Dividend investing can really be a good way to earn a little extra income. Indeed, if you create a plan, and take advantage of dollar cost averaging, it can also be a way to build up a substantial portfolio that can yield solid income opportunities. As long as you are reasonable about your dividend expectations, you can eventually build up a stream of income that can serve you well in retirement, during an emergency, or for other purposes.
One of the things that many dividend investors overlook – at least at first – is the ex-dividend date. It is important that you pay attention to this date, since it can affect when you are actually entitled to a dividend.
It sounds like it might be a little ominous (it’s the “ex” that does it), but the ex-dividend date is actually rather straightforward. This is the date at which you become legally entitled to the dividend. But the process of determining the ex-dividend date does take a little bit of twisting and turning.
In order to receive the dividend, you must be a shareholder of record by a specific date. This is often called the record date. We can use Pepsi (PEP) as a recent example. One July 15, 2011, PEP announced that there would be a regular dividend payout of $0.515 per share. This payout will be made on September 30, 2011, to shareholders of record on September 2. That means that, to be able to receive the PEP payout, you have to own shares at market open on September 2, which is the record date.
If you don’t own shares of a dividend stock at the time of opening on the record date, you will miss the dividend payout for that period. This is where the ex-dividend date comes in. You should realize that it takes time to process transactions. It takes two days for you to become the legal owner of shares, as opposed to being the practical owner. So, if you buy shares of PEP on September 1, you won’t be a legal owner in time to be a shareholder of record. You need to buy your PEP shares on August 31, 2011, if you want the PEP dividend payout on September 30.
So, basically, the ex-dividend date is two days before the record date. If you want to be able to get in on the next payout, or if you want to increase your payout by purchasing more shares, you need to make your dividend stock purchase by the ex-dividend date.
When companies release press releases about their dividend announcements, you won’t see mention of the ex-dividend date. However, this is a very important date. If you want to be entitled to receive the next payout, you need to know the ex-dividend date. Luckily, figuring it out is fairly simple: Just make sure you buy your shares at least two business days prior to the record date.