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Old 11-25-2008, 11:34 PM
 
Location: Denver
1,339 posts, read 3,540,072 times
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Default Dividends - How do they work?

Just curious how this works.

So, you buy a stock and when the dividend date comes you get a dividend? How does that money get to you?

Also, what prevents people from buying the stock the day before the dividend and selling the day after?

Thanks!
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Old 11-25-2008, 11:51 PM
 
44 posts, read 161,319 times
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Wankel

I have a good example for you.

I own shares of Alcoa (AA)
All shareholders of AA as of 11/5/2008 (this is called the Ex Date) will receive .17 cents per share tomorrow 11/25/2008 for a quarterly dividend pay date. The ex date is usually at least a week before the pay date. Most dividend stocks pay each quarter, but some are also semi-annual. An important thing in looking at dividend stocks is their payment history and yield.The yield for Alcoa is 7.01%. I use Scottrade and they automatically deposit the dividend into my account. Hope this helps you out.
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Old 11-26-2008, 12:15 AM
 
Location: Keller, TX
1,592 posts, read 2,049,685 times
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Quote:
Originally Posted by wankel7 View Post
Just curious how this works.

So, you buy a stock and when the dividend date comes you get a dividend? How does that money get to you?

Also, what prevents people from buying the stock the day before the dividend and selling the day after?

Thanks!
Good questions. Generally, you would buy a stock in a brokerage account. The shares are held in "street name," which just means the brokerage firm is the custodian for the shares.

There are basically two options if you own stock in a brokerage account and that stock pays a cash dividend. A) the money can be paid to the cash "core" of the account, and B) the money can be reinvested to buy additional shares. As a variation on A), your brokerage firm might let you arrange to be sent the dividend as a check or ACH transfer to a bank account. As for option B), this isn't always available (you'd have to check with your brokerage firm), but if it is you'll probably be owning fractional shares (like with a mutual fund).

There are also DRIP programs -- dividend reinvestment programs -- but these are initiated through the company and transfer agent, not through a brokerage firm.

As for buying the stock, getting the dividend, and selling, it doesn't work out that way due to the Ex-dividend. Basically, you have to own the shares on the Record Date -- and that means you have to purchase it at least three days before the Record Date.

So let's say a stock is paying a dividend on Friday December 19th. The company might set the Record Date as Friday December the 5th. Since settlement is three days, you have to have bought the stock by the end of the trading day on Tuesday December 2nd. If you wait and buy it on Wednesday December 3rd, you won't be the official owner of the stock until three business days later, or Monday December 8th, so you won't be the owner of record on Record Date.

So why wouldn't somebody just buy on the 2nd and sell on the 3rd? That's where Ex-dividend comes in. The Ex-dividend date is two days before the Record date, or Wednesday December 3rd. The stock price is REDUCED by the amount of the dividend first thing in the morning on this date. That doesn't mean the stock won't finish the day higher than it was on Tuesday, it just means it will have downward pressure equal to the amount of the dividend. So you can sell on the 3rd, but everything else being equal, you're selling at a lower price, so you're trading a dividend for a lower share price.

Similarly, if you own the stock and want to get out before the price goes down due to Ex-dividend, you have to sell by Tuesday the 2nd -- but you lose the dividend.

Mutual funds (stock and bond) work somewhat differently but similarly as far as Ex-dividend. I attached an image of a fund with extremely regular price movements. You can clearly see the Ex-Dividend each month for this bond fund.
Attached Thumbnails
Dividends - How do they work?-atoix.gif  
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Old 11-26-2008, 03:19 AM
 
Location: BOY-see
4,271 posts, read 6,351,862 times
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The important thing to remember about dividends is what yield represents. The dividend is not a percentage; it is a dollar amount per share per period (can be monthly, can be annually, or something in between). To calculate the current yield, they add up a year's dividends (based on past history or management declarations) and divide by the stock price at the moment.

But that isn't your yield. Your yield is based on what you paid. Say you bought a stock at $10 that pays $.50 per share per year: 5%. Then it goes up to $15, the dividend amount has not changed, and you see in a stock quote that the dividend is 3.3%. While you probably are glad about the price appreciation, from a yield standpoint you don't give a flying fornication what the quote says; you care only that the dividend amount has been sustained (better still, increased). Your yield is 5%, period. Only for the people jumping in at $15 is it 3.3%.

What this means: the fine art of dividend investing is based on buying things when they are very cheap, so that you can get more shares and thus bigger checks. However, that isn't so simple as just waiting patiently for periodic market disfavor. A major price decline usually has a reason, and the security may be in distressed: a bond CEF may be mostly in downgraded bonds, a company may be in serious trouble, etc. So be careful. Think.

Above all, if you see a yield above 10%, at least question it. If you see an apparently astronomical yield, seriously question it. No one actually pays 200%, and the penny stock you see that supposedly yields that has probably suspended the dividend and will likely go to zero. And once you're in, keep on top of the security. They can and do cut or eliminate dividends. They hope not to do that, but we all hope not to have problems, and we sometimes do anyway.

Here's a concrete example. Check out HJS, the Tribune Co.'s SATURNS (essentially mini-bonds). Par is $25. Closed yesterday at $1.61 each, which Marketwatch says produces a yield of 108.7%. Now, why would a bond trade so flipping low? Obvious answer: enough income investors think that Sam Zell is going to default on them that they want no part of the bonds. Surely newspapers aren't doing so hot...but would Zell really bust the bonds? Fair question; good question. Obviously the market doesn't have much faith in the basic value or the company's ability to pay the interest to bondholders. They're callable, at 25 I think, meaning that if Sam wants to retire them before maturity (which is long after all our deaths, IIRC, some ungodly year like 2099), he has to cough up $25 per bond to do so. But let's say you decide you'll bet on Sam. At yesterday's prices, $1610 plus broker commission buys you a thousand of Sam's bonds. He only has to pay the coupon of $1.75 per bond per year once in order for you to make back your investment. Next ex-date is in May 2009. Will it happen? They paid the November coupon, and obviously a lot of people thought they wouldn't or they'd have owned the bonds. Your call.

That's just an example of the situations one may see and how one might examine them.
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Old 11-26-2008, 08:29 AM
 
Location: NY
1,416 posts, read 3,282,119 times
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Quote:
Originally Posted by Armyman2007 View Post
The yield for Alcoa is 7.01%.
Wow, do I now feel rather stupid. I used to own it back in the mid 1980s. Then when the aluminum industry started to tank in the early 1990s I sold it. Naturally, a couple of years later Alcoa acquired Reynolds and I guess that's what did it.

7.01%. Sheesh. That's a better yield than my BP.

Woulda shoulda coulda...
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Old 11-26-2008, 11:02 AM
 
Location: The Pacific NW.
700 posts, read 991,867 times
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Quote:
Originally Posted by j_k_k View Post
What this means: the fine art of dividend investing is based on buying things when they are very cheap, so that you can get more shares and thus bigger checks.
Well, the fine art of investing IN GENERAL is based on buying things cheap so that you can get bigger returns. Whether those returns come via dividends or share price appreciation doesn't matter all that much, IMHO. As Nepenthe correctly pointed out, dividends are taken directly out of the share price (as SHOULD happen, since the company is now worth that much less after paying the dividend) so it's basically a wash in the end. It's sorta' like taking money out of one pocket and putting it into the other. You may even pay Uncle Sam a cut of that money on the way to the other pocket. There ARE reasons for investing in dividend-paying stocks (and reasons not to), but it should not be for the dividends themselves. The exception to this would be if you need income and would otherwise be selling off shares anyway.

(The dissenting opinions should start rolling in any second now.)

Great answers by j_k_k and Nepenthe, BTW.
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Old 11-26-2008, 12:24 PM
 
Location: BOY-see
4,271 posts, read 6,351,862 times
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Quote:
Originally Posted by LongArm View Post
Well, the fine art of investing IN GENERAL is based on buying things cheap so that you can get bigger returns. Whether those returns come via dividends or share price appreciation doesn't matter all that much, IMHO.
While I don't disagree there with the first part (not sure how anyone could), what I wanted to highlight was the difference in dividend investing: if you buy cheap now, you collect the returns all along and for the life of the investment, assuming the dividend doesn't go down. In other words, you have already booked gains--the security paid them. All the market tanking in the world can't take them away (unless, of course, you reinvested them). What I was most trying to impart to the OP was that if you look at something that's yielding 6% right now, and that doesn't look too good, if you keep an eye on it you might be able to buy it at a time when you get 10% or more--for however long you hold it.

There are a lot of good strategies out there.
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Old 12-17-2008, 10:33 PM
 
4 posts, read 48,956 times
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Default i have question

if i know what date a dividend is calculated on and i invest for a single day or week will/should i get full dividend amout ? and do all companys work dividends out for same time of the year ?
3 questions in one maybe someone can advise
can u juggle money and make ash off dividens?
thanks all . merry xmas
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Old 12-17-2008, 11:15 PM
 
Location: Keller, TX
1,592 posts, read 2,049,685 times
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Quote:
Originally Posted by ihufton1980 View Post
if i know what date a dividend is calculated on and i invest for a single day or week will/should i get full dividend amout ?
Yes. Let's say no outside forces at all are working on on a stock, just for the sake of argument. Let's assume no commissions. You have $10 in your cash core. You buy one share at $10. The ex-dividend date (as explained above) hits and you're a shareholder of record. You get $1 paid to your cash core. Your stock is worth $9 due to ex-dividend adjustment. You sell your stock to cash for $9. You now have $10 in your cash core.

Just remember dividends are not free income.
Quote:
Originally Posted by ihufton1980 View Post
and do all companys work dividends out for same time of the year ?
No, it can vary.
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Old 12-18-2008, 12:03 AM
 
4 posts, read 48,956 times
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ok so all/most company have different days for ex day . whats the problem me moving cash always 2 get dividend ?
am new to this and looking to invest and it was just an idea how to make cash , tell me down falls to my idea is welcome thanks
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