Should I Wait for a Dividend Before I Sell My Shares?

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Should I Wait for a Dividend Before I Sell My Shares?

It’s a question we’re frequently asked. The short answer for most people is “no”. In the short term, receiving a dividend comes at the expense of the capital value of your shareholding; shares fall by roughly the dividend amount on the Ex-Dividend Date (if you ignored all other market forces).

Regardless, if you’d like to sell your shares and still get the dividend, hold onto them until the Ex-Dividend Date. Sell on or after the Ex-Dividend Date and you’ll still receive the dividend.

That’s the simple answer, but here is a little more information about interim and final share dividends and the various dates around their payment.

What is a Dividend?

A dividend is your share of the profits produced by the company that you are part owner of.  When a company makes a profit, the company directors may decide to reinvest the profits back into the business or pay them out as a cash dividend either.  The money is received as a cheque or direct into your bank account, at your election.

Some companies have share reinvestment plans, and if you’ve opted into such a plan, your dividend will be paid in the form of new shares.

Interim and Final Dividends

Many ASX companies pay dividends twice a year; Interim Dividends and Final Dividends. Dates vary, but many of the biggest companies pay an Interim Dividend around March and a Final Dividend in September or October.

Dividend Dates – what do they mean?

When a company announces a dividend, it will also announces the following 3 dates.

Ex-Dividend Date
The ex-dividend date occurs first. You must have acquired your shares before the ex-dividend date in order to receive a dividend. If you acquired your shares on or after the ex-dividend date, the previous owner will receive the dividend. Sell your shares on or after the Ex-Dividend Date and you’ll receive the dividend.

Record Date
2 days after the ex-dividend date is the Record Date. At 5pm on the Record Date a company closes its share register (list of shareholders) to confirm which shareholders are to receive the current dividend. In other words, ensuring the records are up to date with details of shareholders who qualified for a dividend on the ex-dividend date.

Date Payable
The Date Payable is the date on which a company’s dividend is paid to shareholders; usually between 2 and 8 weeks after the ex-dividend date. Funds will be transferred to you via direct debit or a cheque will be sent on this date. If you’ve opted into a dividend reinvestment plan, you’ll receive new shares in lieu of payment around this date.

Cum-Dividend vs Ex-Dividend
You may have seen ‘CD’ and ‘XD’ next to the share price? This stands for Cum-Dividend and Ex-Dividend. If you acquire a stock shortly before the ex-dividend date, the stock is cum-dividend and you’re eligible to receive the dividend if you keep it until the ex-dividend date. Once the stock is XD or ex-dividend you can sell your shares and still receive the recently announced dividend.

All things being equal, the price of a share will fall on the ex-dividend date by the amount of the dividend.

www.dividendharvester.com.au provides a good place to see what upcoming dividends there are.

Wait for a Dividend or Sell Now?

In some ways a dividend payment is a false economy.  If you wait to sell on or after the ex-dividend date, sure yes, you receive a dividend, but at the expense of the value of your shareholding. On the Ex-Dividend date, the price of a share falls by roughly the dividend amount – all other things being equal.

By “all other things being equal”, I mean the share price may fall by more or less than the dividend, but the share price change that is different to the dividend amount would have happened anyway.  Lets say US markets went up 1% overnight, we would expect most Australian shares to put on gains for the day.  If a share went ex-dividend on such a day, it may in fact not fall in price, but in the absence of a dividend being entitled on that day, the price would have increased.  So in effect, the price did fall – “all other things being equal”.

For most people, it is not rational to time delay their share sale to capture a dividend.

There are some minor tax consideration, but these will not be material for most people with relatively small shareholdings.

Bottom line – if you want to sell your shares, sell them!

Commonwealth Bank Example

Let’s look at Commonwealth Bank share dividends as an example. They ordinarily pay dividends twice a year; an interim dividend in March and a final dividend in October.

Commonwealth Bank dividend payments – financial year 2015/16 (2016 financial year example):

Ex-Dividend Date Record Date Date Payable Dividend Amount Type
18/08/2015 20/08/2015 01/10/2015 $2.22 Final
16/02/2016 18/02/2016 31/03/2016 $1.98 Interim

Let’s say you have 1,000 Commonwealth Bank shares.

Example A – Final Dividend:
If you sold your 1,000 shares before 18 August 2015 you would not be entitled to the subsequent dividend.

Example B – Final Dividend:
If you sold your 1,000 shares on or after 18 August 2015 you would have received:

  • Final Dividend 1,000 shares x $2.22 = $2,220 dividend, but the price of the shares would have fallen by $2.22 on the ex-dividend date (below where it would have been in the absence of a dividend) therefore your shares would have been worth $2,220 less.

So waiting for a dividend doesn’t always make sense financially; if you want to sell your shares, sell them!

Are You Ready to Sell Your Shares?

All you need to complete a sale is a Dividend Statement or Holding Statement for each shareholding.