There are some myths of dividend payout that always confuse young investors.
Here will list out those common myths of dividend payout and reveal the truth to young investors.
Dividend payout will not impact the stock price.
This is wrong. On ex-date, stock price will be deducted for the dividend per share to reflect the pay out of dividends.
Investors can buy the stock on record date to be entitled for dividend.
This is wrong. Every buy order and sell order in stock market required 3 days settlement period to complete the transfer of stock. If investors buy on the record date, the stock is only complete transfer 2 days later after the record date, which will not entitle for dividend.
Investors can buy the stock on ex-date to be entitled for dividend.
This is wrong. If investors buy the stock on ex-date, with 3 days settlement period, the stock is only complete transfer the day after record date. Hence, the investors will not entitle for dividend. To entitle for dividend, the investors must buy the stock the day before ex-date.
Investors need to own the stock for a period to be entitled for dividend.
This is wrong. Investors just need to own the stock one day to be entitled for dividend.If investors bought the stock the day before ex-date, and then sell it on the day after record day, the investors will be entitled for dividend and only need to own the stock on record date one day only.
Since investors only need to own the stock one day on record date, investors can earn from dividend and capital gain when the investors sold the stock after record date.
This is wrong. Investor will only able to earn the dividend and hardly will earn from capital gain because after ex-date, the stock price had been reduced to reflect the dividend payout. Moreover, the received dividend is taxable too.
If investors sell the stock on ex-date, the investors are not entitled for dividend.
This is wrong. Investors sell the stock on ex-date, which mean the stock price is selling at price without dividend. Hence, the investors will still entitle for dividend because the stock transfer is only complete on the day after record date. If investors do not want to be entitled for dividend, rhe investors need to sell the stock successfully on the day before ex-date.
If investors sell the stock on record date, the investors are not entitled for dividend.
This is wrong. Even the sell order was traded successfully on record date, it still need 3 days to complete the stock transfer. Hence, investors are still entitled for the dividend.
Distributing dividends only have positive impact on companies.
This is wrong. Although a consistent dividend history is a good sign for good investment, but distrubuting dividends has negative impact to the companies too. If company pay out 20% of its net income as dividend, return on equity ( ROE ) for that company will reduce 20% too and expect to have 80% growth only. Hence, unless the companies do not have other better investment opportunities, else paying out dividend will reduce the growth rate for the companies.
To have clearer view on dividend dates and dividend payout process, refer Important Dividend Date.