Are you wondering, “Will I get dividend if I sell before the record date?” This is a valid question since life is unpredictable and you may need to liquidate some of your stocks to raise funds for other things. And the answer is that you could. But you should also know that if you sell a stock before the dividend payable date, things may not work out as you expect them to.
With a soon-to-be-paid dividend, the record date is used to determine who receives the dividend and which investors purchased shares too late to earn the dividend. And the rules of stock settlement make it possible to sell shares before the actual record date. However, the financial results may be disappointing and a trader may miss out on the dividends or lose money on the stock.
Read More: Dividend Payment Factors
Record Date and Settlement
Every dividend announcement includes a declaration date as well as the record date, ex-dividend date, dividend amount, and payment date or dividend payable date.
An investor must be a shareholder of record on the record date to be entitled to receive the dividend. On this date, you must still be in the company’s books to receive dividends as a shareholder. The dividend payable date is the date on which the company’s declared dividends are paid out to shareholders within the company books as of the record date.
U.S. stock market rules allow a stock market trade two business days to settle or become official. Therefore, for an investor to be a shareholder of record on the record date, the shares must be purchased at least two business days before the record date to allow the settlement process to complete. But that is still not a guarantee someone will get the dividends.
Selling After Ex-Dividend
The ex-dividend date or ex-date refers to one business day before the record date. If someone buys stocks before this day, they will receive the dividends for that period. But if they purchase the shares on or after this date, as the seller, you may be the one getting the dividends even after selling your shares.
The two-day stock settlement period means someone who buys shares one business day before the record date will not become a shareholder of record until the day after the record date. This investor will not receive the dividend. The one business day period before the record date will occur on the ex-dividend date.
So if you already own shares, it is possible to sell the shares on the ex-dividend date – a day before the record date – and you will still be a shareholder of record on the record date.
No Free Lunch
It may seem like an easy way to make money. Buy shares three days before the record date to become a shareholder of record. Sell them when the shares go ex-dividend and receive the dividend from owning the shares for less than one business day. But it doesn’t work that way.
The market keeps this trade from being profitable by starting share trading on the ex-dividend date at the previous day's closing price minus the amount of the dividend. A trader who attempts the one-day trade to earn a dividend is unlikely to break even.
Record Date Selling
While it is possible to sell company stock one day before the record date and still receive the dividend, the loss on the stock will probably equal or exceed the dividend amount.
To make this strategy work, a trader must wait for the share price to move back above the value on the date before the shares went ex-dividend. And remember, the record date is also separate from the dividend payment date, which may be up to several weeks after the record date.
All shareholders of record on the record date will receive a dividend on the payment date regardless of if and when the shares were sold. So, if you sell stock before dividend payable date and about two business days before the record date you will probably get the dividends for the previous period you held the investment.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.