Some investors rush to buy dividend stocks in time to receive the next dividend. They discover they bought too late. Stock exchanges have strict rules about who qualifies for a dividend, and the companies that issue dividend stocks have their own rules that can affect whether or not you receive the next payout. Two important dates determine your eligibility for dividends from a stock: the record date and the ex-dividend date.
The company sets this date. The record date is the date on which you must be the registered owner of the stock in order to receive the next dividend. That dividend usually gets paid seven to 10 days after the record date. If you own the stock on the record date, you receive the dividend.
The difficulty in buying in time to beat the record date is that stocks take three days to “settle.” This term means that the stock officially becomes yours because all funds for the purchase have cleared. If you buy a dividend stock the day before the record date, the stock won’t officially be yours for three more days. Since the next day is the day you must be the owner of record, you will miss out on the dividend.
Two days before the record date, anyone who buys the stock will not receive the dividend. This date is set by the stock exchange the stock trades on. On the ex-dividend date, buyers often demand a lower price for the stock to make up for the fact that they won’t get the dividend. If you examine a stock chart for a dividend stock, you will often see that the price plummets on the ex-dividend date and then slowly recovers throughout the quarter. This is because the dividend gets backed out of the price on the ex-dividend date. The price begins to recover as buyers anticipate qualifying for the next dividend.
Only business days count when determining the ex-dividend date. If a stock’s record date is Tuesday, for example, then the ex-dividend date is two business days before the record date, which falls on the Friday before. Saturday and Sunday don’t figure into the ex-dividend date. Neither do holidays when the stock exchanges are closed. Always check a calendar when calculating ex-dividend dates.
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