In the United States, corporations make dividend announcements quarterly. Unless a company is announcing that it is dramatically increasing or decreasing its dividend payments, the stock price generally stays the same at the time of the announcement. However, the stock price may increase or decrease as the ex-dividend date approaches.
The distribution of dividends is a way in which the company shares a portion of its profits with its investors. One reason for a company to pay out dividends to its shareholders is that its analysts have discovered that the company will not experience a significant benefit from reinvesting profits into the company. If a company announces a cash dividend of $1.00, it means that it will pay you $1.00 for every stock share you own. The IRS will tax your dividend payments as interest income.
The four significant dates when it comes to dividends are the declaration, ex-dividend, record and payable dates. The declaration date is when the company announces its dividend, the ex-dividend date is two business days before the record date. The record date is final date in which you must be a shareholder of record on the company’s books and the payable date is when the company pays dividends to its shareholders. These dates are all significant, but when it comes to share prices, the ex-dividend date is arguably the most significant.
As the company nears its ex-dividend date, the per share price often increases by the dollar amount of the expected dividend. On the first ex-dividend day, the company subtracts the dollar amount of the upcoming dividend from the stock price at the start of trading on that day. As a result, the stock price often decreases by the dollar amount of the expected dividend on its first ex-dividend trading day.
It may be tempting to purchase stock when it is trading ex-dividend because of the lower price, however, you must purchase the stock before it begins trading ex-dividend to receive a dividend payout. If you purchase shares at the lower ex-dividend price, you will not receive the dividend payment. Remember, the ex-dividend date is two business days before the record date. So, if the record date is on a Tuesday, the ex-dividend date is two business days prior, on the preceding Friday.