You must choose your selling date carefully if you own a stock that pays a dividend. You receive the dividend, You might forfeit the full share price otherwise, even if you receive the dividend. It's all a matter of timing, centered around something known as an "ex-dividend date."
This all-important date precedes the record date, the day on which you're the owner of record, by one or two business days. It determines whether you receive a dividend and/or the full share price. The share price is reduced by the amount of the dividend if you sell on the ex-dividend date.
You might be able to receive dividends and recoup the price drop of your shares by holding your stock until after the date of record and waiting for the next ex-dividend date.
Evaluating the Record Date
You must know the record date for any dividend stock you own. This date indicates when you must be the owner of record to qualify for the dividend. The company that issued the stock will note who is on the books as a shareholder as of that date, and only those shareholders can receive dividends. You must research each company to determine specific record dates, because each firm sets its own calendar.
You'll encounter few problems if you own only one stock, but you might have to pay extra attention with a portfolio of several stocks, because each may have a different record date.
Understanding the Ex-Dividend Date
The stock enters the “ex dividend” period a business day or two before the record date. Companies set this date based on stock exchange or the National Association of Securities Dealers rules. You can sell the stock after the ex-dividend date and still receive the dividend. The buyer gets the dividend if you sell before the ex-dividend date.
Exploring Price Changes
You might think you would make more money if you sell the stock after the ex-dividend date. Many sellers imagine they will get the dividend plus full price for the stock. But the stock actually drops in price by the amount of the dividend on the ex-dividend date. If you sell the stock at that time, you do get your dividend, but you get less for the stock because the dividend is subtracted from the stock price.
When To Sell Your Dividend Stock
You can watch for the stock’s price to rise again if you want until after the date of record. Typically, a stock will rise by the dividend amount shortly before the next ex-dividend date. If you wait until this period to sell your stock, you may get a better price, although you will become ineligible for the next dividend because you sold the stock before the next ex-dividend date.
In short, if you want to get your dividend and get full price for your stock, you can hold the stock through the ex-dividend date and wait to sell it until the next ex-dividend date approaches. You risk the possibility that the stock price will go down because of some problem with the company, but if you feel the company is healthy, you may profit from waiting for the stock price to rise in anticipation of the next dividend.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.