How Dividends Work

I am a huge fan of dividend paying stocks. I like companies that are paying back their investors now and only use their investor's money so they don't get into a situation where they have a deal on the table that they can't do because they don't have the capital to back the deal.

So, let me talk a little about how dividends work. This discussion is inspired by a talk with a good friend who asked me why a person would not just buy a stock before the dividend paid out and then sell the stock after the dividend paid out. He also did not know about the x-dividend date, so I will clarify that here.

If a stock pays dividends quarterly, the board of directors will meet after each quarter to declare a dividend (or decide not to pay a dividend). In this scenario, I will just assume the second quarter has finished and the board of directors are meeting on July 10th to declare a $1 dividend. We can just call July 10th the "meeting date". This means the company will pay $1 to each shareholder for every share owned. In the meeting, let's say they also decided to make the "record date" on July 20th and the "payable date" on July 30th. Then, the "x-dividend date" is July 18th, which is determined by FINRA to be two business days prior the "record date".

• June 30th - End of second quarter
• July 10th - Meeting date (determined by board)
• July 18th - X-Dividend date (determined by FINRA)
• July 20th - Record date (determined by board)
• July 30th - Payable date (determined by board)

If the stock cost $50 per share on July 17th, the price would automatically be adjusted to $49 per share on July 18th. Whoever owned the stock on July 17th would be paid the $1 dividend, even if that person sold the stock on July 18th. The owner of the stock on July 17th would be recorded by the company as the owner of the stock on July 20th and would be paid the $1 dividend on July 30th.

The important thing to note is that you do not want to purchase the stock on July 17th because you will buy the stock for $50 per share and then be paid a $1 dividend per share and then taxed on the $1 dividend per share. It is better to purchase the stock after the "x-dividend date", once the stock has been discounted to $40 per share.

Support My Mission

1. You can support my mission by visiting http://www.izuservices.com and donating. A dollar lets me know you support my mission or like my posts. Thank you for those who have already donated.

2. Donate to SAGE via http://sagescholars.berkeley.edu/. The UC Berkeley SAGE (Student Achievement Guided by Experience) is a self-funded experiential leadership program that provides education, professional development, mentoring and internships to UC Berkeley students who come from poverty and low income backgrounds. I serve on the Leadership Council for SAGE and want to help raise money for their cause.

3. Call toll-free (877) 855-8111 or log on to www.PrimericaSecure.com to save yourself some money on either your home or auto insurance policies. Be sure to use my last name (IZU) and solution number (2MTFT). PrimericaSecure automatically compares rates from multiple companies such as Progressive, Travelers, Safeco, Hallmark, etc.