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Should you buy ASX shares before or after they go ex-dividend?

With Australia and New Zealand Banking Group (ASX: ANZ) going ex-dividend today, and its banking stablemate National Australia Bank Ltd (ASX: NAB) following suit on Thursday, some of you might be tempted to engage in a bit of buying and selling.

Ex-dividend periods tend to mean a time of increased volatility – especially for the bigger dividend payers like the banks. But is this a good idea? Should we base our buying and selling around dividend pay dates? Let’s take a look.

What does ex-dividend mean?

Since dividends form a major component of stock market returns, there are clear rules about when dividends get paid, and to whom. Typically, when a company announces a dividend, it will declare the dollar payment per share, the ex-dividend date and the payment date. The ex-dividend date is the time when shareholders are quarantined for payment. Put another way, if you owned ANZ shares before the ex-dividend date, you get paid said dividend. If you buy them after, you miss out.

So yesterday, all ANZ shareholders were recorded as being eligible to receive the next dividend that will be paid on December 18. If I were to buy ANZ today, I would not receive this payout.

What does this have to do with the share price?

Everything. A dividend is really an outflow of cash from a business, which in theory weakens the company as capital is walking out the door. Thus, whenever a dividend is paid, the value of the company drops by the same amount. This is reflected in the companies’ share price – as you can see in the graph below.

Source: Google Finance November 11 – ANZ 5-day share price

Foolish takeaway

Unfortunately, there is no free lunch in the world of investing. If you choose to sell your shares before an ex-dividend, you will miss out on the dividend while getting a higher share price. The opposite is true if you wait until after your stock goes ex-dividend. A better way? In my view, just buy-and-hold for the long-term. In the long run, if you pick the right companies, both your shares and dividends will both grow. I like the sound of that better!

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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