Ex-Dividend Date | Financial Crooks

A few months ago I pompously dismissed the suggestion that you can buy a stock the day before the dividend is earned and sell the day after without ever testing the idea. Recently I ran a test.

How I Got Suckered

I made the mistake of looking at the ex-dividend dates of several reliable, high paying, blue chip stocks at the same time. They were all spaced 5 or more days apart. So in theory, you could buy one stock, hold till it went ex-dividend, sell, buy the next, rinse and repeat. You could invest the same money about 4 times in one month and pick up 4 quarterly dividends ranging from 3.5%-5%. Sounds cool right?

Now of course the price for a stock will drop by the same amount as the dividend payment as soon as it goes ex-dividend. But these stocks, though blue chip, are highly traded. You could see that historically they bounced around more on a weekly basis than the amount of the dividend.

So they should bounce right back up in price, right?

(Sucker!)

Where I Went Right

I chose to make the test using BCE. Ma Bell pays a dividend of over 5% and is a strong large blue chip company. (So was Nortel.) If the market was to collapse tomorrow, BCE would probably recover within 5 years, which is before I need the money from the test account.

Where I Went Wrong

I got greedy. I bet the farm, the wood lot, the mineral rights, and the guinea pigs.
Instead of running the test with one share or even one hundred shares, I bet 1035 shares.
Between the two sales commissions and the fact you’d only get a quarterly dividend it didn’t seem practical to invest a small amount for the test.

And yes, I could have just kept track of the stock price on paper. In fact, that’s what I really did. Honest. I didn’t try to juggle acetone peroxide detonators with my bare hands. What’s that? Oh I’ve always been short a finger on that hand.

So when the shares tanked I had no cash to play with in the account. If a harsh market correction had occurred, if I’d had a good chunk of cash, I could have bought shares in defensive stocks (or a low MER full-market ETF) and as it rose in value again, I would have had something to counterbalance the massively overpriced BCE shares.

Like many people who lost their savings when bubbles popped, however, by buying all at once near the top, I risked having to try to hang tight for years with no profit hoping for a rebound. Not a way to sleep comfortably at night—for years.

Where I Got Lucky

It is purely luck that the stock market headed the direction it did and within two months brought the BCE share price back up to the price at which I made the purchase. If I had bought these shares in say early 2008, I could have had a very long wait to see the numbers flip back into the green on my investment.

Remember, people in 2008 didn’t see the market crash coming either. It’s like when a transport crosses the grassy median between the lanes on the 401 on a foggy morning: You can’t see a market collapse coming before you’re staring into the headlights of a big rig coming straight at you out of the gloom at 110 km/h.

I was very lucky. Like Lucy, I nearly had some s‘plainin’ to do to my husband. (I did confess, of course, already. What can I say? He plied me with chocolate.)

Unfortunately, most of us are not lucky all the time. Or even more than half the time. (I do know some people who are unlucky more than half the time, though.) I don’t think I’ll push my luck and try this ever again. Even if BMO is about to go ex-dividend April 29…..

What Happened to the Share Price?

I bought on March 10.
On March 12 BCE went ex-dividend.
Then it began to plummet.
On April 2, I gave up and sold half of my position for an overall profit but at a price per share lower than I had paid for the stock. (e.g. the dividend for those shares would offset the capital loss)
On April 15 the stock returned, very briefly, to the price I had purchased it at.
On April 16, I received the dividend payment.
On April 17, the stock climbed enough above the purchase price to sell the rest of my position and break even on the capital cost plus the trading commissions. I ended up with a total event capital gain of $0.20 and the entire dividend.

Was It Worth the Stress for Over a Month?

No. There are much calmer ways to make $600. Like working as a pothole repair person on the 401 in the middle lanes near Toronto.

Is Any of This True?

Right now you may be wondering whether this article was posted on April 1.

All I’ll say is it should have been.

Related Reading

Can You Buy a Stock Before the Dividend Is Payable Then Sell It Immediately Afterward?

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Have you ever invested way too much in one stock only to live the life for the next few weeks of the 12-cups-a-morning caffeine addict who can’t get anything stronger than a cup of herbal tea? Please share your words of financial hindsight wisdom with a comment.

Dividends fascinate some investors. Many are looking for a steady long-term source of income. Others, though, are looking for a quick buck. So a common question from the Easy Money crowd is whether you can buy a stock just before the dividend is paid and sell it just after to make a quick profit without investing for the long term. The answer is: Maybe. Here’s how dividends work.

The Three Key Dates for a Dividend

It’s important to understand how dividend payments are made. The company paying the dividend wants to know who to issue the cheques to and for how much before the actual day the cheques are payable. Otherwise they would always be late making the payments.

The Record Date or Date of Record

So the company sets a date to take a snapshot of who owns their stock. This is called the Record Date. A shareholder must officially own their shares on the Record Date to receive the next dividend payment. What makes them “official” owners is whether they have been entered into the books as the owner of those shares.

The Record Date is NOT the date you enter your order to buy a stock and your order is filled.

Settlement Date

When you place an order to buy stock and someone agrees to sell it to you the clock starts ticking towards the Settlement Date. At the start of business on the third day after your request to buy stock was accepted, you become the official owner of the shares.

You’ll see it reported on your Transaction History as the Settlement Date.

The timing of the Settlement Date is standard. It dates back to the days when the paper share certificate had to be physically delivered to the new owner or the new owner’s broker. Getting it out of a safe or safe deposit box and couriering it to the new owner took time. Even now when most share certificates are electronic and can be transmitted instantly, the Settlement Date is still Trading Day plus 3 Business Days, making you the official owner on the third business day. This is sometimes reported as T+3.

For a clearer example,
I put in an order for CGX (Cineplex) on Tuesday, May 28.
The order filled May 28.
The money was taken from my account May 28.
The trade settled on Friday, May 31.
I became the Owner of Record on May 31.

When Is It Too Late to Buy a Stock to Get the Dividend?

As described in an article discussing things to consider before buying a stock, you must purchase a stock BEFORE the Ex-Dividend Date if you want to get the next dividend.

The Ex-Dividend Date is the second business day before the Date of Record. That’s because you have to buy the shares 3 business days before the date you need to be the owner. So the last business day you can buy and get the next dividend is the business day before the Ex-Dividend Date.

Dividend Payment Date

This is the date on the dividend payment cheques.

Where Can I Find These Dates?

The best place to find the Date of Record and Payment Date is on the company’s Investor Relations’ Page. Some websites also show the Ex-Dividend Date but not all of them.
Although most trading screens show the Ex-Dividend Date, most do not show the Payment Date.

So If I Buy Before the Ex-Dividend Date and sell on the Ex-Dividend Date Then I Can Make a Quick Buck, Right?

Companies don’t actually want you to flip their stock. They want investors not speculators. Stock Markets themselves don’t want you to flip either. While they can’t stop the practice, they can try to take the profit out of it.

Say you buy a stock at $50 a share on the business day before the Ex-Dividend date. You sell it on the Ex-Dividend date. The dividend will be $0.50 a share. It’s a pretty stable stock that doesn’t bounce around much, so you assume you can sell it for $50 at the opening of trade.

Very unlikely.

Even though the stock closed at the closing bell at $50, it was immediately adjusted down by the dividend to an Adjusted Close of $49.50.

The stock price will be manually adjusted downwards for the value of the dividend before the next open of the market.

To see an example, look at the price history for Cineplex on ca.finance.yahoo.com

You’ll see on May 28, the stock closed at $34.26. Then further to the right, you’ll see a column of the Adjusted Close which says $34.14. The line above it says: “0.12 Dividend.”
In fact, on May 29, the stock opened at $34.10.

Of course trading will continue to affect the price. Many investors don’t want to buy a stock immediately after it goes Ex-Dividend because they will have to wait over a year (for an annual dividend), or over three months (for a quarterly dividend), or two months (for a monthly dividend) to get paid anything.

Often on the Ex-Dividend date and for several days following the stock will remain flat or fall.

That’s ok, you may think, I’ll wait a few days and when the stock goes up, I’ll sell it and make a profit both on the dividend and on the capital gain.

OK. Or you might sell it and make a capital LOSS that is only partially offset by the dividend. Stocks do not always go up.

Remember you will also have to pay two trading commissions for the buy and sell. That cost can range from about $10 to $60 depending on your brokerage.

If you bought 100 shares of Cineplex at $34.26 with a $10 trading commission on May 28, you’ll need to sell it for at least $34.46 just to break even. Cineplex closed at $34.34, 34.25, 34.06, 34.36, 34.34, and 34.43 for 6 of the next 7 trading days. You could have broken even a few times if you sold on the High, but it would not have been easy or routine.

Why is the Dividend So Small? I Thought They Paid 4% !

Another common mistake made by new investors is mentally calculating the size of the dividend. When they buy the stock, they see a nice 4% yield listed. On a $10 000 purchase, they expect to get $400. But the cheque is only for $100.

For some reason, they don’t check how often the dividend is paid. The 4% is the annual yield.

Many dividends are paid quarterly. That means each dividend payment is 1%, or $100 on $10 000.

If the dividend is paid monthly, the dividend payment is a mere $33.33.

That can be quite a shock to someone paying $29.95 a trade! If they are receiving a monthly dividend, they can’t sell the stock for at least 2 months and even expect to pay back the two trading commissions.

It’s Been 3 Business Days Since I Bought: Where is My Dividend?

Although you must buy shares before the Ex-Dividend date in order to be the shareholder on record on the Record Date, that doesn’t have anything to do with when the dividend will actually be paid.

Some companies, such as Canadian banks, have a Record Date that is a month or so before the payment date.

For example,
BMO goes Ex-Dividend on Tuesday, July 30, 2013.
BMO has a record date of Thursday, August 1, 2013.
The corresponding dividend will be paid August 27, 2013.

In another example, Cineplex pays a monthly dividend.
CGX goes Ex-Dividend on July 29, 2013.
It has a record date of July 31, 2013.
It will pay the corresponding dividend on August 30, 2013.

This last Cineplex example points out another item to watch out for: when I checked the Quote for Cineplex on BMO InvestorLine, it reports the Ex-Dividend date as May 29 today on June 9. This is true because that is the last time it went Ex-Dividend. It will be going Ex again, though near the end of June. For monthly dividend payers, you have to keep an eye on the Record Date on the company’s Investor Relations page if you want to make plans based on when it will next go Ex-Dividend.

So Can You Flip Stocks To Make a Quick Profit Off the Dividend?

Maybe. Your success will have more to do with market volatility, however, than with strategy or common sense.