When Must I Buy a Stock to Get the Dividend?

NEW YORK (TheStreet) -- The one question I hear most often about dividends is when do I have to buy a stock in order to receive the payment?

The answer is more complicated than you would think. The company doesn't tell you this date when the dividend is announced and it's not published on the quote pages of TheStreet.com, Yahoo Finance or even the expensive Bloomberg terminal on my desk.

That is, until I coined the term "must-own date" several years back. Terms like "record date" and "ex-date" are commonly thrown around in dividend parlance, but the must-own date is the simple answer that most folks want to drill down to.

Here's how to determine the must-own date for any dividend, so you'll never be confused by this important question again.

First, when most dividends are announced, the company generally says it is "payable to shareholders of record" on a certain date. This is useful information, but investors often confuse the record date as the cutoff to receive the dividend.

The difference is that stock trades actually settle three days after the fact, even if you're a frequent trader that buys and sells the same name several times a day. Similarly, the ex-date is two trading days before the record date, so another way to look at the must-own date is the day before a stock goes ex-dividend.

So now that we know to subtract three days from the record date in order to determine the must-own date, how do the dynamics of the dividend actually work?

Here's an example: Let's say ABC Corp., which is trading at $10 a share, declares a regular quarterly dividend today of 10 cents a share (4% yield), payable to shareholders of record on Thursday, Dec. 13. Looking at the calendar, we can determine that the ex-date will be Tuesday, the 11th and the must-own date will be Monday, the 10th. Let's also assume the company is concerned about the pending fiscal cliff and declared the payout for Dec. 27, before any potential tax changes in the new year.

Here's how the dividend works: Only investors at the close of trading on Monday, the 10th will receive the dividend. This is the must-own date.

You could have owned ABC Corp. for five years, but if you sell it on the must-own date, you will not receive the payment. On the other hand, it's possible to buy ABC shares in the final minutes of trading on Monday, the 10th and receive the full dividend.

At the open of trading on the ex-date, Tuesday, the 11th, ABC shares will be adjusted 10 cents lower. This is to reflect the dividend being taken out of the stock, but there's no penalty because of the adjustment.

With that in mind, an investor can technically buy ABC at 3:59 p.m. ET on the 10th and sell it at 9:31 a.m. ET on the 11th and still receive dividend in their account on the 27th.

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. Check back here regularly to learn more about how dividends work and how they can be used to enhance overall returns.

-------------------------

Dividend investors, find dividend stock ideas in our dividend investor center. Also, don't forget to bookmark our list of high-dividend stocks and ex-dividend date calendar. New to dividend investing? Don't miss Dave's primer on how to invest in dividend stocks.

David Peltier is a research associate at TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.