Your dividend and DRIP questions answered

Globe and Mail

13 hours ago

How do companies and brokers handle dividend payments when stocks are bought or sold between payout cycles? For example, if I sell a stock a week before the payout date, will I lose out on the full value of that dividend payment? Or, conversely, if I purchase a stock just before the payout date, how much of that dividend will I receive?
Depending on when you purchase your shares, you'll either get the full dividend, or no dividend at all. Companies don't prorate the dividend amount based on your purchase date.
To be eligible for the dividend, you will need to own the stock on the record date for the next dividend payment. The best way to illustrate this is with a real-life example.
On May 28, Bank of Montreal declared a quarterly dividend of $1.63 per common share. The record date for the dividend is July 30, and the payment date is Aug. 26.
The payment date is straightforward enough. That's the day the dividend is distributed to shareholders. But the record date requires a bit of an explanation.
You might think that purchasing the shares on the record date of July 30 will entitle you to the next dividend. But that's not the case. Because it takes one business day for a stock trade to settle – that is, for the shares and cash to actually change hands – you would need to purchase your shares no later than July 29. That way, you'll be a shareholder of record on July 30 and receive the dividend to be paid on Aug. 26.
July 30 is also known as the ex-dividend date, because investors who purchase the shares on or after this date will not get the dividend. The record and ex-dividend dates didn't use to fall on the same day. In the past, when the settlement period for stocks was T+3 (the trade date plus three business days), and later shortened to T+2, the ex-dividend date always came before the record date. But when T+1 settlement was adopted a year ago, the record and ex-dividend dates became the same.
With all of that said, it's important to understand that timing your stock purchases in order to receive the next dividend isn't going to put you any further ahead. If you buy before the ex-dividend date, the price you pay will reflect the fact that the dividend is included. If you wait until the ex-dividend date to buy, the price should be lower – all else being equal – because the dividend is no longer included.
The price of a stock rarely drops by the exact amount of the dividend. The price could even rise on the ex-dividend date. That's because stock prices are affected by many other factors – such as analyst reports, economic news, general market sentiment and company-specific announcements – that have nothing to do with the dividend.
Bottom line: If you like a stock, don't worry about whether you'll buy it in time to receive the next dividend.
I am writing to you because this really annoys the stuffing out of me. We have two self-directed accounts, one at TD Direct Investing and the other at RBC Direct Investing. All of our stocks are enrolled in the brokers' respective dividend reinvestment plans (DRIPs). Recently, I noticed that the brokers have been reinvesting dividends from the same company at different prices. For example, TD reinvested my Enbridge Inc. dividends at $62.03 a share, and RBC reinvested at a more attractive price of about $61.30. I checked six other examples, and TD reinvested at a higher price in four cases. Should I be concerned?
I don't think so.
Reinvestment prices often differ because not all brokers operate their DRIPs in the same way. Some brokers purchase DRIP shares on the dividend payment date using the cash received from the company. Others may acquire shares in the days leading up to the pay date. In some cases, shares are purchased on the open market, while in others they are issued by the company's treasury, in which case it might take longer for the shares to show up in your account.
When a security is not eligible for a treasury DRIP, 'we purchase shares on the market on the cash dividend payable date. The shares are then posted to your account at the end of the day,' TD Direct Investing explains on its website.
Because share prices are constantly changing, even when two different brokers purchase the same shares on the same day, the price can vary depending on what time the transactions occurred.
In your case, the fact that one broker reinvested dividends at a higher price in five of seven cases doesn't indicate to me that anyone is trying to rip you off. Rather, given the small sample size, this seems to be well within the bounds of chance. I suggest you continue to monitor your DRIPs to see if one broker consistently reinvests at higher prices over a longer period of time. I am skeptical that this will be the case, but if a clear pattern emerges, feel free to get back in touch.
E-mail your questions to [e-mail]. I'm not able to respond personally to e-mails but I choose certain questions to answer in my column.