Owning dividend-paying stocks is a great investment if you want to build long-term wealth. Below, the professional investor and owner of the investment firm Brio Capital Management LLC, Shaye Hirsch will share a piece of introductory information about dividend stocks.
How Do Dividends Work?
A dividend is a distributed portion of the company’s earnings. Namely, for every owned share, you are paid a small portion of the company’s earnings.
Shaye Hirsch gives an example in order to explain how dividends work. Let’s say that company X pays a dividend of 60 cents per share on an annual basis. Some of the companies pay dividends quarterly. That means that the company will pay you 1/4 of 60 cents (15 cents) per share, four times a year. This may not seem like a lot, but if you have thousands of shares in your investment portfolio, and reinvest those dividends, you can make a lot of money on a long-term basis.
Important dates in a dividend
As Hirsch states in his publications, there are four important dates in the dividend payment process:
Declaration date – This is the date on which the company’s board of directors announces to the shareholders and the market as a whole, that the company will pay a dividend.
Cut-off date or ex-dividend date (Ex-date or Ex-dividend date) – On or after this date, purchase transactions are made without your dividend. If you buy an action that pays dividends one day before the ex-dividend date, you will receive the dividend. But if you buy on the ex-dividend date or later, you will not receive the dividend. On the contrary, if you want to sell an action and still receive a dividend that has been declared, Shaye advises that you need to sell on (or after) the ex-dividend date. The ex-dividend date is the second business day prior to the date of record.
Date of record – This is the date on which the company looks in its records to know who are the shareholders of the company. An investor must appear as a holder in the registry to guarantee the right to collect dividends.
Payable date – This is the date on which the company sends the dividend payment to the registered holder. This date is usually one week or more after the record date so that the company has enough time to ensure that it is accurately reported to all those who are entitled to payment.
Why are these dates used?
According to Hirsch, whose company wined the hedge fund awards in 2017, ex-dividend dates are used to ensure that dividend payments go to the right investors. In the current market, settlements of transactions in the record book is a 3 T process, which means that when you buy an action, it takes three days (3) from the date of the transaction (T) so that the changes are entered in the company’s registration books.
As mentioned, if you are not in the company registration books on the date of record, you do not receive the dividend payment. To ensure that it is in the record books, you must buy the shares at least three business days before the date of record, which also happens to be the day before the ex-dividend date.
As you can see in the diagram presented by Shaye Hirsch, if you buy on the ex-dividend date Tuesday the 6th, which is only two business days before the date of record, you will not receive the dividend because your name will not appear in the record book of the company until Friday. If you want to buy the shares and receive the dividend, you need to buy on Monday 5th.
But, if you want to sell the shares and still receive the dividend, you need to sell the shares starting on the same Tuesday 6th, or after Tuesday.