Many stocks and funds pay you a regular cash dividend payment. In order to receive this payment you must be a registered owner of the stock before a specific date: this is the ex-dividend date. If you buy the stock after this date you won't get paid a dividend until the next dividend payment. For some stocks that could be up to a year later.

Where does the dividend come from?

If you own a share a company may decide to return some of its profits to its shareholders as a cash payment. Each share in the company will receive some of this cash, and the more shares you own the more dividend you will be paid.

If you own a share fund, like an Exchange Traded Fund, the dividend payments of the shares in the fund are passed through to you. If you own a bond fund it will be the bond coupon payments which are paid to you as a dividend.

The reason why companies are willing to pay you is that you have risked your capital to provide them with funds. If you buy shares they own your share capital forever (or until you sell the share to someone else), and if you buy bonds the capital will be repaid but you will receive interest payments. Either way the company benefits because it can use your capital to generate more profits.

How often are dividends paid?

In the UK traditionally dividends were paid twice each year, but more UK companies are moving to the US way of doing things which is to pay dividends four times each year. Some funds pay dividends each month. The picture shows the dividend payments for the UK insurer Legal and General which are paid twice each year in March and August.

Occasionally a company will receive a large amount of cash. For example it might have sold off part of the company, or it may have accumulated excess cash from its business which it has not spent. This may be paid to shareholders as a special dividend which isn't paid on one of the regular scheduled dividend payment dates. This payment is often much larger than the "usual" dividend payments. For obvious reasons shareholders like special dividends. Below you can see a special dividend paid by the mining company Rio Tinto in 2006 (in blue).

What are the key dates for dividends?

There are four dates that matter:

• Declaration Date: the day on which the board of directors of the company announces that it will be paying a dividend
• Ex-Dividend Date: if you own the stock before the market opens on this day you are entitled to receive the declared dividend
• Record Date: is the date on which the company officially notes the number of shares owned by investors in their share register before the ex-dividend date
• Payment Date: is when shareholders receive the cash dividend payment for the shares they owned before the ex-dividend date

The record date is the least important of the four dates as it involves behind the scenes bookkeeping. In the UK the ex-dividend date occurs one day before the record date.

What are income and accumulation funds?

Funds are sometimes described as "income" or "accumulation". This is often abbreviated in the fund name to Inc and Acc.

• Income Funds: you are paid a cash dividend just like a stock
• Accumulation Funds: income is continually reinvested in the fund

If a fund has both in income and accumulation version then it is interesting to compare the prices. The price of the funds will gradually drift apart with the accumulation fund price rising above the income fund as its dividends boost the price of the fund. Below is just such a comparison for the Vanguard LifeStrategy 60% equity fund. The red line shows the accumulation fund price steadily rising above the income fund as dividends are reinvested.

Another difference between income and accumulation funds is that income funds have an ex-dividend date but accumulation funds do not. Accumulation funds steadily reinvest the share or bond income as it is paid and all this machinery goes on inside the fund.

If you are drawing income from your investments then it might make sense to buy income funds, and this is often the case for retirees. For people who are still actively building up their savings accumulation funds make more sense because you don't have to pay transaction costs to reinvest the cash you receive. It can also be a headache continually having to reinvest cash as it appears in your investment platform.

Why does the ex-div date matter?

If you are saving regularly into the same shares or funds then the ex-dividend date matters less because the timing of your investments is determined by the date on which funds become available. However, if you have a lump sum to invest then timing can matter more, as I will illustrate with a mistake I made.

I transferred the cash for my ISA allowance into my Vanguard account on June 23rd 2018. Then I allocated the new cash by buying funds on June 25th which I recorded as a video which you can watch here:

• How I Invested 20k Using ETFs and Vanguard Direct ISA

However, I made a big mistake. The funds I bought had the following ex-dividend dates (you can click on the fund ticker to see the dividend payment schedule complete with ex-dividend dates):

• VMID: June 21st, 2018 (quarterly)
• VERX: June 21st, 2018 (quarterly)
• VGOV: June 21st, 2018 (monthly)
• VECP: June 21st, 2018 (monthly)
• VEMT: June 21st, 2018 (monthly)

They all went ex-dividend on June 21st. If I had bought my funds five days earlier I wouldn't have missed out on all those dividends. For the fixed income (bond) funds that only mattered a bit because the dividend is paid monthly, but for the equity funds I missed out on dividends for a quarter (three months).

The moral of this tale is: look up the ex-dividend dates. It might make the difference between missing out on a dividend or not.