There are four important dates to note with dividend-paying stocks. There’s the declaration date, ex-dividend date, date of record, and pay date. As an investor, it's important to understand what these dates are, and how it impacts us.
On the declaration date, the management at the company declares if dividends will be paid and the amount. This is the first date in the series.
Date of record
The date of record is determined by the company as the date where all shareholders are counted and everyone holding shares as of that date will be paid dividends. This is an important date because it helps determine the ex-dividend date.
The Ex-divided date is the most important date we need to know. This date is determined by the exchanges after the date of record is set by the company and this date is usually two days before the date of record. To receive dividends we need to have purchased or previously owned the stock prior to the ex-dividend date. If we buy on the ex-date or after instead of before, we would have missed receiving dividends for this period. Typically the stock may rise in value just before the ex-date and drop in value after.
This is when the dividend is issued out to all of the shareholders.
Dividends received are taxed differently based on the qualifications of whether they are qualified dividends or ordinary dividends. Ordinary dividends are taxed as normal income while qualified dividends can be taxed at the long-term capital gains rate.
Dividends that are qualified usually have to comply with the rules set by the IRS. Good news is that most US-based businesses issue out qualified dividends. However, to get a lower tax rate we need to abide by a minimum holding period. The rule is that we need to hold the stock for a minimum of 60 days around the time the dividend is declared and issued out. An easy way to meet this requirement for short-term positions is to buy the stock 30 days before the ex-dividend date and sell it 30 days after (watch out for the wash sale rule!)
Ordinary dividends are taxed as income and are comprised of non-US-based businesses or tax-exempt US-based companies. Examples of tax-exempt US-based companies are REITs or MLPs (master limited partnerships) Additionally, special dividends fall under this category.
While the increased taxes with dividends isn’t noticeable for a given tax year, a 1099-DIV tax form is issued out by the brokerage/clearinghouse, and the extra form is needed to file taxes—don’t forget this!