How

Imagine you own 100 shares in America’s best energy company. You bought the stock 20 years ago, knowing that retirement is approaching. It is a good company and has made money each year.

Every quarter, the company sends you a check in the mail. At first, it was $7 per check. Then, it gradually rose to $14 and then $21. You are now making $21 every quarter from a single stock in your portfolio. 

Another stock you bought may pay a yearly dividend versus a quarterly dividend. Or you noticed when you first bought shares, you missed the most recent dividend payment.

By knowing when dividends are declared and paid out, you can create a portfolio that pays you a dividend each month for steady income.

We’ll explain the important dates you need to know for effective dividend investing, how dividends affect stock price, and how dividends are taxed.

Monthly, Quarterly, or Annually: How Often Are Dividends Paid?

How

Most companies pay dividends on a quarterly basis when they release their earnings report every three months. On the other hand, some companies pay their dividends every six months or once a year. 

In rare cases, a company will pay monthly dividends. Out of nearly 20,000 U.S.-listed stocks and funds, only a few hundred pay their dividends monthly. The number shrinks even more if you want a monthly payer that yields more than the overall market.

A monthly dividend payout benefits you as the investor since you will be getting a nice stream of extra income each month. A significant benefit of monthly dividends is the steady dividend reinvestment plan.

What you must be aware of are the risks associated with monthly dividends. On average, monthly dividend stocks tend to have elevated payout ratios. An elevated payout ratio means there’s less margin for error to continue paying the dividend if business results suffer a temporary decline.  

Dividends and Their Important Dates

When you buy and sell dividend stocks, the dates determine who gets the dividend and who doesn’t. To decide the rightful recipient of dividend payments, companies keep track of several dates during the life of a dividend: the declaration date, ex-dividend date, payment date, and record date.

Let’s have a look at each of these dates.

Declaration Date

The first important date is the declaration date — also called the announcement date. This is when the company’s board of directors announces its next dividend payment. Within the announcement, the board includes the dividend’s size, ex-dividend date, and payment date.

Ex-Dividend Date

The ex-dividend date is the most important date for you to understand. It’s the cutoff day for you to receive a company’s upcoming dividend. 

If you are looking to buy shares of stock with a dividend, you must buy shares before the ex-dividend date. If you buy shares on or after the ex-dividend date, you will not be entitled to the upcoming dividend.

Date of Record

The date of record — also called the record date — is when you have to be in the company’s books as an investor to get the full benefits of the dividend. You must hold shares on the dividend record date, or you will not receive the specific dividend distribution. 

The date of record and the ex-dividend date are very close to one another. The ex-dividend date is one business day before the record date. If a company’s ex-dividend date is on a Friday, its record date will be the upcoming Monday. 

One key difference between the ex-dividend date and the record date is that the stock exchange sets the ex-dividend date. In contrast, the record date is set by the board of directors.

Also, on the ex-dividend date, stock prices get adjusted downward by the dividend amount. However, on the record date, the share price is unaffected by the dividend declared by management.

Payment Date

The final date for you to understand is the payment date, which is also known as the company’s distribution day to stockholders. This is the date when the company actually pays the dividend to investors

A dividend can either be sent as a check by mail or can be paid directly to your brokerage account.

A Real-Life Example of Dividend Dates in Action

Let’s take a look at a real-life example of how these dates work. We will use Enbridge, Inc. (NYSE:ENB), which has a dividend yield of 7%. 

Enbridge announced a quarterly dividend of 81 cents per share in a press release on November 4, 2020 (the declaration date).

That dividend was payable to shareholders of record on Friday, November 13, 2020 (the date of record). Since the date of record was on November 13, the ex-dividend date fell one day before on Thursday, November 12, 2020. So to be entitled to the 81-cent dividend, investors needed to own or buy Enbridge’s shares before November 12.

The press release states the dividend would be payable on December 1, 2020 (the payment date). 

How Dividends Impact the Stock Price

Dividends directly impact the price of a stock. For example, a markdown in the stock price by the amount of the dividend occurs on the ex-dividend date.

The stock price drops on the ex-dividend date because buyers are not entitled to the next dividend payment. Another reason why the price drops is because the dividend comes from the company’s reserves or retained earnings, which reduces its value.

Using Enbridge as an example, on November 12, the ex-dividend date, the company’s share price dropped 81 cents from the closing on November 11 to the opening on November 12.

If you wanted to buy Enbridge after the ex-dividend date, you would have been able to buy the stock at a lower price. You’d be entitled to the next dividend payable on March 1, 2021.

On the date of record and payout dates, adjustments do not occur on the stock price by the stock exchanges. Those two dates are strictly administrative indicators that do not affect the value of the stock. From an investment standpoint, the key date is the ex-dividend date.

Taxation of Dividends

We all dislike the word taxes. So, how can you avoid a huge tax bill on your dividends?

Dividend income is not free money and is usually taxable. There are two types of dividends: qualified dividends and non-qualified dividends. 

If the dividend is qualified, it was paid by a U.S. corporation or a qualifying foreign corporation, and you held the underlying stock for more than 60 days. Most stocks, mutual funds, and real estate investment trusts in the United States pay qualified dividends. Dividends that don’t meet these requirements are considered non-qualified. 

Qualified dividends are taxed at the capital gains rate. The tax rate on non-qualified dividends is the same as your regular income tax bracket. 

Since the capital gains tax rate is lower than the income tax rate, you can avoid a larger tax bill by avoiding non-qualified dividends. For example, if you receive a dividend but haven’t held those shares for more than 60 days, you will have to pay taxes at a higher rate.

Fully Equipped on Dividends

A

Knowing all the dividend dates is essential for you to receive consistent monthly, quarterly, or yearly income. Paying close attention to the ex-dividend date is key because it verifies whether you qualify to receive the upcoming dividend.

Even if you miss the opportunity to own shares before the ex-dividend date, you can buy the stock after the ex-dividend date. This is important because you have the opportunity to purchase shares at a lower price.

Now that you have a great understanding of the important dividend dates, you are one step closer to constructing a high dividend yield portfolio and being more aware of when to make that investment decision.

You are always looking for that extra cushion to help pay your bills or stay retired. But which stocks will help you in the long run?

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