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.
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.
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.
Now that we know to subtract three days from the record date in order to determine the must-own date.
To learn how to invest in dividend stocks, click here to read the basics of dividend investing and how to find safe dividend growth stocks.