This tutorial is to explain the importance of the terms, ex-dividend date, dividend record-date, and dividend payable-date in the context of dividend swing-trades and dividend reinvestment positions here at Crane Capital.
Before we start we need to define a few terms to help explain the approach we use:
- dividend capture strategy – A dividend capture strategy is a timing-oriented investment strategy revolving around the purchase and sale of dividend-paying stocks. Dividend capture is specifically the practice of buying a stock just prior to the ex-dividend date in order to capture the dividend, then selling it immediately after the dividend is paid. The purpose of the two trades is simply to receive the dividend, as opposed to selling at a profit. We do not use the dividend capture strategy here at Crane Capital, instead we buy the stock up to 14 trading days leading up to the ex-dividend date and we sell the stock 1 day before the ex-dividend date and thus we make a larger gain than what we would have received if we captured the dividend.
- dividend declaration date – The declaration date is the date on which the board of directors of a company announces the next dividend payment. This statement includes the dividend’s size, ex-dividend date, and payment date. Declaration date is also referred to as the “announcement date.”
- dividend payment date – A payment date, also known as the pay date or payable date, is the date on which a declared stock dividend is scheduled to be paid to eligible investors. This date can be up to a month after the ex-dividend date. However, the stock price may fall on the payment date to reflect the dividend payment.
- dividend record-date – The record date, or date of record, is the cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution. The determination of a record date is required to ascertain who exactly a company’s shareholders are as of that date, since shareholders of an actively traded stock are continually changing. The shareholders of record as of the record date will be entitled to receive the dividend or distribution, declared by the company.
- ex-dividend date – The ex-dividend date, or ex-date for short, is one of four stages that companies go through when they pay dividends to their shareholders. The ex-dividend date is important because it determines whether the buyer of a stock will be entitled to receive its upcoming dividend. Here at Crane Capital we will use the term ex-dividend date when referencing a dividend’s ex-date and distribution’s ex-date we don’t make any distinction between this date when differing between payout types.
Now that we have the definitions out of the way we can continue with our tutorial.
Lets say that we have a stock XYZ that pays a dividend on a monthly basis. At certain points during the month we might not know when the next dividend payment will “officially” be paid out. Most monthly dividend stocks pay their dividend in a pattern each month like on the 2nd Friday of the month or the 10th trading day of the month, etc. The company usually doesn’t publish this information but if you inspect the historical data then you can see the trend or pattern that they use for their ex-dividend date and record-date. We might be able to estimate when the ex-dividend date and record-date will be but until the company officially announces these dates then it will only be an estimate. The day when the company actually announces these dates is referred to as the dividend declaration date.
After the dividend declaration date occurs we have all the dates that we need for the swing-trade, namely: the ex-dividend date, dividend record-date, and the dividend payable date. If we are not able to estimate these dates before the dividend declaration date then it will not be possible for us to do the analysis needed to setup our dividend swing-trade or dividend reinvestment position. Luckily on CraneCapital.net we have an algorithm that does the estimation analysis for us so we don’t have to spend hours of our own time trying to analyze previous ex-dividend dates to determine what the pattern is for each stock we want to trade. The output of this algorithm is known as the projected ex-dividend date in our stock finder and portfolio tools.
Now that we have all the dates that we need we can start looking at what each one of these dates means in the context of a trader (let’s call him John) that wants to buy the stock XYZ for the sole purpose of being able to collect the dividend. If John wants to collect the dividend on each share of XYZ that he can purchase then he must make sure that he buys on a certain number of days before the ex-dividend date. This is because of the T+2 system of settlement presently used in North America, whereby stock trades settle two business days after the transaction is carried out. Thus, if John buys a stock one business day before its record date, his trade would only settle the day after the record date. He would therefore not be a shareholder of record for receiving the dividend.
To ensure that John is in the record books, he would need to buy the stock at least two business days before the date of record, or one day before the ex-dividend date.
Using the graphic above as an example John would need to buy the stock on Monday the 5th to be eligible to receive the dividend payment. Monday the 5th is two trading-days before the date of record and one trading-day before the ex-dividend date. Now it should become more obvious why we almost always use one trading-day before before the ex-dividend date as the sell date for our swing-trades. If you would prefer to use the record-date as the point of reference then you could say that we always use two trading-days before the record date as our sell date for our swing-trades.
Our goal in our swing-trades is not to capture the dividend but rather sell our shares at a premium price to the buyers that are willing to pay a premium during the days leading up to the day before the ex-dividend date so that they will be on the record books and will therefore collect the dividend payment for the stock. You can receive gains many times the amount of the dividend by buying early and then selling the rights to these dividend shares 1 day before the ex-dividend date.
People who are in search of high dividend yield using the dividend capture strategy are willing to pay a premium for their shares in the days just before the ex-dividend date because they don’t want to miss out on the dividend payment. The fear of missing out is a very motivating force in the minds of men and women alike and it can be seen in the data that we generate for the stocks we support on the website.