Investing Club mailbag: What is an ex-dividend date and should you buy a stock before of after?

Published Thu, Apr 20 202312:05 PM EDTUpdated Thu, Apr 20 202312:14 PM EDT

Jim, what is your strategy to sell CSCO the day before its ex-date? I always wanted the dividend and then waited a few days to sell because the stock price always seemed to go down after the ex-date. Please advise. Do you consider the ex-date on any stock sale? Why yes or no; I need to know if I am investing correctly. — Richard F. We don't concern ourselves too much with trading around an ex-dividend date because it, technically, doesn't matter. While it's hard to see in real-time, a stock's price actually gets adjusted by the exchange for the dividend on the ex-date. The ex-dividend date is when the value of the next dividend payment is extracted from the stock price. For example, if a company is going to pay out a quarterly dividend of 50 cents per share, then on the ex-date, the exchange will downwardly adjust the stock price by 50 cents per share sometime after the prior day's close and before the ex-date open. That accounts for the dividend flowing out from the company to you, the shareholder. The reason it's hard to see in real-time is the daily price action masks the adjustment, which is especially true for smaller dividends. However, to better demonstrate this dynamic, let's consider a larger dividend payment. In this case, the $10-per-share special dividend Costco (COST) paid out on Dec. 11, 2020. The ex-date was on Dec. 1, 2020. Given the $10 dividend, we would expect to see the stock decline by $10 after going ex-dividend. However, if we look at the price history, using FactSet, what we see is that Costco closed on Nov. 30, 2020 at $391.77 per share, opened the next day at $384.50 and closed that day at $387.56. Clearly, we don't see a $10 decline reflected between the close on Nov. 30, 2020 and Dec. 1, 2020. So what happened? Let's say you own one share of Costco and no cash in your brokerage account. On Nov. 30, 2020, your balance was $391.77 in Costco stock (represented by the "closing price" column) and zero dollars in cash. Sometime after that close and before opening on the ex-date — again, Dec. 1, 2020 — $10 per share is extracted and earmarked to be given to investors in cash on the pay date, which in this case was 10 days later. So, now your Costco share is worth $381.77 and you have $10 in cash coming your way. Now back to that pesky thing about market trading: the Dec. 1, 2020 open of $384.50 per share (represented in last column "opening price) was actually higher than the dividend adjustment $381.77, and the eventual close of $387.56 actually higher as well. However, FactSet and other data providers don't spell all that out. They reflect a $4.21-per-share, or 1.07%, decline (based on "daily $ change and daily % change) from the closed on Nov. 30, 2020. Based purely on the stock price move that is correct. But remember, that while your one share of Costco lost $4.21-per-share, or 1.07% (purely from a stock price perspective), on the ex-date, you gained $10 for a net return of $5.79 ($10 cash dividend less the $4.21 loss int he stock price). That's why the "daily % change" and the "daily % return" columns are the same every session except for the ex-date. Your total return on Dec. 1, 2020 was a 1.48% gain (not a 1.07% loss) based on the stock move and your $10 in cash together. Bottom line We hope this has provided some clarity as to why it's not all that important to think about the ex-date when making a fundamentals-decision about whether a stock should be bought or sold. Ultimately, the value of your position, when excluding the daily fluctuation of a stock price, is the same. You either have all of that value reflected in just the stock price or when the ex-date happens the value is reflected in the stock and the cash from the dividend, which again doesn't hit your account until the payment date but is earmarked for you on the ex-dividend date. Since the Club portfolio is based on Jim Cramer's Charitable Trust holdings, we take all of our dividends in cash to be paid out as part of our annual philanthropic donations. However, we recommend as a general rule that if you believe in the stock you should reinvest your dividends. The S & P 500 increased 18.84% over three years, ending in 2022. With dividends reinvested over that time period, the total return was 24.72%. Over five years, the index gained 43.51%. With dividends reinvested, the total return was 56.77%. Finally, over 10 years, the index rose 169.21%. With dividends reinvested, the total return was 226.12%. As we can see, reinvesting dividends is a major component of total return, and the longer the investment horizon the greater the impact thanks to compounding. (Jim Cramer's Charitable Trust is long CSCO, COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

People walk by the New York Stock Exchange (NYSE) on February 14, 2023 in New York City.

Spencer Platt | Getty Images