The Investment Blog

How does one time purchases and sales of stocks relative to the payment of dividends?
I believe that one has to own a stock for some fixed period of time in order to have earned the next quarterly dividend. What rules are in place here? Thanks.

Generally speaking, the price of the stock drops at least as much as the divi payout on or near the date of payout. This isn’t mandatory or mechanical…it just seems to happen. This usually prevents people from trying to buy a stock just before the cutoff date and selling right after they get the dividend payout.

Hope it helps.
-Mike

A company has paid annual dividends of RM0.48, RM0.60 and RM0.62 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least 14% rate of return. What is the maximum amount you are willing to pay for one share of this stock today?

PrivateBanker’s answer is almost right but off by some calculator problem and not very general.
Use dividend capitalization model which says:
Required Return = Dividend Payout ratio + Growth rate
14% = 0.62/share price + 0% => share price = 0.62/0.14 = RM4.43

Cole Company has 289,000 shares of common stock authorized, 253,000 shares issued, and 80,000 shares of treasury stock. The company’s board of directors has declared a dividend of 70 cents per share.

What is the total amount of the dividend that will be paid?

253,000 shares issued – 80,000 shares of treasury stock = 173,000 shares outstanding

173,000 x .70 = $121,100

Is there a minimum number of shares i have to buy and stay longterm with company in order to get their annual dividend?

When a dividend is announced the company declares when it will be paid, how much they will pay and the date of record for the share holders.
The amount of the cash dividend to be paid is stated in a money amount per share.

Every shareholder will get the dividend whether they own 1 share or 1 million shares (or more)

The length of time a shareholder holds the stock is meaningless, is paid to those that own the shares on the record date the company announces.

As far as I know the last day to own/buy the stock is on the EX-Div date and you can then sell it the day after to get the dividend on what ever the payable date is.

If one sells on the Ex-Div date, would they qualify for the dividend or does one need to own the stock as of market closing on the Ex-Div date?

What is the absolute minimal time to have to own the stock?

You must own the stock at the end of the before the ex dividend date. You can buy it 1 second before market close on the day before the ex dividend date and sell it one 1 second after the market opens on the ex dividend date to receive the dividend.

Assume you own a stock mutual fund or ETF in a taxable brokerage account for 10 years. Do you have to pay capital gains and dividend taxes every year you own it, even if you didn’t sell any shares during the year? Or do you only pay the capital gains and dividend taxes after you sell in year 10? Or do you pay dividend taxes every year (assuming you reinvest the dividends in your ETF every year), but only pay capital gains taxes after you sell in year 10?

Assume you’re in the 25% tax bracket.

There are two layers of ownership at play here.

1. You own shares of the mutual fund. As owner of the fund shares, you pay tax on the dividends every year, whether or not you reinvest dividends. The dividends are reported to you every year by the mutual fund on form 1099-DIV.

You pay capital gain on these shares when you get rid of them – either by selling them or by exchanging them into a different fund. When that happens, the mutual fund will send you form 1099-B.

2. Mutual fund itself owns stocks, bonds, and other securities. They sell those securities whenever they feel it’s good investment decision, and you have no control over that. When they sell stocks, the fund – not you – generates capital gain. However, the fund does not pay capital gain tax. Instead, it distributes this tax proportionally to all shareholders, including you. So, even if you did not sell anything in 2010, but the fund did – you will be stuck with paying capital gain on THEIR transactions. The fund reports these transit gains to you on form 1099-DIV, as "capital gain distributions."

So, in short, you pay ongoing taxes on dividends and on *their* capital gains, plus you pay one-time capital gain when you sell your shares.

Michael Plaks, EA, Houston TX
www.MichaelPlaks.com

At what time do I need to be in a stock to qualify for their dividend?

Also, what is the earliest day that I can sell the stock and get to keep the dividend?

You need to buy the stock prior to the ex-dividend date. You can sell it the day it goes ex-dividend and still get the dividend. So, you only need to own the shares one day, but you need to be aware that the stock price will open down the amount of the dividend on the day it goes ex-dividend. ie, a stock that closed at $20 on tuesday, (assuming wed is ex-date) will open at 19.50 (assuming a .50 dividend). The stock will then trade up or down depending on buy and sell orders. If you are trying to do some dividend capture trading, remember that others are too, and selling pressure on the ex-date may preclude your getting out with a profit. And, other market forces are typically greater that the dividend amount, so beware. You will do best if you sort of get to know a stock and how it typically trades. Then compare its chart to a sector etf to get a better timing feel. ie a utility stock and XLU the utility ETF. Good luck.

George Vasic, Equity Strategist and Chief Economist for UBS Securities Canada Inc, with Rob Carrick from the Globe and Mail discuss how to find good dividend stocks.

What are the dangers of a high dividend yield? What is a typical dividend yield for a blue chip stock on the TSX? What is a dividend growth stock and how does it work? What kind of premium can you expect to yield from dividend stocks? How have the dividend growth stocks performed in times of recession?

Duration : 0:3:22

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I am not sure how exactly to ask this. Is there an added benefit to owning enough shares of a dividend paying company so that each quarter I get enough that another share or more can be reinvested? Therefore every quarter I have one or more additional shares and therefore am guaranteed to always make more in dividends. I can’t figure out the math. FYI I currently receive about 36.00 in dividends from GE quarterly and can therefore reinvest around 2 shares a quarter.

There is really no cumulative benefit to owning a certain amount of stock in a company.

You will always receive the same dividend per share. Dividends are a part of the return on your investment as a stockholder. You can use this cash for any purpose that you desire, including purchasing more shares. Please keep in mind that the more money that you have invested in a single stock, the more of a hit that you will take if that particular stock should tank.

If you are interested in reinvesting your dividends, then look into a dividend reinvestment plan (DIP). Some brokerages and most employee stock plans will offer a DIP where you will not be charged a commission on each purchase. While this would save you money on brokerage fees, you will loose the flexibility to use your dividends for any other purpose, such as purchasing shares of a different company or paying for dinner out.

As J mentioned, doing so in a tax deferred account will defer the payment of taxes on the dividends, whether you reinvest or not. Discuss the strategic use of any tax deferred investment strategy with your tax profession as the benefits and drawbacks vary dependent upon your specific situation.

On a personal note, I do own shares of the same company (GE) and consider it to be one of the top blue ribbon US public companies, and it has, in my opinion, a very low risk profile.