Ex-Dividend Stock Purchase

Whenever a company declares a dividend, it’s paid to the shareholders that officially own that stock on a certain date. Normally, the stock goes ex-dividend (meaning “without dividend”) four business days prior to that date of record. If you own a stock before it goes ex-dividend, you get the dividend; if you buy a stock after it goes ex-dividend, you don’t collect that dividend.

For instance, suppose that on March 15, Chemical Bank declares a 38-cent per share quarterly dividend, payable on April 30, to holders of record as of April 6. The stock will go ex-dividend on March 31.

The temptation may be to buy the stock before March 31 in order to get the dividend. However, you are probably better off waiting to buy the stock when it is ex-dividend. This is because the stock goes down after it goes ex-dividend, and you can buy it at a lower price.

An Example

Let’s say Chemical Bank is trading at $40 per share on March 30. You buy 100 shares for a total of $4,000. On March 31, the stock goes ex-dividend, and the shares fall $38, the amount of the dividend paid (.38 per share dividend x 100 shares = $38). You now own shares of Chemical Bank worth $3,962, absent any other price movement.

It is true that you will receive $38 in dividends on April 30, which you can reinvest in Chemical Bank shares. However, you’ll also be hit with an immediate tax obligation for the $38 dividend. In essence, you’ll have to pay a tax on getting back your own money. You are better off buying the shares for $3,962 on March 31.