OK to buy an ETF just before the dividend?

[Ella]

I know it's usually recommended to wait until after the capital gains distribution to buy into an ETF. But what about the dividend?

I am ready to purchase both VTI and VEA in my taxable account. Based on last year's distribution schedule, both will have dividends distributed in late December. For VTI, this in the past been mostly qualified dividends; I'm not sure about VEA.

My tax rate is 33% on ordinary income, 15% on qualified dividends.

So: do I buy now or wait? I guess the logic for waiting should be the same for capital gains as for dividends, but I just haven't heard that said.

Also, if I wait to buy, can I buy the day after the RECORD date or do I have to wait until after the actual distribution date?

Thanks in advance.
Ella

[Karamatsu]

All else equal, I think you'd always want to buy on or after the ex-dividend date.

[Ella]

All else equal, I think you'd always want to buy on or after the ex-dividend date.

Fair enough. Second question: there are really two dates, right? The "record" date - i.e., the date the dividend officially is assigned; and the "ex-dividend date" -- i.e., the date is actually distributed. Do I have to wait until after the ex-dividend date to buy, or is it enough to wait until after the record date?

Thanks again.

Ella

[DSInvestor]

Here's a page from SEC's website about ex-dividend dates, record dates:
http://www.sec.gov/answers/dividen.htm

[pshonore]

You can buy on the ex-div date or after. "Ex-dividend" means without the dividend.

[Taylor Larimore]

Hi Ella:

Buy anytime after the "Record Date."

[GG]

You can buy on the ex-div date or after. "Ex-dividend" means without the dividend.

It's record date, not ex-div.

[Latestarter]

So if the date of record is 12/22 and the ex-div date is 12/24, I could buy the ETF on the 23rd and my shares -- unlike most other owners' -- wouldn't decline on the following day?

[pshonore]

The ex-div date is always BEFORE the record date (except for a few isolated cases) and usually by 2 business days. You must be on the company books on the record date to get the dividend. It generally takes three business days to update the books and that why you have to own at the close of business on the day prior to ex-div date to get the dividend. If you don't want the dividend, buy on the ex-div date or later. The price of the stock usually opens down by the amount of the dividend on the ex-date, subject to market conditions. The link someone posted to the SEC website explains it all.

[Taylor Larimore]

So if the date of record is 12/22 and the ex-div date is 12/24, I could buy the ETF on the 23rd and my shares -- unlike most other owners' -- wouldn't decline on the following day?

Hi Latestarter:

I'm not sure you understand the reason for waiting until after the record date. It has nothing to do with the fund's NAV price change as a result of the dividend. The net result is the same. The reason for waiting to buy a fund until after the distribution (in a taxable account) is to avoid paying a tax on the distribution.

In a retirement account, it makes no difference if you buy before or after the distribution date.

[Latestarter]

The ex-div date is always BEFORE the record date (except for a few isolated cases) and usually by 2 business days.

My example wasn't hypothetical. A Vanguard rep. just told me that VSS's date of record is 12/22 and ex-div date is 12/24. Of course, he might have been misinformed. Couldn't find anything on the website.

[tfb]

All else equal, I think you'd always want to buy on or after the ex-dividend date.

All else are NOT equal. That's where this conventional wisdom breaks down.

If the price goes up while you wait, you are better off buying now and paying the tax on the dividend. The dividend can be very small, say 2%. 15% tax on 2% is 0.3%. Chance of price going up by more than 0.3% is very high. Plus paying the tax now reduces your tax in the future, which may be levied at a higher rate. Waiting only defers the tax. It does not avoid it unless you never sell before you die.

Don't let the tail wag the dog.

[Latestarter]

I'm not sure you understand the reason for waiting until after the record date. It has nothing to do with the fund's NAV price change as a result of the dividend. The net result is the same. The reason for waiting to buy a fund until after the distribution (in a taxable account) is to avoid paying a tax on the distribution.
In a retirement account, it makes no difference if you buy before or after the distribution date.

I do understand this, thanks. (Or at least I think I do.) In exchanging one int'l SC ETF for another (in a taxable account), I was trying to figure out whether I might time things so as to avoid receiving (and thus paying taxes on) the dividends on the fund I'm selling, yet also buy the new fund after *its* distribution.

[pshonore]

The ex-div date is always BEFORE the record date (except for a few isolated cases) and usually by 2 business days.

My example wasn't hypothetical. A Vanguard rep. just told me that VSS's date of record is 12/22 and ex-div date is 12/24. Of course, he might have been misinformed. Couldn't find anything on the website.

Looks like VG rep might be mistaken - The Ex-div date for VSS is 12/24 according to VG website. The record date for VFSVX (the equivalent fund) is 12/22. ETFs follow the rules for stock. Mutual funds are different.

[Latestarter]

The ex-div date is always BEFORE the record date (except for a few isolated cases) and usually by 2 business days.

My example wasn't hypothetical. A Vanguard rep. just told me that VSS's date of record is 12/22 and ex-div date is 12/24. Of course, he might have been misinformed. Couldn't find anything on the website.

Looks like VG rep might be mistaken - The Ex-div date for VSS is 12/24 according to VG website. The record date for VFSVX (the equivalent fund) is 12/22. ETFs follow the rules for stock. Mutual funds are different.

Record date for VSS is also 12/22, according to the distribution page for all Vanguard funds just posted today. Unless I'm missing something, it seems like the VG rep was correct.

[pshonore]

The ex-div date is always BEFORE the record date (except for a few isolated cases) and usually by 2 business days.

My example wasn't hypothetical. A Vanguard rep. just told me that VSS's date of record is 12/22 and ex-div date is 12/24. Of course, he might have been misinformed. Couldn't find anything on the website.

Looks like VG rep might be mistaken - The Ex-div date for VSS is 12/24 according to VG website. The record date for VFSVX (the equivalent fund) is 12/22. ETFs follow the rules for stock. Mutual funds are different.

Record date for VSS is also 12/22, according to the distribution page for all Vanguard funds just posted today. Unless I'm missing something, it seems like the VG rep was correct.

ETF section of Distribution Page (dated today) does not show Record date; it shows Declaration Date and Ex-Div date. Now, are you trading this stuff thru a brokerage account (VG or otherwise)?

[Latestarter]

ETF section of Distribution Page (dated today) does not show Record date; it shows Declaration Date and Ex-Div date. Now, are you trading this stuff thru a brokerage account (VG or otherwise)?

Through a Fidelity brokerage account.
If declaration date isn't the same as record date, how does one learn what the latter is?

[livesoft]

Thanks for pointing this out.

[livesoft]

Duplicate post.

[Karamatsu]

All else are NOT equal. That's where this conventional wisdom breaks down.

Well, the conventional wisdom doesn't really break down, it's just predicated on all else being equal. Obviously price movements between now and the ex-dividend can wipe out the net effect of the dividend distribution, so the conventional wisdom applies most directly if, say, it's 15:55 on the day before ex-dividend and you have to decide whether to buy or not. Extend that to a week before? Two weeks before? I think all bets are probably off at that point, but you could compute the probabilities given tax bracket, price, volatility, dividend amount, and days before ex-dividend.

But I didn't realize that it was possible in the US for the record date to precede the ex-dividend date. Good to know. Still I don't think it changes the recommendation. If the record date comes before the ex-dividend date, then you certainly would not want to buy until the ex-dividend date. Otherwise you'd be paying a market price that includes the dividend, and when the price dropped on the ex-dividend date, you would get nothing (except a short-term capital loss).

[tfb]

so the conventional wisdom applies most directly if, say, it's 15:55 on the day before ex-dividend and you have to decide whether to buy or not. Extend that to a week before? Two weeks before? I think all bets are probably off at that point, but you could compute the probabilities given tax bracket, price, volatility, dividend amount, and days before ex-dividend.

Before doling out the conventional wisdom, nobody bothered to ask if the OP is considering investing now, two weeks before the ex-dividend date, or 15:55 on the day before the ex- date. Nobody said you should compute the items you mentioned. They jumped right into the conventional wisdom.

But I didn't realize that it was possible in the US for the record date to precede the ex-dividend date. Good to know.

This is not possible. You won't pay a price for nothing. People got confused between fund shares and ETF shares.

[firewynd]

I am kind of shocked by the number of people who say to buy afterward.

Is there some factual evidence that on the ex-dividend date that the stock price has dropped by the relative amount of the dividend?

I'm not a pro by any means - but by looking at the charts of many different stocks - I personally could never look and say "oh the price fell because of the dividend distribution". There have been many occasions where the price actually rose. The price movement just seems to be the normal every day movements. So I would be interested in seeing some factual studies with data.

I know that "theoretically" the price should be lower - but not everything on paper translates well to real life.

I will go against the grain and say that if you want to own the fund and think it will increase in value... don't wait. Buy it now. Enjoy the dividend.

After taxes I would still rather have 85% of the dividend than 0%.

[Karamatsu]

Well, we are in the realm of probabilities, and the question is just whether you want to bet with the house or against it. For example, if you take a quick-and-dirty look at VTI, it gaps down into the open on the ex-dividend date about 80% of the time. On some of those occasions it recovers, but in the end, there's a net loss versus the previous day's close 73% of the time. Pretty one-sided odds.

As for getting 85% of a dividend or none at all, if you ignore price changes, and buy for a taxable account the day before the ex-dividend date, and the dividend is $1.00, then on the next day you will indeed get that $1.00 and perhaps feel happy about it. But in reality at that point you will not be up 85 cents. You'll be down 15, because the dollar you got back is just one of the very same dollars you put in yesterday, except that, come tax time, you will have to give the IRS 15% of it. It's more a question of getting 0 dividend by waiting or losing 15% of a dividend by buying the day before the ex-date... all else equal.

That said, there are people who work strategies for "scalping" dividends. Some people claim to do quite well at it, at least for a while, but I suspect that if you total the gains and losses of all of the people doing this in a given year, the only ones would would come out happy are the brokers and the IRS. Brokers love active traders.

[Karamatsu]

That said, I think tfb is right and it might have been better to ask more questions. I think of these forums as a place for conversation with people who have different opinions, not so much as a place to post a question and get THE ANSWER. So as usually happens, a simple answer is followed by much give-and-take, and in the end we come away understanding at least some of the nuances. That's the nice thing about it.

[Ella]

Wow, the brainpower on this forum...Most of what has been said here is totally new to me (and a bit confusing!). I think I understand it now:

For ETFs, the ex-dividend date PRECEDES the record date. (I did not know this! Not sure if I was just confused, or if it's different for mutual funds and that's where I got my mixup from.)

As Taylor noted, I should buy after the record date. Technically I am probably OK buying after the ex-div date, since my name won't get on the company books in time for the record date. But no need to risk that, since the lapse from ex-div to record is only two business days.

As for whether it is in my best interest to wait or buy now, in my case I prefer the simplicity of waiting - it's only a few weeks, and I am not worried about "missing out" on gains in those weeks. I care more about simplifying my financial life. The dividend will result in some smallish amount of money being deposited in my core brokerage account that would have otherwise stayed in the market. (I don't do automatic reinvestment.) I will then have to wait until I've saved up another lump sum to put that bit of hanging cash back into the market. So I'll just wait.

Do I have all this right?

Thanks again to everyone for their posts.

Ella

[Ella]

aagh. I just read VG's ETF dividend distribution schedule. It describes a declaration date, followed two days LATER by an ex-dividend date.

No idea where the record date fits in here.

I'll just wait until after the ex-dividend date. My head hurts at this point.

[grabiner]

I'm not sure you understand the reason for waiting until after the record date. It has nothing to do with the fund's NAV price change as a result of the dividend. The net result is the same. The reason for waiting to buy a fund until after the distribution (in a taxable account) is to avoid paying a tax on the distribution.
In a retirement account, it makes no difference if you buy before or after the distribution date.

I do understand this, thanks. (Or at least I think I do.) In exchanging one int'l SC ETF for another (in a taxable account), I was trying to figure out whether I might time things so as to avoid receiving (and thus paying taxes on) the dividends on the fund I'm selling, yet also buy the new fund after *its* distribution.

It is more important to buy the new fund after its distribution than whether you sell the old fund before or after the distribution. If the old fund pays a $100 dividend, you will also have a $100 capital loss (or $100 less in capital gains) if you sell after the ex-dividend date, so your taxable income won't change, and whether you gain or lose on taxes depends on whether your gain was short-term or long-term and whether the dividend was qualified. In contrast, if the new fund pays a $100 dividend, you pay tax on that $100, and you don't get any compensating tax benefit until you sell the fund years later.

[Karamatsu]

Ella,

Looking at the page for VTI's previous distributions:

https://personal.vanguard.com/us/funds/ ... IntExt=INT

you can see past ex-dividend and record dates nicely displayed (with record date after the ex-dividend date), so I think, at least in that case, Taylor's advice is probably best, to wait until after the record date.

The declaration date is just the day on which the amount of the dividend is declared, so it doesn't really affect the timing of your purchase. Good luck!

[Sammy_M]

I'm not sure you understand the reason for waiting until after the record date. It has nothing to do with the fund's NAV price change as a result of the dividend. The net result is the same. The reason for waiting to buy a fund until after the distribution (in a taxable account) is to avoid paying a tax on the distribution.
In a retirement account, it makes no difference if you buy before or after the distribution date.

I do understand this, thanks. (Or at least I think I do.) In exchanging one int'l SC ETF for another (in a taxable account), I was trying to figure out whether I might time things so as to avoid receiving (and thus paying taxes on) the dividends on the fund I'm selling, yet also buy the new fund after *its* distribution.

It is more important to buy the new fund after its distribution than whether you sell the old fund before or after the distribution. If the old fund pays a $100 dividend, you will also have a $100 capital loss (or $100 less in capital gains) if you sell after the ex-dividend date, so your taxable income won't change, and whether you gain or lose on taxes depends on whether your gain was short-term or long-term and whether the dividend was qualified. In contrast, if the new fund pays a $100 dividend, you pay tax on that $100, and you don't get any compensating tax benefit until you sell the fund years later.

seems you may prefer the higher capital gain over the dividend income if you already have substantial capital loss carryforwards to offset the gain, as many do these days.

[Ella]

Ella,

Looking at the page for VTI's previous distributions:

https://personal.vanguard.com/us/funds/ ... IntExt=INT

you can see past ex-dividend and record dates nicely displayed (with record date after the ex-dividend date), so I think, at least in that case, Taylor's advice is probably best, to wait until after the record date.

The declaration date is just the day on which the amount of the dividend is declared, so it doesn't really affect the timing of your purchase. Good luck!

Thank you Karamatsu. Apparently the foward-looking distribution schedule Vanguard has up just doesn't go so far as to show the record and payoff dates. OK. I have a firm grasp of this now. Per you and Taylor, I will wait until after the record date to buy. Thank you!

Ella

[magellan]

OK, since my head is spinning a bit with all these dates flying around, I'd like to get a sanity check on this from helpful Bogleheads.

I just realized that as part of annual rebalancing, I need to sell a bunch of emerging markets ETF (usually would be right after Jan 1).

I've got a huge carry-forward capital loss on the books thanks to 2008 TLH activities, so the large capital gain from this rebalancing sale will be completely offset and will cause no tax liability.

I was thinking it would make sense to do the rebalancing sale before the distribution, rather than waiting and then paying taxes on the dividend.

But alas, the record date for Emerging Markets ETF is today (12/22). I think I've waited too long because even if I sell the shares today, the transfer of ownership won't happen in time for me to miss the distribution.

Have I interpreted the dates correctly?

Thanks in advance,

Jim

[pshonore]

You are correct - if the record date is today, the ex-div date was late last week and you will receive the div shortly. In order to not receive it, you should have sold prior to the ex-div date.

[Ron]

In a retirement account, it makes no difference if you buy before or after the distribution date.

An important detail for a lot of folks who only have IRA/401k's.

All to often, discussions don't include how investment questions/concerns are related to the type of investment account, IMHO.

- Ron

[magellan]

You are correct - if the record date is today, the ex-div date was late last week and you will receive the div shortly. In order to not receive it, you should have sold prior to the ex-div date.

Thanks for the confirmation. Not a really big deal, but hey, who wants to pay extra taxes? Next year, I'll do the rebalancing calculations a little earlier so I can capture any similar opportunities that arise.

Jim

[Charybdis]

Are there ETFs which don't pay dividend at all?

Why cannot the ETF just reinvest immediately the dividend into the fund, and not paying it to the investors?

If you buy ETFs in a taxable account, do you pay dividend tax each year?

[pshonore]

Why cannot the ETF just reinvest immediately the dividend into the fund, and not paying it to the investors?

If you buy ETFs in a taxable account, do you pay dividend tax each year?

ETFs (like mutual funds) are obligated to distribute investment earnings to shareholders, or pay tax on the earnings at a higher rate. If an ETF pays a dividend (or capital gains at year end), it is taxable income to you

[Charybdis]

Why cannot the ETF just reinvest immediately the dividend into the fund, and not paying it to the investors?

If you buy ETFs in a taxable account, do you pay dividend tax each year?

ETFs (like mutual funds) are obligated to distribute investment earnings to shareholders, or pay tax on the earnings at a higher rate. If an ETF pays a dividend (or capital gains at year end), it is taxable income to you

Thanks. I have a short question on this topic. Let's investigate this tax distribution table as an example: Vanguard Total Stock Market Index Fund Tax Distributions

I see 2.22% dividend in 2009. Does it mean if I invested $10 000 on Jan 1st, 2009, then I received $10 000 * 2.22% = $222 dividend?

[BradMajors]

If you are buying in a tax deferred account such as an IRA you should buy BEFORE the record date.

[pshonore]

If you are buying in a tax deferred account such as an IRA you should buy BEFORE the record date.

Actually, if you want the dividend, you must own the stock or ETF at the close of business on the business day PRIOR to the ex-dividend date. That will make you an owner on the record date. (somewhat different than mutual funds)

[grabiner]

If you are buying in a tax deferred account such as an IRA you should buy BEFORE the record date.

In a tax-deferred account, it's irrelevant. If an ETF is trading at $50 and pays a $1 dividend, and the market doesn't move, the price will drop to $49. The reason is that the ETF represents a share of ownership in the fund's holdings. If the ETF has 1M shares outstanding, then it has $50M in assets on the record date, and it will pay out $1M in cash on the dividend date. After the record date, you lose your right to receive the dividend, so the shares represent a claim only on the $49M which will not be paid out as a dividend.

The reason it matters in a taxable account is that you pay tax on the dividend when it is paid out, even if you immediately reinvest the dividend in the same ETF. You may go from 490 shares worth $50 to 500 shares worth $49, but in a taxable accoount, you still owe tax on the $490.

[plats]

Thanks. I have a short question on this topic. Let's investigate this tax distribution table as an example: Vanguard Total Stock Market Index Fund Tax Distributions

I see 2.22% dividend in 2009. Does it mean if I invested $10 000 on Jan 1st, 2009, then I received $10 000 * 2.22% = $222 dividend?

Yes. To answer a previous question: Not all ETFs pay a dividend. Commodity ETFs, for example. Check out gold shares GLD.

[Charybdis]

Thanks. I have a short question on this topic. Let's investigate this tax distribution table as an example: Vanguard Total Stock Market Index Fund Tax Distributions

I see 2.22% dividend in 2009. Does it mean if I invested $10 000 on Jan 1st, 2009, then I received $10 000 * 2.22% = $222 dividend?

Yes. To answer a previous question: Not all ETFs pay a dividend. Commodity ETFs, for example. Check out gold shares GLD.

But I heard commodity ETFs distribute a lot of capital gains, so maybe they are not so tax efficient.

[pshonore]

Thanks. I have a short question on this topic. Let's investigate this tax distribution table as an example: Vanguard Total Stock Market Index Fund Tax Distributions

I see 2.22% dividend in 2009. Does it mean if I invested $10 000 on Jan 1st, 2009, then I received $10 000 * 2.22% = $222 dividend?

Yes. To answer a previous question: Not all ETFs pay a dividend. Commodity ETFs, for example. Check out gold shares GLD.

But I heard commodity ETFs distribute a lot of capital gains, so maybe they are not so tax efficient.

Some of the commodity ETFs (USO, UNG, etc) are structured as LPs and report tax info on a K1. Thats a whole different ball game.

[zeugmite]

Is there some factual evidence that on the ex-dividend date that the stock price has dropped by the relative amount of the dividend?

...

I know that "theoretically" the price should be lower - but not everything on paper translates well to real life.

You misunderstand. The stock price isn't supposed to be lower in absolute value. It's only lower compared to what it would have been without the dividend distribution. This isn't some investment theory. It's just accounting.

Also as somebody says, this is essentially an issue of when tax is paid, not how much. If you buy before a distribution, you get a higher basis.