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Reader Q&A: How The Ex-Dividend Day Works And Your Taxes On DRIP Dividends

I’ve recently received an e-mail from one of my readers with some really good questions. Below is his mail:

“Hello Tom, I recently discovered your website and have read many times about buy and hold dividend stocks is best way to future income; especially if you buy those that increase dividends every year. I have been trading way too much in my tax account and in years I do get ahead I pay too much taxes.

I am 62 now and have too much time to watch the market. I still need some growth until I turn 70 when I hope to generate income in safer stocks. I am wondering how long you have to hold a stock after the Ex-dividend date to get the dividend in case one wants to sell? Reason for selling may be stock dropped or bad earnings or news report or better dividend opportunity. I have paper traded Dogs of the Dow the last 4 years and am impressed with the return. I wonder what the next 4 holds?

I also wanted to know if one reinvested dividends in those stocks instead of taking cash; would you still need to pay taxes on the dividends?”

First the ex-dividend date is the date on which you are noticed as stockholder who receives the dividend. You can sell the stock on the ex-date and could receive the dividend a month later or so without owning the stock anymore. My advise: You should not buy stocks only because of the ex-date. There is no deeper sense behind.

With your age of 68 it's still possible with solid dividend growth stocks to double your investments by the age of 70. All you need is some good picks, a stable growing capital market and a very good health.

I have also no idea if the Dogs of the Dow strategy works. Some discovered that it could deliver a good return but if I look at the current Dogs, I think that its better to choose other dividend growth picks with lower debt ratios and human growth perspectives.

If you reinvest your dividends, you have no tax advance. Every investor must pay taxes annually on his or her dividend income, whether it is received or reinvested. Some people use a dividend reinvestment program or dividend reinvestment plan (DRIP). The benefit is to investment returns from dividends immediately for the purpose of price appreciation and compounding, without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock. The disadvantage is that you buy at prices which are not ever the best.

I hope my answers helped you to understand when you will get the dividend after selling the stock as well as the taxation of dividend reinvestments. Feel free to submit a comment on my Facebook-Page. I always try my best to help others.