I’m a Stock Expert: Don’t Buy Dividend Stocks on These Days
Written by
Austin Bernhardt
Edited by
Rebekah Evans
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Investing in dividend stocks can be a good way to add stability to your portfolio, especially in more volatile times for the market. But before you make use of the benefits of a dividend stock, it’s important to understand how they work and the trading deadlines that must be met to make the most of this feature.
Also here are 15 high-dividend stocks.
What Is a Dividend?
A dividend is a form of profit distribution used by a publicly traded company to give back to its shareholders. In other words, when a company announces that it will pay a dividend, it’s saying that people who own shares of that company will receive either cash or additional stock.
Why would they do this? Essentially, offering dividends sends a message to current shareholders and prospective buyers that the company is in good shape and expects to continue to experience steady growth. It’s a way of both thanking current investors and inviting possible future investors by showing that a company’s finances can be relied upon.
Benefits of a Dividend Stock
As CFRA’s chief investment strategist Sam Stovall explained it to CNBC, reinvested dividends account for a third of total returns in the S&P 500 since 1945. From an investor standpoint, those returns are the result of “free money” you get simply from owning a dividend stock.
Best Time To Buy a Dividend Stock
You can buy a dividend stock more or less whenever you want, but to actually be eligible to receive a dividend, there are a few important days you’ll want to keep in mind.
The declaration date is the day a given company announces that it will pay a dividend. From there, the clock is ticking for anyone who wants to benefit from holding the stock.
Next comes the ex-dividend date — or the ex-date for short — which is the deadline for prospective investors to buy the stock in question and still qualify for the dividend. The record date typically comes the day after the ex-date and is the actual day when the company checks its list of shareholders to see who qualifies for a dividend. If you buy a stock on the record date, you’re ineligible for the dividends that will be paid out on the last important milestone, the settlement date.
In short, to receive a dividend, the safest course of action is to buy well before the ex-dividend date to ensure your eligibility.
Buyers May Not Qualify For Dividends in Time
The question of dividend timing gets a little more complicated when you consider that actually buying a stock doesn’t happen instantaneously after putting in an order. Rather, it takes a few days — stock exchange rules give brokers three days. So if a prospective investor puts in an order to buy a dividend stock, say, the day before the ex-date, there’s a good chance that the actual sale won’t take place until after the ex-date. In those cases, even though the investor put in an order to buy the dividend stock before the ex-date, they’re still not eligible for a dividend.
As a general rule, then, it pays (literally) to put in a buy order at least several days before the ex-date to ensure dividend eligibility.
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