A subscriber recently wrote and suggested I include some additional information on dividends, particularly as they may affect stock price. Before reaching that point, a little review may be helpful. Generally, there are four relatively important dates that relate to dividends. They are the announcement date, the ex-dividend date, the record date, and the payment date.

The announcement date is essentially self-explanatory. It is the date when a company announces it is going to pay a dividend. Often, though certainly not always, the announcement may be made around the time earnings are announced. The ex-dividend date is the date before which investors need to own the shares in order to be eligible to receive the dividend the company announces or has announced it is going to pay. The day the stock goes ex-dividend, the share price can be expected to drop by the amount of the dividend since investors who buy the stock then will not be receiving the dividend. The record date is the date on which the investor must be the holder of record of the shares in order to receive the dividend. It is important to realize that settlement on a stock purchase does not occur until three business days after the order to buy is filled so if you bought a stock the day before it went ex-dividend, you would not be the holder of record in time to get that dividend. Finally, the payment date is obvious in that it is the date that the dividend is actually paid.

Some investors employ a strategy of capturing dividends. Back when the Japanese economy was roaring and many Japanese investors were investing heavily in the U.S. stock and real estate markets, some used this strategy to great advantage. Essentially the strategy means that the investor buys the stock after the announcement of a dividend, but sufficiently before it goes ex-dividend so that he is the owner of record on the record date. The investor expects the share price to dip by the amount of the dividend on the ex-date, but, ideally, then looks for a bounce in share price following that dip to sell the position so that he winds up with the dividend and is in and out of the stock in a relatively short time.

Currently dividends are taxed at a very low rate so many investors prefer to own shares of companies that have a history of paying dividends. Certain classes of stock may offer very attractive dividends. Some vehicles even make regular payments that are federally tax free. I discuss, in detail, the use of many of these in "Trade Your Way to Wealth," my new book, that is now available on Amazon.com, at Borders, and Barnes and Noble in the stores and on their websites. One example of stocks paying high (though taxable) dividends is the real estate investment trust (REIT). I recently sent paid subscribers alerts on my trades in and out of such an REIT paying an annual dividend of over 17%. Preferred stocks also frequently pay high dividends, sometimes in the 6% and higher range.

Many of these types of investments may be worthy of your study and investigation to determine whether they fit into your personal investing plan.

Good Trading!
Bill Kraft

January 19, 2008

Copyright 2008, Makin' Hay, Inc., All Rights Reserved

Back To Articles Home Page