When investing in dividend stocks, there are five important dates dividend investors need to be aware of. Here they are in the general order in which they occur:
1. Trade date -- As the name implies, the trade date refers to the day you actually buy shares of stock. However, most investors don't realize that you don't technically take ownership of the shares immediately.
2. Settlement date -- This is the day your purchase becomes finalized and you become an official shareholder of record on the company's books. Think of the settlement date like the closing date on a real estate sale. If you agree to purchase a house at a certain price, you can't simply move in right away; you need to wait until the purchase is finalized some time later.
For stocks, the settlement date is three business days after the trade date. For example, if you buy a stock on Monday, your trade will settle on Thursday. This is the date that determines whether or not you will receive a dividend payment on your shares.
3. Ex-dividend date -- The first trading day a stock trades without its dividend. If you buy shares (trade date) before the ex-dividend date, you are entitled to the dividend. On the other hand, if you buy your shares on or after the ex-dividend date, you will not receive a dividend.
For sellers, as long as you sell your shares on or after the ex-dividend date, you are still entitled to the dividend -- even if you no longer own the stock when the dividend is paid.
4. Date of record -- From the company's standpoint, the date of record is the date that determines who gets the dividend and who doesn't. In order to receive the dividend, your purchase must settle on or before the date of record. For stocks, the date of record is two business days after the ex-dividend date.
5. Payment date -- The day when the dividend is actually paid to shareholders. This can be considerably later than the other dates mentioned, and has no bearing on who receives a dividend. In other words, you'll still receive a payment on this date if you were a shareholder of record on the date of record, regardless of whether or not you sell your shares before the payment date.
A quick example...
To illustrate how this all works, consider the following example of Apple's upcoming dividend payment. It's declared a quarterly dividend of $0.52 per share, payable on Aug. 13, to shareholders of record as of Aug. 10.
From this information, we can gather that the stock will trade without the dividend (ex-dividend date) on Aug. 6, which is two business days before the date of record. Thus, in order to receive the dividend payment, an investor needs to buy shares on or before Aug. 5 for the trade to settle in time for the date of record three business days later.
How to use this information (and how not to use it)
Now that you know the crucial dividend dates, it's important to be aware of some dividend "strategies" that simply don't work. One unfortunately popular strategy involves simply buying a stock the day before its ex-dividend date, and then selling the stock on its ex-dividend date. It may seem like that's a great way to collect lots of dividends and earn a profit, but this is rarely a profitable idea because the dividend comes out of the stock price on its ex-dividend day. As a result, all you'll end up doing is paying commissions on both sides of the transaction to execute the trade.
That said, understanding how dividend dates work is useful for long-term investors. For one thing, you know that on the ex-dividend date, you'll notice the share price drop, even though you won't be paid the dividend for some time. Also, knowing these dates can avoid confusion when you buy new stocks too close to the payment date and you don't receive the dividend.
Simply put, knowing the dividend dates give you a better understanding of how your investments work.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.