There are several dates of importance concerning the sale of stock on the ex-dividend day. This important trade date determines the last date an investor must hold a stock and still keep an announced dividend. On this date, the stock may be sold at any time. The important feature to remember is that the stockholder who receives the dividend must be the stockholder of record preceding the dividend date. Understanding the ex-dividend rules is important for both option and equity traders who use such strategies for quick profits.
Know the date that the board of directors chose as the date of record. You must be the shareholder of record on that date. The shareholder of record date is not the date you buy the stock, but the date on which you must have paid and settled on the stock. For illustration, assume a January 15 date of record. Using the standard three-day settlement, you must have paid for the stock on or before January 12.
Trade stock on or before the date of record cum-dividend (with dividend). Trades on or after the date of January 13 will trade ex-dividend. The ex-dividend date is a binary decision controlled by the date of record. Ex-dividend is therefore two days before the date of record.
Assume a dividend of $2.00. On the day the stock goes ex-dividend, the stock price, all things being equal, will drop by about $2.00 (it may be a little less due to an unrelated tax effect). Sell your stock on the ex-dividend date at the lower price but having qualified for the dividend.
Receive the dividend check within 48 hours after the stock's record date. Dividend checks are mailed the morning after the record date. The date of record is the important date for investors to note. You cannot elect not to receive the dividend. You cannot sell the dividend or detach it from the stock.
Trade your stock on the ex-dividend date immediately if the price rises. It should decline by the value of the dividend payment. If your dividend is qualified (it will be deposited into your tax-exempt IRA or retirement account), there will be no tax burden. Your cash will increase, and your stock will decline in value. If you are a taxable party, the dividend is taxable as ordinary income, and you have a stock with a capital loss.
If you have owned the stock a long time, sell the stock during the cum-dividend period for a tax-advantaged sale.
If you are the shareholder of record, you will receive the dividend. Consider whether you want the dividend or the extra stock appreciation in anticipation of the dividend.
- If you have owned the stock a long time, sell the stock during the cum-dividend period for a tax-advantaged sale.
- If you are the shareholder of record, you will receive the dividend. Consider whether you want the dividend or the extra stock appreciation in anticipation of the dividend.
After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.