Why individual investors want dividends

You need to be a shareholder on the record date, which means you have to buy before the record date. The ex-dividend date essentially reflects the settlement period. You may wonder if there is a way to capture only the dividend payment by purchasing the stock just prior to the ex-dividend date and selling on the ex-dividend date. The answer is "not quite. Remember that the stock price adjusts for the dividend payment. It's possible that, despite this adjustment, the stock could actually close on February 6 at a higher level.

Are you better or worse off for capturing the dividend? It would appear to be a wash. But what about taxes? The answer is "yes," but with a catch. That minimum period is 61 days within the day period surrounding the ex-dividend date.

The day period begins 60 days before the ex-dividend date. When counting the number of days, the day that the stock is disposed is counted, but not the day the stock is acquired. In this case, the dividend-capture strategy was not a winner. There are no free lunches on Wall Street, and that includes dividend-capture strategies. Be sure to keep this in mind the next time you consider buying and selling stocks for the sole purpose of nabbing dividend payments. Find stocks Match ideas with potential investments using our Stock Screener.

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While an overall downmarket generally drags down stocks across the board, dividend-paying stocks usually suffer significantly less decline in value than non-dividend-paying stocks. However, that trend did change of late. There have been three bear markets over the last 20 years, with dividend stocks outperforming during the first two, but during the most recent—amid the coronavirus pandemic—dividend-paying stocks underperformed.

Meanwhile, dividend-paying stocks did outperform during the other two bear markets—the tech bubble burst of the early s and during the financial crisis.

As well, dividend stocks have proved to be less volatile. Per a Merrill Lynch study, stocks with a history of steadily increasing dividends outperformed non-dividend paying stocks from to with less volatility. The way dividends are treated in regard to taxes makes dividends a very tax-efficient means of obtaining income. Qualified dividends are taxed at substantially lower rates than ordinary income.

Dividends also help out in another area that investors sometimes fail to consider: the effect of inflation on investment returns. For an investor to realize any genuine net gain from an investment, the investment must first provide enough of a return to overcome the loss of purchasing power that results from inflation.

The good news for investors in dividend-paying companies is that many dividend yields outpace inflation. Internal Revenue Service. Accessed July 13, GFM Asset Management. Hartford Funds. Merrill Lynch. Dividend Stocks. Mutual Funds. Your Privacy Rights.

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