08-24-2014, 10:42 AM
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!
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!