I can’t remember if I’ve ever done an investment tip about the differences between stock and bond payouts. If I have, it was long ago and it’s helpful to understand the difference.
By and large when stocks make a payout, it’s called a dividend, and they are done quarterly. When the stock goes ‘ex-dividend’ (that is, you buy the stock without the right to the very next dividend) they reduce the stock price by the amount of the dividend on the ex-dividend date.
Example:
XYZ Corp. goes ex-dividend on July 1st with a 20 cent dividend for stock holders who hold the stock on June 30th. So If XYZ Corp closes on June 30th at $30 a share, it will open on July 1st at $29.80 ($30 minus the 20 cents). That’s because the new holders miss out on the next dividend, and so the stock is worth a little less.
However, bonds are quite different. Bonds have a ‘coupon rate’ (because you used to buy bonds with actual coupons you’d clip out and take to the bank) that is normally paid out twice annually. With a bond, the old holder of the bond gets his coupon payment right up the date he sells.
Example:
Say you have a $1,000 bond that pays out a $20 coupon twice a year on January 1st and July 1st. If a bond holder sells that bond on April 1st, he is entitled to half of the coupon, or $10, since he held it for half of they payout period. So what happens is the seller pays $1010 for that bond. He will recoup the $10 in 3 months, because he will get to keep the whole $20 payment. On the statement it looks like he’s lost $10, as he paid $1010 for a bond that is worth $1,000.
Why do they do this? Mostly because bond holders are looking for steady income. By having the new buyer pay the coupon up to the date of purchase, you prevent bond prices from jumping all over the place because of pending coupon payouts.
Keep this in mind if you’re buying a stock or bond. You are getting all the money you are owed, but the way it’s paid out is not the same.