Most investors like to see dividends deposited to their brokerage accounts.

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The function of dividend payments in the stock market usually results in an investor holding an equivalent position before and after a dividend is paid. Some traders develop strategies around the dividend dates to profit from small changes in the share price, but the market effects often render these strategies ineffective. Understand what happens when dividends are paid and base your selling decision on your personal financial situation.

Important Dividend Dates

To earn a stock dividend you must be an official owner of the shares on the declared record date — what’s called being a shareholder of record. Since a stock purchase settles or becomes official three business days after you buy shares, the stock goes ex-dividend two days before the record date. If you own shares and sell on the ex-dividend date, you will still be a shareholder of record and receive the dividend. Anyone who buys shares on the ex-dividend date or later will not receive the dividend payment. The actual payment date, when the dividend is credited to your brokerage account, may be several days to weeks after the record date.

Ex-Dividend Price Drop

On the ex-dividend date, the share price of a stock will start trading at the previous day’s closing price minus the amount of the dividend. This means a share owner gains nothing by selling on the ex-dividend date. For example, a stock that will pay a $1 dividend closes the day before the ex-dividend date at $25. On the ex-dividend open, the stock will be at $24. Someone with 100 shares had a value of $2,500 the day before and on the ex-dividend date shares worth $2,400 plus a dividend coming for $100.

Tax Considerations

Whether it is better to sell before or after the ex-dividend date may depend on the tax rates attached to the transactions. If you owned the shares for more than one year, a gain would be taxed at a lower long-term capital gains rate. A shorter holding period means gains would be taxed at your regular rate. If the stock pays qualified dividends and you owned the stock for at least 60 days, the dividend will be taxed at the same lower rate as long-term capital gains. Non-qualified dividends are taxed at your regular rate.

Short Gain to Qualified Dividend