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A colleague at work asked for guidance on selling a long-held mutual fund on the Record (12.26) Date but before the Ex-Dividend Date (12.29). I was not able to advise.
If they proceed with selling on the Record Date, will they get stuck with a higher tax bill, and the hefty distribution, once it goes Ex-Dividend, or will their profit benefit from a lower taxed long-term capital gain?
In general, here is how I understand it along with what was written on a site that I referenced.
The record date is not the key date, the ex-dividend date is. Ex-dividend date is three days after the record date. The reason is that it takes three business days for share purchases to record (T+3). Trades made three days before the record date record on the record date, trades made two days before record one day after. So if you buy three business days before, the trade records in time and you get the dividend. If you buy two days before, you don't get the dividend because the sale doesn't record until after the record date, if you are the seller, you still get the dividend because even though you've sold the stock, you will be the holder of record on the record date (Possibly, See Comment).
Comment: I have known of some mutual funds that recgonize a fund owner as those that own the fund at the opening of business on record day; and, then some that recgonize only those that own the fund at the close of business on record day. For this reason I'd present this question to the subject's financial advisor and/or the fund company. In this way, the potential seller will have heard it straight form those that are inside the business transaction.
SEC:"If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend."
Mutual funds are a little weird when it comes to dates - I think I've got it right, but I'm not sure. Though I am sure that it's not T+3 (what Skeeter linked to was a page describing T+3 for stocks; a rule that also applies to ETFs). The ex-date is generally one (market) day after the record date; I've never seen longer, though I have seen same day.
It's often referred to as T+1, but that doesn't seem right, as I'll explain. For practical purposes though, with almost all mutual funds, if you own it on the record date you get the dividend, and if you own it one day later, you don't.
For stocks, what happens (with T+3) is pretty straightforward. You buy/sell on the trade date ("T"). If you're buying, you take "possession" of the stocks in three business days ("settlement date"). Until then, you've got a contract (at an agreed upon price) for the stock, but you're not the owner as far as the stock company is concerned. You haven't taken possession. Three days later you are the owner, so if the record date is then or later, you get the dividend.
That's why the ex-date is two (market) days before the record date. If you buy the stock two days before the record date, then by the time you're the owner of record three days later, you'll have missed the dividend. But if you buy three days before the record date, you'll be on the books just in time for the dividend.
So you would think that what T+1 for mutual funds meant was that if you bought the fund shares zero days before the record date, you'd have missed the dividend. That is, the ex-date would be the same as the record date. But it's not (usually).
Traditionally, open end funds were bought and sold directly from the fund distributor. So my theory (haven't found this anywhere) is that even if the settlement were a day after purchase (T+1), the "company" (distributor) knew about the transaction and had you on the books as the owner.
So if you bought on the record date, you got the dividend, regardless of the settlement date. That's what strikes me as weird about mutual fund dividends.
Skeeter mentioned some funds where "owner of record" is applied at the open, not at the close. I found that very helpful. I used to see (but no longer do see) many funds where the record date and ex date were the same date.
That makes perfect sense if the "owner of record" is determined at the open. If you buy on the record date, the transaction is effective at the end of the day, and you don't get the div. So the ex-date is the same as the record date. But if the ownership of record is determined at the end of the day (the usual situation), then if you buy on the record date, you are the owner when they check to see if you get the dividend.
Here's a page from Hartford saying that their funds check at the beginning of the record date: http://hmf.hartfordlife.com/hmf_help/hmf_helpgloss.htm#R (See Record Date: "Only shareholders who are invested in the fund at the opening of business on the record date will receive the distribution.")
Now, that you have picked our collective brains for certain information ... How about telling us what actually went down with this presented sell transaction?
Linked site shows important dividend dates for selected stocks/ETF's as well as summary of dividend payment history. Doesn't support mutual funds' dividend dates though.
Now, that you have picked our collective brains for certain information ... How about telling us what actually went down with this presented sell transaction?
Old_Skeet
As usual, the collective wisdom here was outstanding. Thanks.
Fairholme Capital Management in Miami says the "owner of record" is determined at the close of business (rather than the open). So, a sell transaction (even) on the record date puts you out of the fund in advance of the ex-dividend date, avoiding the hefty distribution.
Comments
The record date is not the key date, the ex-dividend date is. Ex-dividend date is three days after the record date. The reason is that it takes three business days for share purchases to record (T+3). Trades made three days before the record date record on the record date, trades made two days before record one day after. So if you buy three business days before, the trade records in time and you get the dividend. If you buy two days before, you don't get the dividend because the sale doesn't record until after the record date, if you are the seller, you still get the dividend because even though you've sold the stock, you will be the holder of record on the record date (Possibly, See Comment).
Here is what is said on the SEC's site ...
http://www.sec.gov/answers/dividen.htm
Comment: I have known of some mutual funds that recgonize a fund owner as those that own the fund at the opening of business on record day; and, then some that recgonize only those that own the fund at the close of business on record day. For this reason I'd present this question to the subject's financial advisor and/or the fund company. In this way, the potential seller will have heard it straight form those that are inside the business transaction.
Hope this helps ...
Old_Skeet
Pretty cut and dry.....simple..tb
Merry Christmas,
Ted
http://theory.stanford.edu/~oldham/publications/financial/distributions/distributions.pdf
It's often referred to as T+1, but that doesn't seem right, as I'll explain. For practical purposes though, with almost all mutual funds, if you own it on the record date you get the dividend, and if you own it one day later, you don't.
For stocks, what happens (with T+3) is pretty straightforward. You buy/sell on the trade date ("T"). If you're buying, you take "possession" of the stocks in three business days ("settlement date"). Until then, you've got a contract (at an agreed upon price) for the stock, but you're not the owner as far as the stock company is concerned. You haven't taken possession. Three days later you are the owner, so if the record date is then or later, you get the dividend.
That's why the ex-date is two (market) days before the record date. If you buy the stock two days before the record date, then by the time you're the owner of record three days later, you'll have missed the dividend. But if you buy three days before the record date, you'll be on the books just in time for the dividend.
So you would think that what T+1 for mutual funds meant was that if you bought the fund shares zero days before the record date, you'd have missed the dividend. That is, the ex-date would be the same as the record date. But it's not (usually).
Traditionally, open end funds were bought and sold directly from the fund distributor. So my theory (haven't found this anywhere) is that even if the settlement were a day after purchase (T+1), the "company" (distributor) knew about the transaction and had you on the books as the owner.
So if you bought on the record date, you got the dividend, regardless of the settlement date. That's what strikes me as weird about mutual fund dividends.
Skeeter mentioned some funds where "owner of record" is applied at the open, not at the close. I found that very helpful. I used to see (but no longer do see) many funds where the record date and ex date were the same date.
That makes perfect sense if the "owner of record" is determined at the open. If you buy on the record date, the transaction is effective at the end of the day, and you don't get the div. So the ex-date is the same as the record date. But if the ownership of record is determined at the end of the day (the usual situation), then if you buy on the record date, you are the owner when they check to see if you get the dividend.
Here's a page from Hartford saying that their funds check at the beginning of the record date: http://hmf.hartfordlife.com/hmf_help/hmf_helpgloss.htm#R
(See Record Date: "Only shareholders who are invested in the fund at the opening of business on the record date will receive the distribution.")
Now, that you have picked our collective brains for certain information ... How about telling us what actually went down with this presented sell transaction?
Old_Skeet
http://www.nasdaq.com/symbol/dsw/dividend-history
Fairholme Capital Management in Miami says the "owner of record" is determined at the close of business (rather than the open). So, a sell transaction (even) on the record date puts you out of the fund in advance of the ex-dividend date, avoiding the hefty distribution.