Ex-Dividends

[TopRamenTrader]

Sorry dont know if this is the right place to ask this. But i'm having some trouble understanding what an Ex-Dividend is.

DHY is a high yield Div but is going Ex-Dividend. its supposed to mean who ever owns stock gets paid. But what does that really mean?

If i purchased it i get the money directly?

sorry noob question but i rather hear it from the pros. IE you guys

TRT

[ronn38]

We were all noobs once :-)

There is a date that a company declares its stock as "ex dividend"--you must own that stock BEFORE that date to collect the dividend. Otherwise the dividend is paid to the previous owner.
The Wikipedia definition is pretty straightforward:

http://en.wikipedia.org/wiki/Ex-dividend_date.

If you purchase a dividend paying stock, the money will be paid into your brokerage account. It will show up as CASH. It can then be transferred to your bank account, or reinvested.
OR, you can DRIP (wiki that as well). Then the dividends are reinvested into the company in the form of new stock purchase(s). All but a few of my holdings are DRIP—compounding interest is the best interest ;-)

Believe it or not, wiki and Investopedia are very helpful for decoding investment “lingo.”

http://www.investopedia.com/terms/e/ex-dividend.asp

Ronn

[daat99]

Just to add a bit to what ronn38 already elegantly explained.

At the Ex-Dividend date 2 things usually happen:
1. The price of the stock at the opening will be lower by the dividend amount.
2. All the people that owned the stock at the close of the previous day will be marked for dividend payments.

Another date to note is the dividend payment date.
At this date all the people that owned the stock at the close of the day before the Ex-Dividend date will be paid the dividend.

Back to DHY example.
Here is what Nasdaq has to say about DHY dividend history:
http://www.nasdaq.com/symbol/dhy/dividend-history

Ex/Eff Date Type Cash Amount Declaration Date Record Date Payment Date
8/14/2014 Cash 0.024 8/1/2014 8/18/2014 8/22/2014

The Ex-Date is Thursday 8/14/2014 which means if you want to get the dividends than you need to own the stock at the close of Wednesday 8/13/2014.
On the Payment-Date 8/22/2014 everybody who owned DHY at the close of Wednesday 8/13/2014 will get $0.024 dividend for every share he owned at that time.

Example:
If you owned 100 DHY shares at the close of 8/13/2014 and then purchased another 100 shares between the open of 8/14/2014 and 8/22/2014 you will get dividend only for the first 100 shares you owned.

Example 2:
If you purchased 100 DHY shares after the close of 8/13/2014 than you will not get dividends at all.

[Dividend Watcher]

(08-19-2014, 03:43 AM)daat99 Wrote: At the Ex-Dividend date 2 things usually happen:
1. The price of the stock at the opening will be lower by the dividend amount.
2. All the people that owned the stock at the close of the previous day will be marked for dividend payments.

Actually, IIRC, the date people are marked as getting the dividend on the corporate books is the Record Date. The ex-date is usually 2 days before to allow to settlement on the exchanges.

[TopRamenTrader]

After reading some wiki and investopedia. I am starting to understand this @dat99 that was a pretty good explanation. but what i'm confused about is after the ex -dividend date for example 8/14/2014 those who bought before that day. Will receive their div days or weeks later. But then the cycle starts over again right? so after the payment if i were to buy stock i would receive dividends on the next ex div date?

[Dividend Watcher]

Correct. If you buy after the ex date, you get the dividend on the next distribution.

[TopRamenTrader]

phew thanks for clearing that up for me DW. I was like " man some other guy is gonna get the money when i risked my cash ". I got sad for a moment but sounds like we are good!

[earthtodan]

Keep in mind, no money or value is created when a company pays a dividend. Part of the company's cash gets transferred to shareholders, and the value of the company (the market cap) gets reduced by a similar amount at that time. In fact, brokers automatically adjust bid/ask limit orders downward overnight by the amount of the dividend payment. Any price change before and after the ex-dividend cutoff incorporates this difference. The point is that there is no advantage to buying a stock before or after the ex-dividend date. I admit there is a psychological draw to buying a stock in time to receive a dividend, but that urge has to be unlearned.

Over the next quarter, the amount of the dividend (or the next expected dividend payment) gets built back into the price. Of course you can't watch this happen because the price movement over 3 months totally obscures it. But that is the beauty of dividend investing. While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.

My point here is, understand ex-dividend but don't let it factor into your buy timing.

[TopRamenTrader]

good point Dan not really understanding Ex-Dividend is what lead me to think that way of purchasing only because of dates.

[Dividend Watcher]

(08-19-2014, 10:55 PM)earthtodan Wrote: While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.

Dan, that is an awesome metaphor and so apropos. I'm gonna put that in my Notable Quotes section of my portfolio business plan. Thanks for wording it so simply and eloquently.

[Roadmap2Retire]

(08-19-2014, 10:55 PM)earthtodan Wrote: Keep in mind, no money or value is created when a company pays a dividend. Part of the company's cash gets transferred to shareholders, and the value of the company (the market cap) gets reduced by a similar amount at that time. In fact, brokers automatically adjust bid/ask limit orders downward overnight by the amount of the dividend payment. Any price change before and after the ex-dividend cutoff incorporates this difference. The point is that there is no advantage to buying a stock before or after the ex-dividend date. I admit there is a psychological draw to buying a stock in time to receive a dividend, but that urge has to be unlearned.

Over the next quarter, the amount of the dividend (or the next expected dividend payment) gets built back into the price. Of course you can't watch this happen because the price movement over 3 months totally obscures it. But that is the beauty of dividend investing. While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.

My point here is, understand ex-dividend but don't let it factor into your buy timing.

Very well put, earthtodan.

[daat99]

The is a drawback of buying stocks just before the Ex-Date as opposed to on the Ex-Date itself.

Let's recap:
1. If you buy the stock a day before the Ex-Date than you are entitled for the dividend and the stock price is reduced by the dividend amount on the Ex-Date open.
2. If you buy the stock at the Ex-Date than you are not getting the dividend but you bought the stock for less than it was priced yesterday by the dividend amount.

In theory you get the same value for your $ on both scenarios but here comes the ugly difference: Taxes (where it applies)!

In scenario #1 you need to pay taxes for the dividend you just received.
In scenario #2 you don't pay taxes at all.

Let's put some numbers in this example.
For simplicity I'm going to assume the following unrealistic assumptions:
1. Stock XYZ is trading a day before the Ex-Date for $100.
2. XYZ is paying $1 in dividends (4% yield)
3. On the Ex-Date open the XYZ stock price will be reduced by the dividend amount to $99.
4. XYZ stock price doesn't move at all between Ex-Date open and Pay-Date
5. The Pay-Date is 1 week after the Ex-Date.
6. We need to pay 10% taxes on dividends.
7. We don't pay commissions.
8. We have $1000 to invest.

In scenario #1 we buy 10 shares for $1000 and get paid $10 in dividends and pay tax of $1.
On the Ex-Date open we hold 10 shares worth $99 each and no cash in our account.
Our account value on the Ex-Date open is 99*10=$990.
After a week - on the Pay-Date we get $10 and pay $1 in taxes.
Our account value on the Pay-Date is 99*10+10-1=$999 where $9 is cash

In scenario #2 we buy 10 shares for $990 ($99 each) on the Ex-Date open and we have $10 cash left in our account.
Our account value is 99*10+10=$1000 without change.
On the Pay-Date nothing happens to us and we still have $1000 value where $10 is cash.

Notice how our account value is bigger in scenario #2?

Now to the cherry on the top:
In scenario #2 we had the cash in our account immediately when we purchased the shares so we could've allocated it to another purchase and let the compounding start working for us!
In scenario #1 we will get only $9 back instead of $10 but we also got it one week later so the compounding works 1 week less (there are stocks with more than a month between the Ex-Date and Pay-Date, this has more impact on those).


Just remember that in the real world theory usually doesn't work so well so don't worry about it so much.
Personally if I have 2 comparable stocks on my radar and I think they are both equal than I prefer to buy the stocks that just passed the Ex-Date but before the Pay-Date.
I always prefer the better stock regardless of the Ex-Date/Pay-Date though!