Shareholders may buy a stock in part to collect dividend payments. Dividends are profits distributed to equity owners, and shareholders of dividend-paying firms are eligible to receive them as long as they own the stock by the ex-dividend date.
But what happens if you sold short a dividend-paying stock? Read on to learn the answer.
- Shareholders of dividend-paying companies as of the record date are entitled to collect declared dividends.
- If, however, you are short a dividend-paying stock, you are not entitled to receive the dividend and must pay it instead to the lender of the borrowed shares.
- If you sell short a dividend-paying stock after its record date, you are not responsible for paying a previously declared dividend.
Important Dividend-Related Dates
Dividend payments follow a sequence of dates important in determining who receives them:
- Announcement date: The date a company declares a dividend.
- Ex-dividend date: The first trading day on which buyers of a stock no longer qualify for a previously declared dividend is called the ex-dividend date, or simply the ex-date. For instance, if a dividend has an ex-date of Tuesday, June 5, only the shareholders who owned the stock as of Monday, June 4 are eligible for the payment.
- Record date: The record date is the cut-off date set by the company to determine the roster of shareholders eligible to receive a dividend. Since it currently takes two days to settle a share purchase, the record date is typically the next business day after the ex-date (and two trading days after the last day on which share buyers qualify for a previously declared dividend).
- Payment date: The company pays the dividend on the payment date, also known as payable date, which is when the money gets credited to investors' accounts.
Short Stocks and Dividend Payments
Shorting a stock means selling borrowed shares in hopes of buying them back later at a lower price. If the price falls, there is a profit. If the price rises, there is a loss. A brokerage firm usually arranges the lending of shares for shorting by the shareholders among its clients, or the clients of other brokers. There is generally a borrowing fee for the stock, which may vary with its availability and liquidity. The borrower of the stock is responsible for paying any dividends to the lenders.
Investors short a stock are never entitled to its dividends, and that includes those short a stock on its dividend record date. Rather, short-sellers owe any declared dividend payments to the shares' lenders.
Shorting stocks is a risky strategy suitable only for sophisticated traders. Because publicly listed companies typically generate profits that can be reinvested in the business, share prices tend to rise over the long term. Short-sellers must buck that general trend, in addition to making up dividend payments on the shares they short.
Borrowing costs add a significant expense. Finally, the risks of short-selling are asymmetrical to its reward. The maximum short-selling return if the share price goes to zero is 100%, minus borrowing costs and any dividends. The maximum loss, in contrast, is unbounded because stocks, and heavily shorted stocks in particular if there is a short squeeze, can rise more than 100%.