What a Difference a Day Makes for New SEC Rule

 | Sep 09, 2017 | 12:00 PM EDT
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Tuesday was a milestone date for income investors but passed with little fanfare. On March 22, the Securities and Exchange Commission mandated that brokerages must switch to settling trades two business days after the event instead of the previous three-day standard, and Tuesday was the deadline for adherence to the new rule. The switch to "T+2" from "T+3" -- the industry standard since the 1990s -- changes the rules for investing to capture dividends and interest payments, and also affords investors with non-marginable accounts a shorter trip to the "where is my cash" penalty box. 

So the move to T+2 is a big deal, and I am surprised it has not garnered more attention in the financial media. Anyone who has ever taken the mind-numbingly boring Series 7 exam remembers the seemingly stupid questions:

If I trade a stock Tuesday, the trade will settle (and I will have access to the funds):

  1. Wednesday
  2. Thursday
  3. Friday
  4. Monday

For more than 20 years, the answer was "3," but as of this week it's "2" and that changes one of the fundamental tenets of dividend capture strategies. 

As I have written in many Real Money columns, the date I focus on when trying to buy a stock or bond ahead of a payout is what I call the "buy date." That is the day before the ex-dividend date, the date on which the stock or bond's price is reduced at the opening of trading by the amount of the payment. Under the prior regime, the buy date was three full days prior to the record date. So if you knew a company would be paying a dividend to shareholders as of a record date of Sept. 15, you had to buy it by Sept. 12, so you could be a shareholder of record as of the end of the 15th. Now that process has been shortened by a day, so for a Sept. 15 record date, the ex-date is now the 14th and the buy date is the 13th. 

This may seem like an academic exercise until one realizes that, as the final month of a calendar quarter, September is rife with dividend payments, and setting the record date on the 15th and payment date on the 30th is a frequently used payment schedule. That 15-day period is not mandated by the SEC -- and is often shorter for bonds' interest payments -- but it's a rule-of-thumb length for stock dividend payments and is quite common. 

I have a passel of securities that have record dates for their next payments on Friday, Sept. 15, and I now have until the close of trading Wednesday to buy and receive the dividends. Several of the common stocks, preferred stocks and corporate bonds I have written about in RM columns are facing a record date of next Friday, so Wednesday is a big day for me. Actually, I try to buy a few days ahead of the buy date in an attempt to beat the algorithmic traders and catch a little of the "pre-dividend pop," but it is important to remember deadlines. 

So my firm owns all of the following securities with Sept. 15 record dates, and I'll look to add opportunistically to these positions between now and the end of Wednesday. 

Frontier Communications (FTR)

Frontier Communications 11.125% Preferred Series A (FTRPR)

Evolution Petroleum (EPM)

Callon Petroleum 10% Preferred Series A (CPE-A)

Telephone and Data Services, 6.625% Senior Notes due 3/2045 (TDI)

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