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Topic: Dividend Stocks
May 3, 2024|by Pat McKeough
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Use the ex-dividend date (and record date) as an investing strategy to get the most dividend returns
Knowing your ex-dividend date, and record date, will help you get full value from your dividends, but trying to make a quick buck buying and selling around key dividend dates is not worth the risk.
Dividend stocks are an essential part of a good conservative investing philosophy. But there are certain details you should know about the way dividends are paid out. Key to that is understanding the ex dividend date and record date. The ex-date for dividends is a crucial concept for dividend investors to grasp.
Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.The Growing Power of Dividends
Important detail: the ex dividend date and record date
The ex dividend date and record date are closely related and often confused. The ex-dividend date is one business day before the record date when the shares begin to trade without their dividend. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade cum-dividend, or with dividend. If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle. It’s why investors pay close attention to both the ex dividend date and record date when buying shares. Understanding the ex-date for dividends is essential for maximizing your dividend income.
An example of using the ex-dividend date as an investing strategy
Here’s how it works:
Let’s say a company’s dividend of $0.52 a share was payable on Friday, February 24, 2023, to those shareholders of record at the close of business on Wednesday, February 22, 2023, the record date.
One business day before that record date, the shares began to trade without their dividend, that is, on the ex-dividend date of February 21, 2023. If you bought this dividend-paying stock one day or more before the ex-dividend date, you still got the dividend (because the shares are trading cum-dividend, or with dividend). But if you bought these shares on the ex-dividend date or later, you would not receive the dividend. Knowing the ex-date for dividends allowed investors to time their purchases to qualify for the payout.
How to decide if an ex-dividend date, and record date, can be used in your investing strategy
“Dividend capture” is the trading technique of buying a dividend stock just before the dividend is paid, holding it just long enough to collect the dividend, then selling it. If you can sell it for as much as you paid for it (and that’s not guaranteed), you have “captured” the dividend at no cost, other than the transaction costs.
To do this, you would buy shares in stocks just before the ex-dividend date, so you would be a shareholder of record on the record date, and would receive the dividend. Because the stock falls by the amount of the dividend on the ex-dividend date, the strategy then calls for you to wait for the stock to move back to the price where you bought it at before the ex-dividend date. At this point, you sell the stock for a break-even trade.
Dividend capture strategies may have appeal for securities dealers or brokers executing huge trades with very low transaction costs. Corporations may even have tax benefits. But for the average investor, there’s little chance of making a significant profit on this use of ex dividend date, and record date. Trying to game the ex-date for dividends is generally not advisable for retail investors.
In summary, the ex-dividend date, also known as the ex-date for dividends, is a key concept for dividend investors. It represents the date on which a stock begins trading without the value of its upcoming dividend payment. Investors who purchase the stock before the ex-dividend date are entitled to receive the dividend, while those who buy on or after the ex-date will not receive the payout. The ex-dividend date is typically set one business day before the record date, which is the cutoff date used to determine which shareholders are eligible for the dividend. Some investors attempt to employ a “dividend capture” strategy, buying stocks just before the ex-date to collect the dividend and then selling the shares. However, this approach is risky and generally not recommended for average investors due to transaction costs and the uncertainty of the stock price recovering after the ex-date drop. Understanding the ex-dividend date is crucial for investors seeking to maximize their dividend income, but attempting to exploit it for short-term gains is usually not a wise strategy.
Is using the ex-dividend date as an investing strategy new to you? What do you think of this investing strategy in the current market? Please share your thoughts with us.
This post was originally published in April 2017 and is regularly updated.
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