Saturday, January 19, 2008

Dividend Capture

A subscriber recently wrote and suggested I include some additional information on dividends, particularly as they may affect stock price. Before reaching that point, a little review may be helpful. Generally, there are four relatively important dates that relate to dividends. They are the announcement date, the ex-dividend date, the record date, and the payment date.

The announcement date is essentially self-explanatory. It is the date when a company announces it is going to pay a dividend. Often, though certainly not always, the announcement may be made around the time earnings are announced. The ex-dividend date is the date before which investors need to own the shares in order to be eligible to receive the dividend the company announces or has announced it is going to pay. The day the stock goes ex-dividend, the share price can be expected to drop by the amount of the dividend since investors who buy the stock then will not be receiving the dividend. The record date is the date on which the investor must be the holder of record of the shares in order to receive the dividend. It is important to realize that settlement on a stock purchase does not occur until three business days after the order to buy is filled so if you bought a stock the day before it went ex-dividend, you would not be the holder of record in time to get that dividend. Finally, the payment date is obvious in that it is the date that the dividend is actually paid.

Some investors employ a strategy of capturing dividends. Back when the Japanese economy was roaring and many Japanese investors were investing heavily in the U.S. stock and real estate markets, some used this strategy to great advantage. Essentially the strategy means that the investor buys the stock after the announcement of a dividend, but sufficiently before it goes ex-dividend so that he is the owner of record on the record date. The investor expects the share price to dip by the amount of the dividend on the ex-date, but, ideally, then looks for a bounce in share price following that dip to sell the position so that he winds up with the dividend and is in and out of the stock in a relatively short time.

Currently dividends are taxed at a very low rate so many investors prefer to own shares of companies that have a history of paying dividends. Certain classes of stock may offer very attractive dividends. Some vehicles even make regular payments that are federally tax free. I discuss, in detail, the use of many of these in "Trade Your Way to Wealth," my new book, that is now available on, at Borders, and Barnes and Noble in the stores and on their websites. One example of stocks paying high (though taxable) dividends is the real estate investment trust (REIT). I recently sent paid subscribers alerts on my trades in and out of such an REIT paying an annual dividend of over 17%. Preferred stocks also frequently pay high dividends, sometimes in the 6% and higher range.

Many of these types of investments may be worthy of your study and investigation to determine whether they fit into your personal investing plan.

by Bill Kraft, Editor
Copyright 2007, Makin' Hay, Inc.
All Rights Reserved

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Anonymous said...

The article is interesting and helpful, but is unclear about ex dividend dates and record dates. What if one owns the stock on the ex dividend date, but not on the recoprd date. Who gets the dividends then? Whyile the holder on the ex-div date would seem entitled, according to the definition of record date, he/she will not get it because he/she did not own it on the record date as required by the definition of "record date".

Also, how should a short deal with ex-div and record dates to avoid being liable for the dividends.

Bill Kraft, said...

The holder of record on the "record date" is the one who receives the dividend.

Anonymous said...

Not clear or correct..if you bought the stock the day BEFORE the ex-date you will be the holder of record on RECORD date which is generally three days after the ex dividend date.
The stock will trade "ex" on the "ex" date (without the dividend) The stock will be depreciated by the approximate amount of the dividend.
Thank you..
p.s. Mr. Clark: I enjoy your comments immensely..They have been uncannily correct and profitable for me..Keep it up please. WmJAronson (ex-broker/sole owner WmJAronson & Co., discount broker from 1979 to 1984..I foolish sold book to Paine Webber in 1984 and retired from the customer service aspect of the business.

Bill Kraft, said...

Dear Mr. Aronson - Agreed, what I wrote is you get the dividend if you are the holder of RECORD on the RECORD DATE which is generally though NOT ALWAYS three days after the ex-dividend date. Settlement on the stock purchase does occur 3 business days after the order fill. Thanks, too, for the compliments about how my comments have been helpful and profitable to you. Only one thing -- my name is Kraft, not Clark.