Ex Dividend Date and 'Dividend Investing'

Many companies reward their shareholders for holding the stock by paying dividends. This is particularly true of blue-chip stalwarts. These often generate big profits and choose to distribute that wealth to the company owners. Smaller outfits often do not pay dividends as they need the cash for various purposes including:
- Expansion through merger and/or acquisition
- Balance sheet consolidation (to shore up capital so that the accounts look good).

But it's not the sole preserve of smaller companies to withhold payments. Behemoths also may decide that dividend payments do not suit their business model or simply may not be appropriate given other variables (such as input cost). A case in point being Warren Buffet's Berkshire Hathaway. Mr. Buffet is considered one of the greatest investors ever and he conducts most of his activity through this company. Berkshire is in the game of investing in or swallowing up other companies with a view to turning them into lean mean money making machines. So Buffets logic is that the shareholder value comes from capital appreciation due to out-performance of the company. Fair enough.

If you do like the idea of investing in dividend paying companies - a form of income investing - there is a date you need to look out for. It's called the ex-dividend date. The decision makers gather periodically to prepare or sign off on accounts and decide on the appropriate dividend payments. Depending on company performance and prevailing economic conditions it will be announced that a dividend will be paid to all shareholders on the books on date X, this is the ex-dividend date. If you buy shares the day after this date, you will not be entitled to any payment in respect of this dividend. If you buy shares the day before, you will be entitled.

The practice of buying shares a few days before the ex-dividend date and selling those same shares for roughly the same price a few days after the date is called 'dividend investing'. The company is obliged to pay you dividends even though you have sold the shares as you held the company on the date. This activity can also sometimes explain why a share price may rise (on the back of no news) coming up to the ex-dividend date, and drop back down afterwards. Such share transactions are legitimate and I'm sure many investors make money from it. But there are risks. The share price, at which the investor tries to sell the shares after the date has passed, might be lower than that at which the shares were purchased. Therefore bull markets are far more suitable than bears. Also, currency movement and transaction costs (such as commission) must be factored in. Another risk is that you miss out on positive share price movements.

The investment style will suit those who do not want to tie up capital in long term buy-and-hold type transactions. It will also suit those who have the time to trawl RNS feeds and other sources of company information to gather the all important ex-dividend date list. Whatever your personal preference it's another variable to watch out for when investing in the stock market.