Too many investors want to know when they can sell shares and still get the dividend, which is the wrong question to ask.
On June 13, home-improvement retail chain Home Depot (HD 1.73%) will do something that it has already done 148 times in a row: pay a quarterly dividend. The Atlanta company has more than 2,300 stores across the country, which are earning the retailer a healthy profit. And management likes to share a portion of this profit with its shareholders.
Home Depot’s upcoming dividend is pretty straightforward. But there are a lot of terms and dates associated with dividends that could get confusing for some. For example, the company just went ex-dividend on May 30. And some investors wonder what that means.
In this article, I’ll break down some important terms and explain what it means for Home Depot’s shareholders.
Here are the three things to keep straight
When it comes to dividends, investors are given three dates: the declaration date, the ex-dividend date, and the payable date. Let’s look at each.
In Home Depot’s case, it declared a quarterly dividend of $2.25 per share on May 16. This is in line with its previous payment in March, and it extrapolates to $9 per share in annual dividends. Given that the stock trades at about $330, the forward yield is about 2.7%, which is pretty good.
HD dividend yield data by YCharts.
Home Depot declared the dividend on May 16, but technically nothing happened at that time. The nitty gritty started on May 30: the ex-dividend date. Investors had to own shares on May 29 to get the upcoming dividend. Those who bought on May 30 or after will be excluded from the payout.
As of this writing, the company already knows who gets the June 13 dividend and who doesn’t. Now it’s just a matter of waiting for it to come in.
The one thing that investors really want to know
In preparing this article, I learned that one of the most-asked questions from investors is when they can sell Home Depot stock and still get the dividend. The home improvement retailer’s case is unusual because the date it identifies all shareholders (known as the record date) and the ex-dividend date are the same — usually there’s at least one day of separation between the two. Therefore, investors could have sold on May 30 and still received $2.25 per share on June 13.
This question makes it seem like some investors were only interested in buying Home Depot stock for this one dividend payment. The idea for some might have been to buy shares before the ex-dividend date and sell at the earliest opportunity.
However, I believe this is the wrong approach. Investors shouldn’t be thinking about how quickly they can get out of an investment in Home Depot and still get a dividend. A better question is whether or not the stock can go up faster than the S&P 500 — a benchmark that’s considered average.
Dividends are actually relevant to this discussion. Home Depot stock hasn’t done as well as the S&P 500 over the last five years. But notice that shareholder returns were much higher when using a dividend reinvestment plan.
HD data by YCharts.
When investors hold shares of quality businesses for the long term and reinvest growing dividends along the way, returns can really start to compound. It’s something that gets better the longer someone holds. By contrast, trying to time trades in and out of dividend payers based on the ex-dividend date is a flawed approach.
Moreover, investors should remember that this will be the 149th consecutive quarter that Home Depot has paid a dividend — that’s just over 37 years. And the dividend goes up most years, which can really contribute to overall returns.
HD dividend data by YCharts.
Home Depot is a consistent business with staying power. And given the ways it can grow its earnings in coming years, I expect the company’s dividend to keep rising just as it has in the past.
Therefore, if Home Depot’s dividend is something that interests you, don’t get caught up just thinking about the upcoming payment. Think about the business and the dividend over the long term. That’s where the larger returns can be found.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.