Most investors who own dividend-paying stocks are aware of the ex-dividend phenomenon. To receive an upcoming dividend payment, shares must be owned before the stock goes ex-dividend.
That’s why you need to be aware of a big change coming to ex-div dates next week.
A dividend announcement includes three pieces of information: the amount of the dividend per share, the record date, and the payment date. To receive the dividend, an investor must officially own shares on the record date.
However, currently (for another week) stock trades take two days to settle. If you want to be the official owner of shares on the record date, you must buy the shares in your brokerage account two days before the record date. The two days is often referred to as T+2 settlement.
Let’s delve into the concept of T+2 settlement. This term refers to the fact that to earn an announced dividend, you must purchase the shares at least two days before the record date. Consequently, the stock goes ‘ex-dividend’ one day before the record date. This means that if you buy shares on the ex-dividend date, you will not receive the pending dividend. Understanding this timing is crucial for maximizing your dividend earnings.
A quick note: To prevent one-day trading to earn the dividend, which would be to buy the day before the ex-dividend day and sell on the ex-dividend date, the share price opens on the ex-dividend day at the previous closing price minus the dividend amount.
Now to the new news. Starting on May 28, the stock exchanges will go to T+1 settlement. This change makes determining the ex-dividend date easy. After May 27, the ex-dividend date will be the announced record date.
Of course, you can buy shares any day and earn all of the upcoming dividends. Waiting until just before the ex-dividend date is not always good planning. I encourage my subscribers to be ready to take advantage of any share price downturns in the stocks we are accumulating to build an income stream.
However, it will be easier to determine when the ex-dividend date is the same as the record date.
— Tim Plaehn
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Source: Investors Alley