This is a pretty basic mistake, but I bet every investor has made it at least once. I know I have, and have wanted to knock my head against the wall for doing it. I’m talking about not paying attention to the ex-dividend date of a stock I am either buying or selling.
Only those investing in dividend-paying stocks care about ex-dividend dates. But as more and more people are migrating away from low-paying bonds and into equities that do give something back to their investors in the form of a dividend, it is something to be reminded of.
What is ex-dividend?
The ex-dividend date is the last day that the shareholder has the rights to any dividend dispersed at the next payout date. In other words, the person who buys the stock before the ex-dividend date will receive the next dividend payout; the person who buys on or after the ex-dividend date will not get the next dividend.
Obviously, this is something to keep in mind. But there’s another aspect of a stock going ex-dividend that an investor should think about: how it can affect the price of the stock.
It would seem evident that the closer a stock is to going ex-dividend, the pricier it would become. And just as evident, the stock’s price should likely decrease when it goes ex-dividend. The question is: Can one take advantage of the ebb and flow of the somewhat predictable ex-dividend tide?
Looking for trends in consumer staples
To test my hypothesis, I looked for stocks in the dividend-rich consumer staples sector with trailing dividend yields over 3%. To try to minimize the effect of stock-price volatility, I only chose stocks with beta values less than 0.8, with ex-dividend dates before August's market roller-coaster ride began.
Closing Price Day Before Ex-Dividend
Opening Price On Ex-Dividend Date
|General Mills (NYSE: GIS )
||July 7, 2011
|Campbell Soup (NYSE: CPB )
||July 7, 2011
|Clorox (NYSE: CLX )
||July 25, 2011
|Procter & Gamble (NYSE: PG )
||July 20, 2011
(NYSE: CAG )
|July 27, 2011
Sources: Screening with Google Finance; price data from Yahoo! Finance;
dividend amount from dividend investor.
What kind of sense can we make out of the above table? Without evaluating the fundamentals of these companies, we really couldn’t -- and shouldn’t -- make any investment decision. But, given that an investor has looked carefully at the companies first, there is something useful to take away.
What usually happens on the ex-dividend date is that the stock opens at a price equivalent to the previous day’s closing price less the amount of the declared dividend. From the table, you can see that only one stock, Campbell Soup, opened above its previous-day closing price -- and it quickly fell back to trade lower for the rest of the trading day.
Another piece of the puzzle
Meanwhile, two of the stocks fell more than the dividend, and one -- Clorox -- dropped considerably more. That might make Clorox seem like a screaming buy, but it's entirely possible that stock-specific news overnight also played a role. Regardless, knowledge of the ex-dividend date and the declared dividend gives an investor a benchmark upon which to measure the value of any potential investment.
The ex-dividend date is one of those items that’s often overlooked even by experienced investors. So put it in your investing toolbox and don’t forget it’s there.
If you need help with some dividend stock suggestions, just click here for a special free report from the Fool listing 13 high-yielders.