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Ex-Dividend Date Explained and Dividend Calendar Strategies | Investing 101 - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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The ex-dividend date is one of the most important
markers in dividend investing but also one
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of the most confusing.
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In this video, I鈥檒l not only walk you through
the dividend calendar dates, I鈥檓 revealing
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three dividend investing strategies you can
use to maximize your returns.
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We鈥檙e talking dividend stock strategies
today on Let鈥檚 Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money.
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Joseph Hogue with the Let鈥檚 Talk Money channel
here on YouTube.
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I want to send a special shout out to everyone
in the community, thank you for taking a little
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of your time to be here today.
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If you鈥檙e not part of the community yet,
just click that little red subscribe button.
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It鈥檚 free and you鈥檒l never miss an episode.
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Now everyone in the community knows I鈥檓
a big believer in dividends.
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These cash-paying investments have been shown
to beat the market and at times, that dividend
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yield is the biggest chunk of market return.
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You see here a chart of the total market return
by decade and that dividends have accounted
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for about a third since 1926 but in some decades
like the 70s it鈥檚 been as much as half the
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total return.
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But there鈥檚 a very important part of dividends
that most investors don鈥檛 understand or
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are a little confused.
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It鈥檚 the process where a dividend is declared
by the company and how it鈥檚 determined if
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you get that dividend or not.
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In this video, I鈥檓 going to show you the
important dividend calendar dates to watch
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then I鈥檒l reveal three dividend investing
strategies around these dates and two tips
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to boost your returns.
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When a company decides to pay a dividend,
it鈥檚 because the Board of Directors has
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approved the cash payment and declares the
dividend.
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From this date, the declaration date, you
usually have about 30 days before they record
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who gets the dividend.
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Whenever you hear that a company has declared
their dividend, they鈥檒l also announce what鈥檚
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called the ex-dividend date.
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This ex-dividend date is the first day that
the stock trades without the dividend, it鈥檚
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ex that payment.
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That means you need to own the shares on the
day before to get the payment.
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It鈥檚 not shown here but sometimes investors
call the day before the ex-dividend date,
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they call it the cum-dividend date.
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So in our example here, and we鈥檒l cover
another example with Apple dividends later,
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here Microsoft announced they鈥檇 pay a dividend
on November 29th and that the ex-dividend
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date would be February 14th.
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Usually it鈥檚 only about a month between
the declaration and the ex-date but here it鈥檚
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longer.
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If you owned shares of Microsoft at the close
on February 13th, you would get the dividend.
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When trading in Microsoft opens on the 14th,
those shares don鈥檛 include the dividend.
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It usually takes a couple of days for the
company to get the books straight to see exactly
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who owned the shares on the 13th so that鈥檚
why the record date is later.
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Then usually a few weeks later, the actual
payment of that dividend goes out on the Payment
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Date.
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An interesting thing usually happens on that
ex-dividend date and this is going to feed
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into our dividend calendar strategies later.
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Because the company has committed to making
that cash payment to investors, and the shares
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on the ex-dividend date don鈥檛 include that
cash payment, the company is technically worth
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less than it was the day before.
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If the company pays out $300 million for that
dividend, and remember it鈥檚 just accounting
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right now because it hasn鈥檛 actually paid
the dividend but that money sitting in Microsoft鈥檚
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bank account doesn鈥檛 belong to the company,
it belongs to those shareholders, then the
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company鈥檚 value is $300 million less than
the day before.
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Now it doesn鈥檛 always happen exactly, and
we鈥檒l get into why, but most of the time
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you鈥檒l see the share price fall by about
the amount of that dividend on the ex-dividend
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date.
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This is why it鈥檚 so important to know these
dates.
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You might have collected that dividend but
now the shares have fallen in value by about
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the same amount.
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Now I want to share those three dividend calendar
strategies you can use to take advantage of
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all this.
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First though, I need your opinion on something.
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I want to get a feel for what kind of investors
we have here in the community, whether you鈥檙e
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long-term investors or looking more for those
shorter-term gains.
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So in the comments, let me know about how
long you usually hold your investments; more
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than 5 years, three to five years, a year
or two or less than a year.
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Scroll down and let us know how long you usually
keep an investment and how you make that decision.
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Part of understanding these dividend date
strategies is understanding the taxes around
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dividend investing and this is really going
to affect your returns.
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Dividends are taxed in one of two ways.
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If you own a dividend stock for more than
60 days either before or after that ex-dividend
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date.
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So the total time you own the stock has to
be 61 days and include that ex-dividend date,
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then the IRS says that鈥檚 a qualified dividend
and you get a special lower rate.
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If you own the shares for 60 days or less
though, you don鈥檛 get that special rate
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on the taxes.
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You collect the dividend but it goes on your
taxes as regular income and you pay those
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regular income tax rates.
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So let鈥檚 look at a chart here because I
know this can be confusing.
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Let鈥檚 just look at the one on the left here
for individuals.
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If you own a dividend stock for 61 days or
more, whether it鈥檚 before or after the ex-dividend
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date, then you pay that capital gains tax
rate on when you account for that dividend
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on your income taxes next year.
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You can see those tax rates in orange are
quite a bit lower than the income tax rates
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in blue.
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In fact, for a lot of people, they may not
owe any taxes on their dividends if their
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income is low enough.
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If, on the other hand, you hold the shares
for 60 days or less, You鈥檒l pay the ordinary
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tax rate in blue on that dividend.
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This is important to the dividend capture
strategies we鈥檒l talk about next because
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obviously those higher taxes are going to
affect your returns.
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Now I鈥檝e got a trick to avoid these higher
taxes that I鈥檒l share in a minute but let鈥檚
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get to that first dividend calendar strategy.
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This first dividend strategy is called Dividend
Capture and is by far the most popular though
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I鈥檝e got two other strategies that might
help you make higher returns.
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The dividend capture strategy is buying the
shares just before the ex-dividend date, so
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buying them the day before and then selling
on the ex-dividend date.
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This means you get the dividend but don鈥檛
hold the shares very long so you鈥檙e not
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really investing on the price moves.
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The beauty of this strategy is that it鈥檚
so simple.
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There鈥檚 no analysis or stock-picking involved.
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Now like we said, a lot of times the share
price will fall on the ex-dividend date because
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new investors don鈥檛 get the dividend.
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So what a lot of dividend capture investors
will do is wait during the ex-dividend day
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to see if the share price rebounds a little.
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This happens a lot actually, investors get
over that knee-jerk reaction of the shares
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not trading with the dividend and they bid
the stock price back up.
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So sometimes with this strategy, you won鈥檛
see the stock price rise all the way back
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to where you bought it the day before but
it will come up a little.
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This means some of the dividend gain will
be offset with a loss on the stock price but
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you鈥檒l still have a gain.
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The great part about the dividend capture
strategy is there is always a stock going
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ex-dividend on any particular day so you can
just roll this one over every day.
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You buy shares of a stock that go ex-dividend
the next day, sell on the ex-dividend day
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and immediately buy shares of another stock
that go ex-dividend the following day.
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Let鈥檚 look at a real-world example of the
dividend capture strategy with Apple dividends
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then I鈥檒l reveal a couple of secrets to
make you more money.
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Apple declared a $0.73 per share dividend
on January 29th 2019 with an ex-dividend date
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of February 8th, 10 days away and a payment
on the 14th of February.
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Using the dividend capture strategy, you would
have bought the shares on February 7th.
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Remember you have to own the stock before
the market opens on that ex-dividend date,
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in this case February 8th.
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Buying the shares on February 7th would have
meant paying $170.94 at the close of trading.
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Notice that even though the payment date,
the day the company disperses the cash dividend,
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is on the 14th of February, it only goes out
to investors that held the stock before that
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ex-dividend date.
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Now the shares did drop on the next day, the
first day the stock didn鈥檛 include the dividend.
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You would have collected that $0.73 per share
dividend but the shares opened on February
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8th at $168.99 per share, losing $1.95 or
about 1.1% of the price you paid.
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As is often the case though, the shares rebounded
through the day and closed at $170.41 per
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share or $0.53 below where you bought them
the day before.
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You gained $0.73 on the dividend but lost
$0.53 on the price for a net gain of $0.20
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per share.
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Now that tenth of a percent gain doesn鈥檛
sound like much but remember, this is a one-day
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gain.
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Even that modest gain, rolled over every day
into a new dividend stock would produce a
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34% annual return.
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Of course the problem here is with those taxes
and trading costs.
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The one-day gain even at the end of the year
on that $1,300 portfolio is only $1.57 so
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not enough to cover a $5 trading cost.
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To cover the trading cost, you鈥檇 need a
portfolio value of just under $4,300 to make
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the tenth of a percent gain cover your cost.
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That鈥檚 not to say the dividend capture strategy
doesn鈥檛 work.
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This was one Apple dividend date.
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There are others where your return is much
more, on the order of a percent a day or more,
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and there are other days when you might book
a loss on the strategy.
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I have two tips though that are going to help
maximize your returns on this strategy.
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First is to focus on larger companies that
pay dividends of 3% or more.
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Smaller companies with a market cap under
$5 billion tend to have bigger price swings
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whether it鈥檚 related to the dividend payment
or not.
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That鈥檚 going to increase the risk that your
share price drops greater than the dividend
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amount on that ex-dividend date.
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Getting that higher dividend yield is also
going to mean a better chance at collecting
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more than the shares drop.
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The second tip here is to use this strategy
in a tax-advantaged retirement account like
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an IRA or a Roth.
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That way, no matter how long you own the shares,
you won鈥檛 pay taxes on the dividends.
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With a Roth account, you鈥檒l never pay taxes
on the dividends you collect.
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That dividend capture idea is the main dividend
calendar strategy but there are a few others
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that while they might not be as popular are
just as good at producing returns.
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Another strategy is looking for stocks to
buy on the ex-dividend date to pick up shares
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at a discount.
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The idea here is that investors over-react
initially and the stock price usually rebounds
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from the ex-dividend selloff.
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So if we look back at our Apple dividend example,
we could have gotten the shares for $168.99
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at the open on the ex-dividend date and made
a 0.84% return by the close.
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Now remember, you still have tax problems
if you sell immediately.
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Price gains are taxed at the lower capital
gains rates only if you own the shares for
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a year.
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If you were to sell your shares that day then
you鈥檇 pay regular income tax rates on the
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gain.
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Still though, this can be a great way to pick
up long-term holdings or even on that short-term
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gain if you hold it in a retirement account
so you don鈥檛 get hit by the taxes.
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Another less followed dividend strategy is
buying stocks that have recently declared
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dividend increases, especially if the increase
above the normal annual increase.
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This one is harder to follow because you have
to check on the normal dividend increase and
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compare it after a company makes its dividend
declaration.
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Still though, it鈥檚 a fairly simple strategy.
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You look for dividends declared on the day
and then go to Yahoo Finance to look at dividend
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history for the company.
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You can then compare the percentage change
from the most recent dividends to see how
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much they have increased in the past.
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Yahoo Finance is a good resource for a lot
of information so I鈥檓 here on the page for
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Apple stock then come down to Historical Data.
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On this page, you find share price, dividend
data and any splits on the stock.
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So I鈥檒l change the dates to get five years
and then go over here to show dividends only
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and click apply.
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This shows me all the dividends for Apple
over the last five years and I can see when
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they were increased and by how much.
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The idea here is that a dividend increase
is a point of confidence in the company and
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business growth.
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Management and directors usually take a very
conservative look at dividends to make sure
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they have sufficient cash for growth and yield
payments so increasing the dividend means
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they鈥檙e confident in that continued business
growth.
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That confidence should result in a higher
valuation for the company and higher dividends
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in the future.
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There are a few dividend funds you can buy
that mimic this approach.
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The Dividend Aristocrats is a special group
within the S&P 500 of companies with 25 plus
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years of consecutive dividend increases and
a market cap over $3 billion.
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There are currently 57 stocks that meet the
criteria and it鈥檚 tracked by the ProShares
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S&P Dividend Aristocrats ETF, ticker NOBL.
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You鈥檝e also got the Vanguard Dividend Appreciation
ETF, ticker VIG, which tracks companies with
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a record of consistently increasing their
dividends.
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The Vanguard fund doesn鈥檛 explicitly invest
in the Aristocrats and has a less strict criteria
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on those consecutive increases but I like
it better for the lower expense ratio.
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You see here that the two funds follow each
other pretty closely so that quarter of a
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percent difference in fund fees each year
can really make a difference.
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If you love dividends as much as I do, we鈥檝e
got another video highlighting dividend stocks
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that pay monthly, how I find them and some
secrets to dividend stock investing.
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I鈥檒l leave a card here in the corner so
click through and check that out.
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We鈥檙e here Mondays, Wednesdays and Fridays
with the best videos on beating debt, making
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more money and making your money work for
you.
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If you鈥檝e got a question about money, just
subscribe to the channel and ask it in the
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comments and we鈥檒l answer it in a video.
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