I get it. You heard about buying dividend stocks as a way to get some passive income. Now you’re wondering how long it’s going to take to get your next payout. Or maybe you’re wondering what’s the minimum time you need to be a shareholder to qualify for the dividend. That’s something I wondered about when I first heard about dividend stocks.
Here’s the short answer: The length of time you’ve held onto a stock isn’t what determines who should get the dividend. What does determine that is the ex-dividend date. As long as you’ve owned the stock (and didn’t sell) before the ex-dividend date, you will receive the dividend. Usually the dividend payout is set about a month after the ex-dividend date.
Dividend Payouts Explained
A dividend is basically a company’s distribution of some of its earnings to its shareholders as determined by the company’s board of directors. It’s kind of like a little bribe to their investors as an incentive to own shares of their company.
There’s a few important dates you should know to understand how companies determine who gets paid dividends and when. Here’s a list of those dates in chronological order:
- Declaration date: The date the company announces it will pay a dividend.
- Ex-dividend date: The date on and after which new stock investors will no longer be eligible to receive the dividend. The ex-dividend date is usually one business day before the date of record.
- Date of record: The date the company checks its records to see who’s a shareholder. To get on the record, you have to buy the stock two business days before the date of record (which is also one business day before the ex-dividend date).
- Date of payment: The date the company pays out the dividend. It usually happens a week or more after the date of record.
The most important date to know in that list is the ex-dividend date. Long story short, just buy anytime before that date and you are good to get the dividend. All you have to do is hold onto the stock until at least the ex-dividend date.
Here’s some visual examples of how the ex-dividend date works:
The second date to know is the date of record. This date is typically one business day after the ex-dividend date. It’s the date the company officially checks its records to determine who its shareholders are. If you own a stock two business days before this date (also one day before the ex-dividend date), you will go on record as a shareholder who should get a dividend.
On your end, the date of record doesn’t affect you as much as the ex-dividend date, but it’s nice to know.
The declaration date and the date of payment are pretty self explanatory. The declaration date is when the company announces its dividend payment.
The date of payment is when the dividend gets sent out to its shareholders. Usually, the date of payment is set about a month out from the date of record. In most cases, you’ll have to wait about a month to get your dividend payment from the ex-dividend date/date of record.
There’s an exception for stocks paying out 25% or more of its stock value in dividend (so-called significant dividends) and for dividends that payout in additional stocks. In these cases, the payout is set one day before the ex-dividend date.
The calendar below shows how these dates lay out in relation to each other. Note: the date of payment is usually about a month out, it’s not normally so close to the date of record.
Can you trade a stock just before/after the ex-dividend and still get the dividend?
Yes you can. Technically, you could buy the stock anytime down to the very last nanoseconds of the market trading hours before the ex-dividend date. You could also sell the stock right when the market opens on the ex-dividend date and still qualify.
There’s a catch to this though. On the ex-dividend date, the stock price will drop by an amount roughly equal to the stock’s dividend per share value. This means the price drop will roughly cancel out any dividend you might be getting from the company.
As you can imagine, there’s going to be higher demand for the stock as people start buying for the dividend, then a drop in demand as people sell off the stock after qualifying for their dividend.
And no, you can’t short the stock to take advantage of that price drop in case you were wondering. If you short a stock during this time, you will need to pay the company the dividend instead of the company paying you the dividend, offsetting anything you might earn.
This is why dividends are usually more of a long term play: the stock price does correct itself to its actual value, but this takes some time. Doing quick buy and sells of dividend stocks typically doesn’t gain you anything significant. You usually have to hold the stock to get the benefit of the dividend without locking in the losses from the price drop.
Dividends are also taxable. They must be claimed as taxable income on the following year’s income tax return (unless you’re trading through a retirement account). If you’re doing a short term trade, these dividend gains are taxed as ordinary dividends as opposed to qualified dividends. This means, you’re paying big taxes on that “quick buck” you just earned.
For these reasons, it’s more advisable to buy stocks just after the dividend if anything. You’re pretty much getting the same dollar value for the stock, but without the additional income taxes.
The Dividend Capture Strategy
There is technically an exception to what I said above. It’s something called the dividend capture strategy. Essentially, it’s doing what I recommended not to do above (short term buying and selling of dividend stocks), but with a planned strategy in place. Disclaimer: this is a strategy for active traders only, something I’m also not a fan of.
Essentially, the dividend capture strategy relies on small market inefficiencies to scoop up small gains. These gains must be amplified with a substantial capital investment to be worth the effort.
If the market was perfectly efficient, the stock price would exactly match the dividend payouts. However, due to market inefficiencies/volatility, the price sometimes doesn’t quite match up with the dividend payouts. These discrepancies are what make the dividend recapture strategy profitable.
Here’s an example: if a stock worth $10 announces a dividend of $0.10 and its price falls to $9.91 on the ex-dividend date, there’s a potential profit of $0.01 per share. If you had a huge capital investment of $100,000 (enough for 10,000 shares), you would earn a profit of $100. Not a bad deal for a few hours of work.
However, the profits aren’t as clear-cut as in the example above. You would still have to pay taxes on that profit at the unfavorable ordinary dividend rate (roughly 20-30% or $20-30 in the example above). You would also have to pay any trading commissions to your broker both for buying and selling the stock, although a lot of online brokers are switching to a commission-free model.
In addition to taxes and commission fees, the dividend capture strategy also carries some risk. If the market makes a considerable movement in the negative direction while you’re holding a position, that could wipe out a huge chunk of any profits gained. It could also result in net losses following this strategy.
If you’re seriously considering doing this, I recommend testing out your strategy with fake money first. Don’t risk your entire life savings on uncertain “get rich quick” gimmicks.
Conclusion
Long story short, how long you held the stock doesn’t matter so much as when you bought the stock to find out if you qualify for the dividend. As long as you bought and didn’t sell before the ex-dividend date, you’re good to get the stock’s dividend.
You get your dividend about a month after the ex-dividend date. There are exceptions for stocks paying out 25% or more of their value in dividends and stocks whose dividends come in the form of more stocks. These stocks have their ex-dividend dates set one day after the payout date. You can lookup your stock’s date of payment to verify.
If there’s one thing I’ve learned about stocks, it’s that the stock market is very efficient. Any little discrepancies will correct themselves quickly. There are no “quick wins” or “easy money” opportunities. If there are any out there, they are few and far between and certainly won’t be a consistent, reliable way of building your net worth.
This is why I don’t recommend trying to “game the system” by quickly buying and selling dividend stocks to make a quick buck. It can work with the right strategy, but who knows how consistent and reliable that strategy will be long term.
If you’re curious about the “right way” to handle the stock market, check out my other article on stock market investing for beginners.
Fun facts: used to lion dance in college, can speak 3 languages (sort of), can lift 400 lbs, once ate a chicken head.
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