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Popular (BAD) Dividend Strategies - How Dividends Work - Ex-Dividend Date Explained - YouTube
Channel: Learn to Invest - Investors Grow
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hi i'm jimmy in this video we're going
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to look at some of the features
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of dividend stocks as well as some
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strategies
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uh let's call it do's and don'ts of
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dividend investing strategies
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now i'm going to use the company
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lockheed martin as our real life example
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so this video idea actually came from a
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question i got
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the other day on a on the lockheed
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martin stock analysis video that i did
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so in that well if you're curious i'll
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leave a link to that video in the
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description below
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but basically what i said in that video
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was that i like the company
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and that personally i plan on buying the
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company by the end of this week
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and then i got a comment where they
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asked well since the ex-dividend date
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was on
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friday is that affecting my buying
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decision
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so do i buy the stock on thursday before
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the ex-dividend date or friday
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after the ex-dividend date or on the
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ex-dividend date and the short answer is
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yes kind of this does affect my buying
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decision
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i'll explain more of that in a second
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first just so we're on the same page
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well there are four important dates that
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we need to know when it comes to owning
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a dividend stock
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first is known as a declaration date and
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this is simply the date
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that the company's board of directors
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approves a dividend payment for lockheed
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martin well lockheed martin issued a
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press release
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saying that their first quarter dividend
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they issued that press release on
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january 28th and basically said that
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their first quarter dividend is going to
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be
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two dollars and sixty cents so because
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that's a date that they told us about
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the dividend well that's the declaration
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date now when they announce the dividend
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well they have to give us a few other
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dates one of them
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is known as the record date in this case
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well lockheed martin
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said that the record date is going to be
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monday march 1st
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the record date is the date that
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investors have to be on record
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as owning the stock but because
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paperwork can take a bit of time
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and it takes time to process payments
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make sure the money is available make
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sure people actually own the stock
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well this means that people must
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actually own the dividend stock
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a couple days before the record date to
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make this a bit more official well they
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call this the
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ex-dividend date for lockheed martin the
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ex-dividend date falls on february 26th
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now this may look like a few days but
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don't forget we can't count the weekend
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these are business days that they care
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about
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so really the ex-dividend date ends up
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being one or two days
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before the record date now i've always
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heard that it's two days before the
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record date
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and i think technically this is true
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even though this looks like it's only
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one day apart one business day apart
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but the record date is as of the end of
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business on the first
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and this is crucial the ex-dividend date
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is before the start of business in this
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case on
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friday and this is crucial to remember
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because
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we must own a dividend stock before
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the ex-dividend date so in this case
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before
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friday if we own it before the
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ex-dividend date well
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that means we are eligible to get the
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dividend now there are quite a few
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interesting trading strategies
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that revolve around investing around the
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ex-dividend date
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but real quick just to touch on the last
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important date well that is known as the
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pay date
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also known as the payment date and as we
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might have guessed this is the date that
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the company
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pays the actual dividend and if you
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still are for some reason receiving
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checks that's the date that they mail
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out the actual checks
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but generally the cash a cash dividend
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just gets deposited
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into your brokerage account so for
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lockheed martin
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well that they're gonna pay their two
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dollars and sixty cents
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per share right down here now there's no
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required
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time difference between the record date
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and
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the pay date it can vary from company to
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company lockheed martin makes it wait
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almost a month from when they announce
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the dividend almost two months from when
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they announce the dividend to when they
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actually pay it so there's no hard and
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fast rule
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okay simple enough now this brings us to
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the question
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if i know i want to buy lockheed martin
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stock do i buy it before the ex dividend
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date let's say thursday
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or do i buy it on the ex dividend date
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in this case
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the 26th do i buy it on the 26 which we
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know means i will not be eligible to
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receive the dividend
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now with that in mind there is a
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strategy that used to be more popular
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than than it is now
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it's known as the dividend capture
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strategy which basically
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means we go around buying dividend
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stocks right before the ex-dividend date
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and then we sell the stock a few days
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later
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after we're eligible to receive the
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dividend so let's say we sold it we
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bought it here and then we sell it down
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here the
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theory being that the we can collect the
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2.60
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dividend giving us a huge boost in the
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probability
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that our stock will do well of course
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the stock will also trade by
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natural buying and selling of the stock
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market but that 260 boost is a nice
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boost
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but the reason this doesn't really work
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in fact it's been proven to be one of
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the weaker strategies
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is because this two dollars and sixty
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cents that lockheed martin's gonna pay
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us
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well that's gonna we're gonna be
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eligible for that if we own it before
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the ex-dividend date
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well where does that money come from the
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most logical answer and
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technically the correct answer is that
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cash comes from the company
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but here's how it actually works let's
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pretend lockheed martin is trading at a
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hundred dollars per share
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right before the ex-dividend they're
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trading exactly 100 bucks per share
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and then they're going to pay a 2.60
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dividend well on the morning of the 26th
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which is the ex-dividend date well that
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stock trades
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excluding the dividend so
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in theory the stock would open at let's
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say 97 dollars and 40 cents
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which is the hundred dollars minus the
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2.60 dividend
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so if we paid a hundred dollars on the
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25th
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and then we got a dividend of 2.60 cents
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or we could just buy it on the
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ex-dividend date
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for 97.40 well we end up in about the
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same place
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now yes this is technically the way it
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works but let's pretend that we already
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own a few dividend stocks
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and let's imagine we've never noticed
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that on the ex-dividend date
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the stock drops by the dividend amount
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well this could happen for a few very
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logical reasons
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first is the fact that the dividend
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stock any dividend stock
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doesn't uh the dividend doesn't get paid
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in isolation
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so on the ex-dividend date well the
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shares trade freely
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and generally the dividend relative to
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the stock price
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isn't huge lockheed martin which is
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actually trading at about 350 dollars
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per share well that stock could easily
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move up or down
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to three or four dollars without any
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problem so it's very possible that a
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2.60 dividend
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doesn't really get noticed but the real
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tricky part here is that when we pull up
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the
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a price quote for a dividend stock and
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for this example i'm actually going to
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switch over
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to analog devices just because
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their ex dividend date is today the day
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i'm shooting this video
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so analog devices closed yesterday
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february 24th
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one day before the ex-dividend date at
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161.76
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and then today i pulled down this quote
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from yahoo finance
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i pulled it down as we can see at about
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10 30 this morning
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and we can also see that the stock is
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currently
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down four dollars and 48 cents so it's
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down 4.48 cents
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from the previous close but if we do
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that math real quick
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and we take the close of 161.76
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and we subtract the four dollars and 48
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cents well we end up with a current
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price
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of 157 dollars and 28 cents
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and we may notice that our recovered
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price does not match
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the quoted price well as we might have
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guessed
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if we subtract our calculated price from
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the quoted price
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we can see we end up with a difference
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of 69 cents
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anyone want to guess how much today's
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dividend was
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that's right 69 cents so the point is
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the reason a lot of people don't notice
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the drop on the ex dividend date
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is because it doesn't get accounted for
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in the quote
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the dividend just gets removed from the
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price as if it was never there
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so that 4.48 cents 4.48 cents that the
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stock is down right now
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well that is a result of purely of
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trading it has nothing to do with the
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dividend so sticking with lockheed
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martin as the example
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well if the lockheed martin was trading
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the day before the ex-dividend date add
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a hundred dollars per share
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and they're gonna pay their dividend of
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two dollars and sixty cents
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well the next day let's pretend no
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trading happened or very little trading
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happen and the stock was breaking even
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it would show 97 dollars and 40 cents
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no change in the stock price even though
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the day before it was 2.60 cents higher
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that is because the dividend gets
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removed from it and put into your
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account
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so it's simply a transfer now this
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brings us back to
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why it doesn't make sense to buy right
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before the ex-dividend date
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because if i paid you know let's say a
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hundred dollars per share they're just
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going to give me 260 of it back
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now i don't want to make it sound like i
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don't think dividends are a good thing
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or that there's any real benefit to it
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that's absolutely not true many studies
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have proven
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that more investors prefer dividends
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so if more people prefer dividends to
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get more people investing in them well
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it's more likely that that stock
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will move higher plus many many people
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live off the dividends that they receive
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they build up huge portfolios throughout
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their life and perhaps they retire
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and they live off the dividends payments
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that they're receiving so dividends have
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an enormous advantage
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i just want to point out where it comes
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from now studies have also shown
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that more people buy dividend stocks
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right before the x date
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that way they can get the dividend
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they're receiving
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what i'm suggesting is that this bias to
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buying right before the x date
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as opposed to on the x dividend date is
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more a lack of understanding from some
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investors as to what's actually
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happening
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on the dividend date now another idea
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that some investors get another
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investing strategy idea that some
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investors get
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around dividends is that once we realize
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that the stock is going to drop
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by a certain price well does it make
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sense to
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instead of buying the stock on the ex
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dividend date well you short the stock
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on the ex dividend date if you short the
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stock and basically just they're all on
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the same page
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shorting a stock means that you borrow
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the stock from your broker and
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essentially you're allowed to sell it
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before you buy it so you make a profit
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if the stock price goes down and since
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we know that the dividend is going to
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naturally
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move the stock lower well in theory
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could be an interesting strategy
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to short the stock right before the x uh
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right before
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the ex dividend date now the short
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answer to that question does that work
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is no it doesn't work and that is
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because
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when we short a stock well we as
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the seller of that stock are required to
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pay the dividend whatever that amount so
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for short lockheed martin
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when the dividend comes up we have to
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pay the 2.60 cents
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per share to our broker who will then
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pass it on
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to whoever they borrowed the shares from
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so if we are short the stock well we're
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going to have to make sure we have the
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cash
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on hand to make sure we can pay the
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dividend but that's the reason again
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that doesn't really work as a strategy
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either now this brings us to the
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question
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do i prefer to buy lockheed martin stock
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before or
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after the ex-dividend date well frankly
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for me either one is fine i'm not too
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concerned about it
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because i'm a long-term investor and i
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plan on reinvesting the dividends
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anyways but if i had to choose
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which day if if it comes down to it like
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it is with lockheed martin i'm
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decided i've already decided i'm going
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to buy it at the end of this week
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and it's either going to be thursday or
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friday well which one do i choose
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for me i would choose to do it on the
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ex-dividend date or after the
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ex-dividend date
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and that is because dividends generally
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get taxed
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so we're unless we're in a tax-free
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account or we happen to be in a
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situation where we're not going to pay
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taxes on dividends
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well the why pay taxes if we don't have
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to
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in my mind i'd rather delay those taxes
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to when i eventually sell the stock many
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many years from now so
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that is what i am doing today but if
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you're curious
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why i waited to buy lmt's stock
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well i recently did a video where i go
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through my investment portfolio
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and some of my rules about when i buy a
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stock
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after i make a video so if you're
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curious perhaps that's a good next video
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for you to watch
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i got a link right here i got a link in
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the description below and thank you so
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much for sticking with me all the way to
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the end of the video
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i really appreciate it thank you and
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i'll see in the next video
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