How do people make money investing in stocks? One way is to buy a stock at a low price, and sell it at a higher the price. This is also known as capital gains yield. Another way is to receive the dividends while holding the stock. This is known as dividend yield.
This is given by the following formula:
Dividends are given out by companies as a way to distribute their earnings to shareholders. However, not all stocks pay dividends. For stocks that pay dividends consistently, it can be a good source of stable income.
1. The respective dividend dates
When a company intends to distribute dividends to shareholders, there are certain dates that shareholders or investors looking at that company’s stock should take note of. These are the announcement date, ex-dividend date, record date and payment date.
1. Announcement date: this is the date when the company formally announces the amount of dividend that it is distributing.
2. Ex-dividend (XD) date is the date where is it crucial: buying a stock on or after ex-dividend date will not have any entitlement of dividends. However, if you already own the stock and sell it on or after ex-dividend date, you will still be entitled to the dividend payout.
According to Dividend.com,
“..as long as you purchase a stock prior to the ex-dividend date, you can then sell the stock any time on or after the ex-dividend date and still receive the dividend. A common misconception is that investors need to hold the stock through the record date or pay date.”
3. The record date is the date company determines which shareholders will be entitled to the dividends. Theoretically, the record date does not affect shareholders, since ex-dividend date takes precedence in determining whether a shareholder will receive dividends.
4. The payment date is the date where the company will pay dividends to the eligible shareholders.
2. When should you buy a stock in order to get its dividends?
As an investor who’s looking to receive dividends, shares should be bought before the ex-dividend date. As mentioned earlier, buying shares before the ex-dividend date will make the shareholder eligible for the dividends.
However, if you buy shares through a brokerage account, it will take T+3 days (official settlement date) to be credited into your CDP account. This means that based on your transaction time (T), you will officially own the shares only 3 days later.
If you intend to buy a stock a day before ex-dividend date, you will have to consider the official settlement date (T+3), which must be before the record date in order to be entitled to the dividend.
When a stock has declared dividends but have yet to pay them, it is said to be cum dividend or CD.
3. What usually happens on or after the ex-dividend date?
On or after the ex-dividend date, the stock price usually drops. Due to new investors no longer being able to get dividends when they buy the stock, they will be less willing to pay for the original price of the stock. Hence, the stock price will drop to reflect this phenomenon in the market.
Let’s take a look at stock prices dropping on or after their ex-dividend date on 26 January 2017.
Fraser Centrepoint Trust: opened 1.46% lower on ex-dividend date.
Similarly, CapitaMall Trust: dropped 1.56% on ex-dividend date.
Does that mean you shouldn’t buy a stock after ex-dividend or only buy nearer to ex-dividend date?
With price very likely to fall as there is no entitlement to dividends on or after ex-dividend date, theoretically many investors would only pay for a stock less its dividends. However, if there are good expectations or projections for the stock, investors might see this an opportunity for entry. Similarly, if it is a good stock, price will likely rise back up due to high demand.
Buying a stock before its ex-dividend date just to get dividends is known as the dividend-capture strategy. In theory, this strategy can work, but in reality, market volatility and other factors come into play which can challenge the theory.
If you’re about to invest in a stock for dividend play, focus more on the fundamentals and less on the dividend dates. As the saying goes, time in the market is more important than timing the market. Consider you own time horizon (investment time), pick the right stocks and collect the dividends.