Most dividend stock investors know that they have to be a shareholder of record before the company’s ex-dividend date. But here’s a pro tip for you. If you are interested in buying shares of a company with a solid track record of paying dividends, it’s better to get in before the company officially announces the amount of its dividend and the payment date.
That’s because a company’s stock price will go up after a dividend announcement. In a completely efficient market, the stock price would go up by the exact amount of the dividend payout. In reality, it may be slightly less or slightly more.
In this article we’ll explain to investors why they should pay attention to dividend announcements.
What Is a Dividend Announcement?
A dividend announcement is when a company publicly confirms that it will be issuing a dividend. This is known as the declaration date. On the declaration date, a company’s Board of Directors will announce how much the dividend payout will be, the date of record, and the payment date. The declaration date is one of four important dates for dividend investors to understand.
Ex-Dividend Date – This is the day that an investor must own the stock in order to be eligible to receive a dividend payment. For a shareholder to collect the dividend they must own the stock before the ex-dividend date. So if the ex-dividend date is on a Monday, investors need to buy the stock no later than the previous Friday.
Date of Record - This is simply the day a company reviews its records in order to identify its shareholders. Sometimes this is the same day as the ex-dividend date, but frequently it is a day or two later.
Payment Date – This is the day the dividend is paid to shareholders. If investors are having their dividends redistributed, that will happen after the market closes on the payment date. The new shares will be purchased when the market opens on the next trading day.
What Happens to the Stock Price After a Dividend Announcement?
Generally speaking, a company’s stock price will rise after a dividend announcement. This is due largely to the efficiency of markets. When a company announces its dividend, particularly if the company increases the amount of its dividend payout, investors will buy the stock. This occurs even though they know that the stock will drop on its ex-dividend date (i.e. the first day it will trade without the price of the dividend in its stock price).
However, it’s also possible that the company’s stock may fall after a dividend announcement. This may happen if the company announces that they are cutting their dividend. But it can also occur if a company announces they are maintaining their current dividend payout when analysts were expecting an increase. The latter scenario may not bother growth-oriented investors. However, income-oriented investors will likely begin looking for more compelling options.
Trading Strategies Around Dividend Announcements
For the most part, a dividend announcement is a non-event for investors. If an investor has had a particular stock on their watchlist, a dividend announcement may be the catalyst they need to start a position before the ex-dividend date. Similarly, if an investor already holds a stock, a dividend announcement may encourage them to buy more shares or sell shares if the announcement is not to their liking.
However, for some traders (particularly day traders), a dividend announcement is an opportunity to execute a dividend harvesting strategy. Dividend harvesting is when an investor buys shares in a dividend stock on or before their ex-dividend date and sells the stock shortly thereafter. This strategy is an income capture strategy that allows investors to capture a company’s dividend with the expectation that the company’s share price will fall shortly after the ex-dividend date.
Making the Best Use of Dividend Announcements
Many dividend stocks are evergreen. Simply put, investors own them no matter what is happening in the broader economy. However, there are times when investors want to capitalize on themes that are taking place in the market. Investors can sort through different sectors and see only the dividend stocks related to those industries.
Investors can also sort based on market capitalization. So if they only want to view large cap stocks they can do that. They can also sort by media sentiment and analyst ratings. And fund investors can choose to see only exchange-traded funds (ETFs) that pertain to the specific criteria selected.