<THE FOOLISH FOUR>

Hurrah for Dividends!
by Ann Coleman
([email protected])

Reston, VA. (November 13, 1998) -- Yesterday, we added some virtual cash to our virtual Foolish Four portfolio -- the $349.81 that our Foolish Four stocks paid out in dividends during the third quarter. Yeah!

The effect may not have been that noticeable yesterday, because several of our stocks dropped, but today the effect is more obvious and we got a nice little boost of about half a percent on our total return. Plus, today we added Union Carbide's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> fourth quarter dividend of $65.48, bringing our total dividends year-to-date to $1,092.81. This is "cash," real, virtual money that stays in our account and is not subject to the whims of the marketplace.

When I say cash, I hope everyone understands that the Foolish Four portfolio numbers we report are different from the other portfolios the Motley Fool covers. The Foolish Four portfolio is a "paper" portfolio that lets us track how this strategy performs in real time. The other Foolish Portfolios, The Fool, Cash-King, Boring and DRIP, are all real-money portfolios.

I've modified our Foolish Four portfolio tracking spreadsheet to automatically include the dividends on the ex-dividend date from now on, instead of just adding them up and popping them in once a quarter or so. These little boosts where everything comes in at once are fun, but not that realistic.

So why the ex-dividend date and not the "payable" date, you ask. (Some ask that -- the others are wondering "What the heck is the ex-dividend date?") Good questions, both of them.

According to my Finance 301 textbook, there are three important dates associated with the payment of dividends: The Declaration Date, the Holders-of-Record Date, and the Payable Date. The Dividend process generally works like this: once per quarter, on the Declaration Date, the board of directors meets and approves the next dividend to be paid to shareholders. At that time, they also specify a Holder-of-Record Date and a Payable Date. The declaration goes something like this:

On November 13, the board of directors of Blue Chip Industries declared a dividend of 0.33 per share to be paid on December 30 to shareholders of record as of December 5.

So, December 5 is the drop-dead date. The company draws up a list of all official shareholders as of the close of business on December 5. These are the shareholders of record, and they are the ones who will actually get their name put on a check. The check goes out on December 30. Happy New Year's!

Oh, you say your shares are held in your broker's name (street name)? No problem. The broker busily draws up his own list of shareholders of record on December 5, and as soon as he gets the dividend check from Blue Chip Industries, he pops your bit into your account.

Obviously, the Date-of-Record is the important one, right? Not exactly. If you want to be sure you get impending dividend of a stock you are planning to buy, you have to make sure you buy it far enough in advance to get yourself on that list. This brings us to the ex-dividend date. (You thought I forgot, didn't you?)

The ex-dividend date was set up by the exchanges to insure that everyone buying a stock knows whether or not they will be getting the next dividend. On the ex-dividend date, the stock trades ex- (without) dividend.

It takes three days for stock trades to settle. If the record date is the fifth, the ex-dividend date is usually the third. Any trade made before the third will settle by the close of business on the fifth, and thus the buyers will be on the list to receive the current dividend. Any trade made on or after the third won't settle until the sixth. On the third, a little x will appear in the newspaper stock columns to designate that the stock is trading ex-dividend.

Here's the interesting part: On the morning of the ex-dividend date, the stock exchanges reset the bid and ask prices of the stock. When the dividend is paid, the actual net worth of the company is reduced by that amount, so the exchanges subtract the amount of the dividend from all pending buy and sell orders. This is to compensate folks who buy the stock after the deadline. Union Carbide illustrates how that works nicely. The stock closed yesterday at $42.75 and opened this morning at $42.50. Their next dividend will be $0.225 per share. Small adjustments like UK's often go unnoticed in the moment-to-moment ups and downs of the market, but when the dividends are larger, the effect is more noticeable. I panicked one day (many years ago) when my shares in the Magellan fund went down $4 overnight!

If you trade online, you may have noticed a check box labeled "DNR" or "Do Not Reduce" on your order form. That is an instruction that you can give to your broker if you enter an order to sell at a set price near the ex-dividend date for times when you do not wish to have your limit order reduced by the dividend amount. Those guys think of everything!

Since the ex-dividend day is the day that the stock prices are adjusted, it made sense to me to adjust our virtual portfolio on that day, too. You could make a good argument for the payable date, as well, but, in theory at least, adding the dividend in on the day it is subtracted from the stock's price should make for a smoother returns picture.

Monday we discuss a silly game: Capture the Dividend.

Fool on and prosper!

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Current Dow Order | 1998 Dow Returns

11/13/98 Close

Stock Change Last -------------------- UK --- 42.75 IP +1 5/16 44.88 MO + 3/16 54.06 EK + 1/4 77.50

Day Month Year FOOL-4 +0.96% 3.49% 14.78% DJIA +1.02% 3.81% 12.79% S&P 500 +0.68% 2.46% 16.00% NASDAQ -0.17% 4.32% 17.68% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 77.50 27.97% 12/31/97 276 Philip Mor 45.25 54.06 19.48% 12/31/97 289 Int'l Pape 43.13 44.88 4.06% 12/31/97 291 Union Carb 42.94 42.75 -0.44% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 15965.00 $3489.13 12/31/97 276 Philip Mor 12489.00 14921.25 $2432.25 12/31/97 289 Int'l Pape 12463.13 12968.88 $505.75 12/31/97 291 Union Carb 12494.81 12440.25 -$54.56 Dividends Paid YTD $1092.81 TOTAL $57388.19