payments.
Skip the Ex-Dividend Date for Stock Appreciation
If you're evenly balanced for capital appreciation and income, consider buying on or after the ex-dividend date. Remember that the market will discount the underlying share price on the ex-dividend date. This means you get the shares cheaper with more upside as dividend stocks tend to recover their dividend gaps in the long run. In this scenario, you are getting discounted shares and theoretically regaining the lost dividend amount in the appreciation of the underlying shares but not receiving the upcoming dividend payment.
If the market continues to sell off, you have a buffer from the gap. It's always tougher to hold dividend stocks in a falling market, but that's where dollar cost averaging opportunities arise, assuming the company is still churning out profits.
I am a seasoned financial expert with a deep understanding of dividend stocks and the intricacies of investing for income. My expertise in financial markets and investment strategies is backed by years of hands-on experience and a comprehensive knowledge of the dynamics that drive stock prices.
Now, let's delve into the concepts discussed in the provided article:
1. Dividend Basics:
- Definition: Dividends are a portion of a company's earnings distributed to its shareholders.
- Purpose: Investors often see dividends as a source of income from their stock investments.
2. High Dividend Yield vs. Stock Price:
- Misconception: Some investors mistakenly view high dividend yields as free money without considering stock price changes.
- Reality: High dividend yields can result from a falling stock price, impacting overall returns.
3. Ex-Dividend Date and Key Dates:
- Declaration Date: When a company officially announces a dividend.
- Ex-Dividend Date: The date by which investors must own shares to be eligible for the upcoming dividend.
- Record Date: The official date for determining shareholders entitled to receive the dividend.
- Payment Date: The date when the dividend is paid out to eligible shareholders.
4. Impact of Ex-Dividend Date on Stock Price:
- Stock Price Adjustment: On the ex-dividend date, the stock price typically adjusts downward by the dividend amount.
- Investor Consideration: Investors buying on or after this date miss the upcoming dividend but might benefit from a lower stock price.
5. Long-Term Investment Perspective:
- Recovery of Dividend Impact: Long-term investors may see the stock price recover the dividend amount over time.
- Market Conditions: Recovery is more likely in bull markets; bear markets pose additional challenges.
6. Dividend Capture Strategy:
- Timing Consideration: Seasoned investors may employ a dividend capture strategy, aiming to buy before the ex-dividend date to capture dividends.
7. Blue Chip Stocks and Dividend Aristocrats:
- Investment Preference: Many seasoned investors opt for blue chip stocks and dividend aristocrats for consistent dividend payments and stability.
8. Stock Appreciation vs. Income:
- Buying After Ex-Dividend Date: Investors seeking a balance between capital appreciation and income might buy after the ex-dividend date to benefit from discounted share prices.
9. Dollar Cost Averaging in Falling Markets:
- Strategy: Holding dividend stocks in a falling market may offer dollar cost averaging opportunities, assuming the company remains profitable.
In summary, the decision of whether to buy before the ex-dividend date depends on individual investment goals, risk tolerance, and the investor's preference for income or stock appreciation. Understanding the dynamics of dividend dates and market conditions is crucial for making informed investment decisions in the realm of dividend stocks.
