The Nuts And Bolts Of Dividend Investing

Let's begin by exploring the nuts and bolts of dividend investing.

All dividend investors should be familiar with and fully understand the following four dividend related dates: the declaration date, the record date, the x-date, and the dividend payment date.  

           The Dividend Declaration Date: Is the date each dividend-paying company declares whether or not the next dividend will be paid; the amount of that dividend; the record date of that dividend payment, the x-date that will determine who will receive that payment, and the date the payment will actually be paid.

            Record Date: According to Investopedia, "the record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution. ... The shareholders of record as of the record date will be entitled to receive the dividend or distribution declared by the company. Also known as the date of record." Although this date is set it alerts you to the fact that the x-date is usually set two business days prior to the record date, although this is variable and must not be relied upon.

            The x-date is most important and set in stone, as I mentioned above, it's the date that determines whether the seller or the buyer will receive the owed dividend. Prior to the x-date, it's the buyer who receives the dividend. On or after that date it remains the seller's dividend.

            The payment date is the date you can expect to receive your dividend payment. Inconsequential as it concerns the application of my trading tactics.

As I mentioned, the x-date is the crucial day that determines whether the buyer or seller will receive the upcoming dividend, which is obviously more important if it is a quarterly dividend rather than a monthly one. Should the stock change ownership anytime up to the day before the x-date, the seller loses the previous quarter's dividend, which the buyer collects. Conversely, the seller retains the upcoming dividend of any shares sold on x-date and thereafter. The buyer does not collect that dividend. Consequently, the market price of the stock usually, although not always, drops on the x-date commensurate with the dividend payment. Consequently, I have developed several trading tactics specifically formulated to take advantage of a stock's price movement dictated by x-date ramifications.

Furthermore, I have, with varying success, utilized a variety of x-date centered trading tactics, mostly limited to dividend-paying common equities that pay on a quarterly basis, and occasionally pay semi-annually or even annually. However, those securities paying a monthly dividend are of no concern simply because the dividend amount is insufficient to more than minimally affect the stock's price in relation to its x-date. Although, when I first developed and employed my trading tactics I utilized them only for common equities because of their increased liquidity, I have recently come around to believing some trading tactics can be used effectively with preferreds as well.

Each quarterly dividend payment reflects the interest earned during the previous quarter. Consequently, a dividend earned in April covers the company's distribution of monies earned during January, February, and March. Should those shares be sold prior to the x-date, the buyer will receive that dividend. If those shares are sold on or after the x-date, the seller retains the dividend. Consequently, shares sold prior to the x-date are more valuable because of the quarterly dividend that comes along with the shares. Likewise, because the buyer will not capture the previous quarter's dividend, he will, consequently, bid less for those shares on or after the x-date. Obviously, it's no secret that a stock's price will most often trend higher prior to the x-date and usually fall on the x-date and shortly thereafter. Knowing this, I was determined to formulate trading tactics designed to best take advantage of this information.

In follow-up articles, I will discuss several profitable (some more than others) trading tactics I developed while I was in the process of building my fortune. Frankly, I no longer utilized them after my time as a virtually exclusive preferred equity investor secured my economic future, enough so that I was certain that the comfortable lifestyle I had become accustomed to would last me for as long as I live.