NEW YORK (TheStreet) -- Dividends are an important part of investing for long-term growth, but the mechanics of how they're paid can be confusing for investors of any level. The one question I hear most often about dividend stocks is: When do I have to buy a stock in order to receive its dividend payout?
The answer is a bit complicated. This date is not included in the company's announcement of a dividend, and it's not published on the quote pages of TheStreet, Yahoo! Finance or even the expensive Bloomberg terminal on my desk.
Over a decade ago, I coined the term "must-own date." Terms such as "record date" and "ex-date" are commonly thrown around in dividend parlance, but the must-own date provides the simple answer that most folks want: the date by which they need to buy a dividend stock.
Here's how to determine the must-own date for any dividend so that you'll never be confused by this important question again.
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When most dividends are announced, the company generally says it is "payable to shareholders of record as of" a certain date. This is useful information, but investors often mistakenly assume that the record date is the date by which they need to purchase a stock in order to receive the dividend.
You see, stock trades actually settle three days after the fact, even if you're a frequent trader who buys and sells the same stock several times a day. That means that you need to buy a stock three days before the record date in order to qualify for the dividend.
Further complicating matters, the ex-date falls two trading days before the date by which you need to be a shareholder of record. We've established that the must-own date falls three days before the record date, so simple subtraction means that you must buy a stock one day before it goes ex-dividend.