Let’s Remember the Basic Rules You Need to Earn that Dividend

There seems to be some confusion in the market about the rules for earning dividends. I have recently heard from someone that you have to own stock for 30 days (or maybe for 45 days) or you don’t get the dividend. This isn’t true. There is only one day when you have to be recognized as the owner: the record date.

Here’s how it works. The company selects a “record date” and anyone who is the registered owner of stock on that date gets the dividend. Once the record date is set, the ex-dividend date is also set to fall two days before record date. This is done because it takes three business days to settle stock transfer. So you have to buy shares of stock before ex-dividend date so that you will be the stockholder of record three days later, on the record date. The same is true of exercising call options. They must be exercised before the ex-dividend date to take delivery of the shares by the record date.

You can sell your shares on ex-dividend date or any date after. As long as you bought shares before ex-dividend date, you get the dividend.

Payout date comes later, often as much as a month later. For irregular payments (semiannual or annual) payout date might be a matter of months.

The stock is expected to be reduced by the amount of the dividend on the record date. But in fact, this

often becomes invisible. For example, a 30 cent dividend might be offset by normal market activity including a possible offsetting rise in price. So many mentions of this offsetting decline in the stock price make it sound

like a disaster, when in fact the amount of the dividend is so small that the offset in the stock price is

likely to have little lasting effect.

So there isn’t really that much to remember. You have to buy (or exercise your call option) before ex-date in order to earn the dividend. And you can sell any time after and still be acknowledged as stockholder of record. It really isn’t complicated.

Michael C. Thomsett

About this week’s Heavy Hitter: Michael C. Thomsett is a widely published options author, with six options books in print, and a contract with Palgrave Macmillan for two option topic books. Thomsett blogs at FT Press, Benzinga and Seeking Alpha and his website is www.MichaelThomsett.com Twitter: @ThomsettPublish