When is dividend paid?

[salamanderforex]

Hi,

I am unclear on how much dividend one receives for holding a stock for certain period of time.

Let's say I buy 100 shares of IBM at $50 each with 2% dividend / year. How much $ dividend would be paid to me if I buy in any of below scenarios:

1- Buy the stock one day before dividend pay date.
2- Buy stock at beginning of dividend quarter.
3- Buy stock at beginning of dividend quarter and sell 1 day before dividend pay.

Thanks,

 

[guru]

You have to find the ex-dividend date, which is usually announced several weeks or months before that date.
You then need to hold that stock during the night before the ex-dividend date. You can buy it during the day or evening before ex-dividend day.
Everything else doesn't matter. You can just hold that stock for one night to get the dividend.
Usually the stock price will drop the next day by the dividend amount, so you may not see any specific benefit. Although stocks move all the time, so you may not even notice whether you benefited during that specific night or not. Many dividend-paying stocks are strong overall, so they can be held long-term, where the dividends add up and can have noticeable effect.

 

[Amun Ra]

Hi,

I am unclear on how much dividend one receives for holding a stock for certain period of time.

Let's say I buy 100 shares of IBM at $50 each with 2% dividend / year. How much $ dividend would be paid to me if I buy in any of below scenarios:

1- Buy the stock one day before dividend pay date.
2- Buy stock at beginning of dividend quarter.
3- Buy stock at beginning of dividend quarter and sell 1 day before dividend pay.

Thanks,

You get the full dividend for the quarter, whether you held for the entire quarter, or just bought the day before ex-date.

100 x $50 = $5,000 x .02 = $100 per year in dividend payments or $25 per quarter.

You can buy the stock the day before the ex-dividend date and sell the next day if you want, but the stock pretty much always drops by the amount of the dividend paid.

So 2% of $50 is $1 divided by 4 = 25 cents. So if you buy that $50 the day before the dividend, it's very likely to open up down 25 cents on the ex-date not factoring in other market conditions.



Trust me...when we all first started trading, we all had that idea to just buy dividend stocks the day before ex-date and sell the next day and then buy another dividend paying stock.

It doesn't work.

 

[salamanderforex]

You get the full dividend for the quarter, whether you held for the entire quarter, or just bought the day before ex-date.

100 x $50 = $5,000 x .02 = $100 per year in dividend payments or $25 per quarter.

You can buy the stock the day before the ex-dividend date and sell the next day if you want, but the stock pretty much always drops by the amount of the dividend paid.

So 2% of $50 is $1 divided by 4 = 25 cents. So if you buy that $50 the day before the dividend, it's very likely to open up down 25 cents on the ex-date not factoring in other market conditions.



Trust me...when we all first started trading, we all had that idea to just buy dividend stocks the day before ex-date and sell the next day and then buy another dividend paying stock.

It doesn't work.

Thanks to both of you for the details.

I don't know if the dividend amount is enough for volatile markets anyway to consider buying them before dividends are announced. However, with so much volatility how do you know that stock dropped because of the dividend? is the drop exactly the same amount from close of yesterday? Is there a paper written on this that has calculated the whole market and has came up with statistical probabilities?

Again, not thinking of doing this as I understand you are experienced but like to know if there was a study done or there is some other force or factor in play in the market / trading that I don't know about that makes this happen.

 

[guru]

Thanks to both of you for the details.

I don't know if the dividend amount is enough for volatile markets anyway to consider buying them before dividends are announced. However, with so much volatility how do you know that stock dropped because of the dividend? is the drop exactly the same amount from close of yesterday? Is there a paper written on this that has calculated the whole market and has came up with statistical probabilities?

Again, not thinking of doing this as I understand you are experienced but like to know if there was a study done or there is some other force or factor in play in the market / trading that I don't know about that makes this happen.

This is not statistical but factual. The stock price is actually adjusted overnight.
https://www.investopedia.com/articles/stocks/07/dividend_implications.asp

 

[salamanderforex]

This is not statistical but factual. The stock price is actually adjusted overnight.
https://www.investopedia.com/articles/stocks/07/dividend_implications.asp

Thanks for clarifying it is factual and not statistical.

So now I am confused. If dividend is given and price of stock is lowered by that amount then how does the share holder benefit?

Let's say today I buy Microsoft at $100/share (only 1 share bought) and I receive $2 dividend the next morning when I wake up (it's dividend pay date). So I see $2 added to my cash account (?) as dividend but at the same time Microsoft stock is now only sell-able (?) at $98/share because the broker lowered (?) the stock price by $2 over night due to dividend. If this is true then what is the point of dividend if they take from my left pocket and put it in my right pocket? (this scenario is assuming this is a solid stock without volatility).

I thought Microsoft actually hands $2 to broker to pass to my cash account because I hold 1 share of their company. I guess I am way off here?

 

[guru]

Thanks for clarifying it is factual and not statistical.

So now I am confused. If dividend is given and price of stock is lowered by that amount then how does the share holder benefit?

Let's say today I buy Microsoft at $100/share (only 1 share bought) and I receive $2 dividend the next morning when I wake up (it's dividend pay date). So I see $2 added to my cash account (?) as dividend but at the same time Microsoft stock is now only sell-able (?) at $98/share because the broker lowered (?) the stock price by $2 over night due to dividend. If this is true then what is the point of dividend if they take from my left pocket and put it in my right pocket? (this scenario is assuming this is a solid stock without volatility).

I thought Microsoft actually hands $2 to broker to pass to my cash account because I hold 1 share of their company. I guess I am way off here?

That’s a good question and maybe someone else could explain this, as I don’t deal with dividends that much and only know a few technical facts.
But I’d imagine that if you, for example, invested in a restaurant that gave you part of their monthly profit as a dividend, then the “stock” price wouldn’t even matter. You could adjust the value of the restaurant down overnight for technical and accounting purposes, but the next day you’d say “well, it’s still worth the same or even more now, so I’ll value it higher”. So dividend-paying stocks are still very attractive while their stock price will fluctuate every day anyway.
At least that’s my simplistic take. I’d have to do some Googling to see how close to the facts I may be on this

 

[Amun Ra]

Thanks for clarifying it is factual and not statistical.

So now I am confused. If dividend is given and price of stock is lowered by that amount then how does the share holder benefit?

Let's say today I buy Microsoft at $100/share (only 1 share bought) and I receive $2 dividend the next morning when I wake up (it's dividend pay date). So I see $2 added to my cash account (?) as dividend but at the same time Microsoft stock is now only sell-able (?) at $98/share because the broker lowered (?) the stock price by $2 over night due to dividend. If this is true then what is the point of dividend if they take from my left pocket and put it in my right pocket? (this scenario is assuming this is a solid stock without volatility).

I thought Microsoft actually hands $2 to broker to pass to my cash account because I hold 1 share of their company. I guess I am way off here?

Yes, microsoft does hand $2 to the broker. But think of it this way. Let's say you own a business worth $100(for easy math). You now pay out $2 to yourself. Is your business still worth $100? No, it's worth $98 because you just took $2 out to pay you.

Hope that helps.

 

[7out]

You get the full dividend for the quarter, whether you held for the entire quarter, or just bought the day before ex-date.

100 x $50 = $5,000 x .02 = $100 per year in dividend payments or $25 per quarter.

You can buy the stock the day before the ex-dividend date and sell the next day if you want, but the stock pretty much always drops by the amount of the dividend paid.

So 2% of $50 is $1 divided by 4 = 25 cents. So if you buy that $50 the day before the dividend, it's very likely to open up down 25 cents on the ex-date not factoring in other market conditions.



Trust me...when we all first started trading, we all had that idea to just buy dividend stocks the day before ex-date and sell the next day and then buy another dividend paying stock.

It doesn't work.

Technically it does if you research the average dividend recapture days of each individual stocks you want to buy. To save you a bit of search time, the shortest recapture days are usually in 4th quarter.

 

[7out]

Yes, microsoft does hand $2 to the broker. But think of it this way. Let's say you own a business worth $100(for easy math). You now pay out $2 to yourself. Is your business still worth $100? No, it's worth $98 because you just took $2 out to pay you.

Hope that helps.

I think you're wrong, it's worth at the ex dividend date might be $98, but it's long term value is still $100 per share or more and within the next time period of the dividend date it will be at $100 or higher barring any other information.