Upbeat music plays throughout.
Narrator: Many companies share profits with their stockholders by paying cash dividends, which are automatically deposited into the shareholders' investment accounts.
These automatic payments may seem like a straightforward way to profit from stocks and ETFs, but simply owning a stock on the day a dividend is paid doesn't guarantee you'll receive it.
The day the dividend is announced, the day you need to be a shareholder to be eligible to receive that dividend, and the day the dividend is paid are different. Understanding these dates can help you know what to expect when investing in dividend stocks.
Here's how it works.
First, the company declares the dividend on the declaration date.
This is when the board of directors announces how much each shareholder will receive per share.
But shareholders don't get their dividend immediately.
In fact, if you want the dividend but don't own shares yet, you still have time to buy. When the board of directors declares the dividend, it also announces what's called the record date.
The record date is the date on which you must be a shareholder in order to receive a stock's dividend.
To make sure shareholders get the dividends they're entitled to, the exchange that the stock trades on sets a cutoff called the ex-dividend date. The ex-dividend date is typically, the same day as the record date. If you want to receive a stock's dividend, you have to buy shares before the ex-dividend date.
After the record date, shareholders still have to wait for payment. The time between the record date and the payment date is different depending on the company, but it can vary from a week to over a month.
If you sell your shares on the ex-dividend date or later, you'll still receive the dividend, even if you're no longer a shareholder on the payment date.
So, let's say a company declares a high dividend payment. Does it pay off to purchase the stock before the ex-dividend date? Well, maybe, maybe not. While you'd be able to receive the dividend, as you can imagine, the price of a stock may rise before the ex-dividend date due to increased demand. On the ex-dividend date, the price may drop.
Let's say a company trading at $100 per share declares a $1 dividend. You have two choices: You could either buy its stock before the ex-dividend date to get that dividend, or you could wait until the ex-dividend date or later. But neither outcome is guaranteed to be more profitable than the other. This is because, in theory, the stock price should drop by the same amount as the dividend payment. So, in this example, if the company is giving away $1 of its income per share, its market price would hypothetically adjust to $99 per share.
While in theory, buying shares before the ex-dividend date isn't necessarily more profitable than buying shares after, in real life, prices aren't always predictable.
If you hear about an upcoming dividend payment and want in on the action, you'll need to know when the company's ex-dividend date is. So, remember, do your research, and stay up to date when buying investments that pay dividends.
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