Basic question about stock dividends

[David1961]

Basic question about stock dividend payments. Assume the board of directors declares a quarterly dividend of, say, $1.00 per share to investors of record on 15 Sept payable on 30 Sept. Is the dividend distribution pro-rated by how long you have owned the stock? In other words, does an investor who has been invested the entire quarter get more per share than the investor who just purchased on 10 Sept? Seems like he/she should.

 

[marko]

I believe that's the case. My experience is that you can't buy shares a few days before the distribution and get the whole amount...for me, it has always been pro-rated.

 

[MichaelB]

Basic question about stock dividend payments. Assume the board of directors declares a quarterly dividend of, say, $1.00 per share to investors of record on 15 Sept payable on 30 Sept. Is the dividend distribution pro-rated by how long you have owned the stock? In other words, does an investor who has been invested the entire quarter get more per share than the investor who just purchased on 10 Sept? Seems like he/she should.

The entire dividend is paid to the holder on record date with no prorating.

 

[marko]

The entire dividend is paid to the holder on record date with no prorating.

thanks MichaelB. I may have been thinking about bonds and/or bond funds. OP: pls ignore my reply.

 

[NW-Bound]

When the stock or MF goes ex-dividend, the market would adjust the share price, so that it would drop by the dividend amount, so that there is not a problem with buying before or after the dividend record date.

For example, a company declares a dividend of $3 on a stock that is worth $100/share. When the stock goes ex-dividend, the share price drops to $97/share. If you reinvest the dividend of a stock or a mutual fund, you still have $100, just as before the dividend payout.

Think of a dividend payout as moving some money from the right pocket to the left pocket. If you do not withdraw money from the left pocket to spend, you would have the same money as before the split.

Of course with the market as volatile as it is, the daily stock price movement may be a lot more than the $3 on a $100 stock in the example above.

 

[RunningBum]

MichaelB is right, and if you look at the close date on Sep 14 and the open date Sept 15 you'll see that it drops by $1 (the amount of the dividend), plus/minus any normal market change. So if you buy the stock on Sept 10 you are "buying" the dividend. The stock gradually increases in value (slightly more than .01/day in this case) to the next dividend date, but that penny increase is hard to detect within other market changes.

 

[NW-Bound]

A problem with buying a stock or MF right before a dividend payout is the tax liability.

Suppose one buys a $100 stock, which immediately pays $3 dividend. You now have a stock worth $97, and $3 of dividend that you will have to pay tax on.

In a year of distant past, I bought an MF that had accumulated quite a bit of capital gain. As I bought near the year end, when the tax time came, I discovered that I suddenly had to pay tax on 15% or 20% of the money that I spent for the MF purchase.

However, if I turned around and sold that MF, the drop in price when it went ex-dividend meant that I would have a capital loss and regain some tax deduction to cancel out that dividend tax.

 

[David1961]

Thanks for all the quick replies. I knew that was the case with mutual funds and was not sure if it was the same with stocks.

 

[MichaelB]

Thanks for all the quick replies. I knew that was the case with mutual funds and was not sure if it was the same with stocks.

It is the case with many mutual funds, but not all. Money market funds and some bond funds do prorate the distribution as Marko pointed out earlier.

 

[ziggy29]

At least in a taxable account, you usually want to avoid "buying the dividend" on a stock or fund about to pay one, because all it represents is an immediate partial return of capital that is taxable. Yes, you adjust your cost basis upward to reduce taxes in the future, but in general, all else being equal, taxes paid later are usually better than taxes paid now... (again, I said ALL else being equal)

 

[Rustward]

At least in a taxable account, you usually want to avoid "buying the dividend" on a stock or fund about to pay one, because all it represents is an immediate partial return of capital that is taxable. Yes, you adjust your cost basis upward to reduce taxes in the future, but in general, all else being equal, taxes paid later are usually better than taxes paid now... (again, I said ALL else being equal)

Assuming you reinvest the dividend, yes?

Rather than saying something like "adjust your cost basis" or "add the dividend to the cost basis" when reinvesting a dividend, I prefer to treat the transaction like it is: 1) a dividend distribution, followed by: 2) a purchase of new shares.

In fact, the cost basis of the original shares never changes -- not at all, so there is nothing to adjust. The old shares have their cost basis, and the new shares have their cost basis.

 

[ziggy29]

Assuming you reinvest the dividend, yes?

Rather than saying something like "adjust your cost basis" or "add the dividend to the cost basis" when reinvesting a dividend, I prefer to treat the transaction like it is: 1) a dividend distribution, followed by: 2) a purchase of new shares.

Well, yeah, that is true -- if you aren't reinvesting then all you have did is cause some of your initial investment to be immediately returned... and taxed.

 

[mathjak107]

you have to picture it as in theory a companies share price moves upward all quarter from profits and investor action. it reaches a peak at the end of the quarter and is payed out.

the nyse and amex rules have the share price automatically lowered by the amount paid out.

the paying of the dividend itself is a zero sum game. your no richer or poorer from the payout. its a wash. the gain is really from the escalating share price before hand so you have to be in it to win it for a while before the payout.

 

[David1961]

Let me make sure I understand. Suppose you own:

100 shares at $10 per share = $1,000.

The company pays out a quarterly dividend of 1%, so at the end, if I reinvest, I now have 101 shares ($1000 / 9.9) at $9.9 per share?

And if I take the dividend, I have 100 shares at $9.9 per share ($990) PLUS the $10 in cash.

 

[Zathras]

Sort of, but the company doesn't pay base on a percent. They pay out a price per share.
So if a companies dividend is $1/share, they pay 1$/share weather the stock price is $100, or $110, or $50.
Dividends do change over time, but they are MUCH less volatile than stock prices.
In general, they are an indication of a strong, mature company. Most companies are extremely hesitant to lower dividends, although it does happen.

In general, I find it much easier to budget with dividends as I know what my annual dividends will be with high probability. I don't know what 3% of my portfolio will be in a month, or year.

In addition, companies tend to raise dividends faster than the rate of inflation.

Dividends aren't for everyone, but if you are willing to do a bit of research in the companies, and don't let yourself start chasing yields, they are a good option.

 

[braumeister]

Let me make sure I understand. Suppose you own:

100 shares at $10 per share = $1,000.

The company pays out a quarterly dividend of 1%, so at the end, if I reinvest, I now have 101 shares ($1000 / 9.9) at $9.9 per share?

And if I take the dividend, I have 100 shares at $9.9 per share ($990) PLUS the $10 in cash.

You have the right idea. But be aware that the company pays its dividend in dollars, not a percentage. In your example, the dividend would be 10 cents.

The percentage is its yield. The yield quoted in the stock's listing is for anyone buying the stock now, but your personal yield is based on whatever you paid for it. If you bought it at a lower price some time ago, then your yield will be greater.

 

[rbmrtn]

Also stocks versus mutual are little different in practice. Mutual funds typically pay the dividend and reinvest on the same day, and the NAV is only priced after the close so you reinvest at the adjusted price.

Stocks are adjusted for the dividend payment but the DRIP may happen until a later date, Also depends who is running the DRIP, the company itself, a brokerage or some other arrangement. So the stock may be up before the DRIP is actually made.

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