Based on searches that lead people to Six Figure Investing, these are the top 11 questions people ask about dividends:
When is XYZ’s ex-dividend date? This information can be hard to find. Some companies provide the entire year’s dates on their webside (e.g., iShares), others like Vanguard only reveal the information a few days before the ex-dividend occurs. I have summarized / estimated ex-dividend dates for many of the popular ETFs here.
When is XYZ’s distribution or pay date? Same as question #1, this information can be hard to find. I summarize pay dates along with ex-dividend dates for many ETFs here.
When do I have to buy a security in order to receive the dividend? The day before it goes ex-dividend or earlier.
When can I sell a security and still receive the dividend? On the ex-dividend date or later. You can safely ignore the record date. See here for a detailed explanation of how this works.
What happens to a security’s price when it goes ex-dividend? It will typically drop by the amount of the dividend—assuming the market is opening flat. If the market is strongly up or down at opening the price will be influenced by this.
What if I’m short the security on its ex-dividend date? You owe the dividend. It will be subtracted from your brokerage account on the distribution date. You borrowed the stock, you are responsible for paying the owner of the security the dividend. If you short the stock on the ex-dividend date or later (e.g., record date) you don’t owe the dividend.
Do I get a dividend if I’m long call or put options on a security? No, with an option you don’t actually own the security, you only have the right to buy or sell it, so you don’t get a dividend. However, the prices of options are influenced by dividends, for example, the bid price on deep in the money calls will decrease to compensate for an upcoming dividend. If the dividend is a special dividend, not regularly scheduled, then your options will likely be adjusted, either with a revised strike price or a cash payout (neither to your benefit). For more on option adjustments see this post. For news on specific adjustments visit the Options Clearing Corporation Website.
What happens if I’m short put or call options on a security when it goes ex-dividend? If you don’t own any of the underlying security, then nothing direct happens. Again the option prices are influenced by the security’s dividend, but there is no direct dividend received or owed. If the premium on your short call is less than the dividend amount your calls may be exercised. If the dividend is a special dividend, not regularly scheduled, then your options will likely be adjusted, either with a revised strike price or a cash payout (neither to your benefit). For more on option adjustments see this post. For news on specific adjustments visit the Options Clearing Corporation Website.
What if I have a covered call position with a security when it goes ex-dividend? It depends on how much premium is present on the option price when the security goes ex-dividend.
- If your calls are deep in the money, with premiums significantly less than the dividend amount, then your options will probably be assigned—and you will wake up on ex-dividend day with your position converted to cash—minus your security and your short options. No dividend for you.
- If your options are out of the money by more than the dividend amount nothing will happen to your calls and you will collect the dividend.
- If your calls are between these two limits then it depends on the prices at the end of the day before the ex-dividend date. My experience is that if the premium of your calls is 50% or less than the dividend amount, your calls will probably be assigned.
Are there any dividend capture schemes that isolate you from market risk? The short answer for retail customers is no. Wall Street excels at preventing anyone from getting a free lunch. You can use a covered call position to move away from the zero-sum situation on ex-dividend day of having a dividend, plus a security that has just dropped by the value of the dividend, but you are still exposed to significant market risk. See this post for more on dividend capture schemes.
What happens with a special dividend? The stock price will behave the same, dropping by approximately the dividend amount on the ex-dividend date. Adjustments to the option’s strike prices will be made to existing positions if the special dividend amount is more than $0.125 per share. This adjustment process prevents options traders from experiencing big losses or windfalls when a special dividend is announced. The Options Clearing Corporation newstream gives specifics on upcoming options adjustments. For more about special dividends see “Profiting From Special Dividends“
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5 thoughts on “Top 11 questions about dividends”
Greetings from Romania!
I have a question, please – a slight variation to dividend capture:
1. I sell a naked ‘at the money’ Call on stock Y 1 day prior to ex Dividend date.
2. My aim is for the stock Y I do not own to be called away. Effectively, on ex Div date I will be short Y stock.
3. On ex Div date, Y stock price dips equivalent to dividend value.
4. On ex Div date I bail out of my short position. I buy back Y stock and close the trade. Thus, I capture the dip in stock price equivalent to dividend + profit from the premium on the Call sold.
a] Stock Y price is 100. Dividend due is 0.75.
b] I Sell a Call one day prior to ex Div date on stock Y at strike 100 for $1.
c] Next day, ex div date, stock Y gets called away and I am short Y stock at 100.
d] Price of Y stock on ex Div date falls to 99.
e] I buy back the short position at 99 to close the trade.
f] I made $1 in stock price dip and $1 as Call premium = $2.
I. Am I correct in my assumptions and calculations as per example above?
II. I read somewhere that given this particular situation or trade, I am liable to pay the broker (or whomsoever) a sum equivalent to dividend becausei am short the Y stock on ex Div date. Is this true?
Appreciate some informed advice, please.
May I request you to kindly mail me your reply at given email, just so I am sure to recieve it? Thanks!
does a person get a dividend if they never reach their stock price
What happens if i short the day before ex-dividend date and cover the same day?
i.e. ex-dividend day is 8/13 for $0.25.
Short Sell XYZ on 8/12 for 1000 shares
Cover Buy XYZ on 8/12 for 1000 shares.
Will I be paying 250$?
If you cover before the ex-dividend date you won’t owe the dividend. The record date is the day that maters and your position will be closed out before that date which is 2 business days after the ex-dividend date.
This is an old post but to add clarity, if you short at any time during pre-market, regular session, or after-hours the day before the ex-dividend date, you have to cover by 8:00pm EST that same day (the close of after-hours) to avoid owing the dividend. You can also buy the stock as late as 7:59pm EST (or in the last 60 seconds) on the day before the ex-dividend date and you’ll still receive the dividend even if you sell first thing at 4:00am EST the next morning in pre-market on the ex-dividend date.