Wondering what is ex dividend date?
What happens on the ex dividend date?
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What Is Ex Dividend Date
Ex-dividend date refers to the date as of which the stock trades without entitling the shareholder to the next dividend payment declared by the company.
In other words, if you buy shares before the ex-dividend date, you will be entitled to receive the next dividend payment that is expected to be paid.
However, if you buy shares on the ex-dividend date or after, you will not get the next dividend payout.
There are three important dates that you’ll need to understand to ensure you know all about the dividend distribution process:
- Dividend declaration date
- Dividend record date
- Dividend payment date
When the board of directors “declares” or “announces” that the company will pay dividends, that’s the declaration date where the dividend payment date and record date are confirmed.
The dividend record date is the date that you must be an official shareholder of the company to be entitled to receive dividends.
The dividend payment date is the date that the company will actually distribute the dividends to those who had shares on the record date.
Ex-Dividend Prior To The Record Date
The record date is a date that is used by companies to determine which shareholders will be entitled to receive dividends.
This is important as there are companies where thousands, if not millions, of shares are traded every day and it’s crucial to properly allocate dividend entitlement.
When a dividend is declared by the board of directors, a record date is indicating that those who are officially holding shares of stock on the record date will be entitled to receive dividends.
Then, based on the rules of the stock exchange where the stock is being traded, the ex-dividend can be set when you know the record date.
The ex-dividend date is generally right before the record date.
If the rules of the stock exchange state that a stock trade settles in two business days, then the ex-dividend date will be one business day prior to the record date.
Transaction Settlement Rules
For many publicly traded companies, there are thousands, if not millions, of shares being traded every day.
As a result, if you want to purchase shares and be entitled to dividends, you must buy your shares early enough so that your transaction has fully settled by the record date.
For your transaction to settle before the record date, you must buy the shares the day before the ex-dividend date or sooner.
If you buy your shares of stock on the ex-div date or after, then your transaction will not have time to settle in time for you to be a shareholder of record on the record date.
Why Ex-Dividend Date Is Important
If you are investing in stocks to earn dividends as a source of income, you must have a very good understanding of what is an ex-dividend date.
By having a good understanding of the ex-dividend date, you can plan your stock trades in advance so you make sure your transaction has time to settle by the dividend record date.
In other words, you’ll need to plan your stock purchase prior to the ex-dividend date.
It’s worth mentioning that typically on the ex-dividend date, the stock price drops by an amount roughly equivalent to the dividends that the company had declared.
For example, if a company declares a $1 dividend to be paid on April 15th to the shareholders of record on March 15th (where the ex-dividend date is March 14th), then the company’s stock price will drop by approximately $1 as of March 14th to reflect the fact that those shares are not entitled to the next dividend payment.
It may be harder to notice the stock price adjustment for small dividend payments but you should be able to notice a slight stock adjustment when larger dividends are declared.
What Happens On The Ex-Dividend Date
If you are not yet a shareholder of a company and are looking to buy shares, as of the ex-dividend date, you will lose out on the opportunity to be entitled to receive the next dividend payment.
This means that you will miss the next dividend payment and you’ll need to hold on to your shares until the next dividend record date to receive any dividends.
If you are already a shareholder of the company, since you had shares prior to the ex-dividend date, you will be entitled to receive dividends on those shares for the upcoming dividend payment.
One interesting thing that happens on the ex-dividend date is that the stock price drops slightly to reflect the loss of the “dividend value” of the shares.
For example, if the stock was trading at $40 per share and the company declares a $1 dividend, then on the ex-dividend date, perhaps the stock price drops by $0.85 to reflect the loss of value of that $1 dividend payment.
Ex-Dividend Date vs Record Date
What does ex-dividend date and record date mean?
There are two dates that are important to consider when investing in dividends:
- Dividend record date
- Ex-dividend date (or ex-date)
The dividend record date refers to the day that shareholders on “record” on that day will be entitled to receive dividends.
The record date allows the dividend paying company to know to whom it must issue dividends.
On the other hand, the ex-dividend date is typically a business day prior to the record where an investor buying shares on the ex-dividend date or after will no longer be entitled to dividends.
The reason that is the case is that by buying the shares on the ex-div date or after, your transaction will not have enough time to settle allowing you to be formally recognized as a shareholder on the record date to be entitled to receive dividends.
What Is An Ex-Dividend Date Example
Let’s look at an example of an ex-dividend date to better understand the concept.
If a company declares dividends to be paid to shareholders on April 15, it will also specify the record date for that dividend entitlement (for instance March 15).
This means that those who are shareholders of the company on March 15th will be entitled to receive a dividend payment on April 15th.
For you to be a shareholder of record on March 15th however, you’ll need to purchase your shares before the ex-dividend date.
If a stock trade settles in two business days, then you must buy your stock two business days before March 15h.
If you buy your shares one day before March 15th, you are purchasing them on the ex-dividend date as your shares will no longer entitle you to the April 15th dividend.
In fact, the purchase of the stocks one business day prior to March 15th will settle one business day after March 15h (and you’d miss the dividend record date).
What Is The Ex-Dividend Date Special Rule
In certain cases, there are special rules that apply to the determination of the ex-dividend payment.
Particularly, if a company intends to pay dividends worth more than 25% of the stock price, a special rule will apply to the setting of the ex-dividend payment.
In such cases, the ex-dividend date will be “deferred” by one business day after the dividend is paid.
A special rule will also apply if the company intends to pay stock dividends instead of cash dividends.
In that case, the ex-dividend date is established on the first business date after the stock dividend is paid.
If you want to sell your shares and be entitled to your stock dividend, you must sell your shares the first business day after the stock dividend is paid.
Otherwise, you’ll sell your shares and sell away your rights to the stock dividend as well.
Dividend Capture Investing Strategy
Understanding how ex-dividend dates work is very important if you are adopting a dividend capture investing strategy.
Dividend capture is a type of investing strategy where the investor invests in shares of stock right before the ex-dividend date and sells the stock right after the ex-dividend date in order to be entitled to the dividends.
If the investor is able to “capture” the dividend and sell the shares at the right price, he or she will make a small profit on the transaction.
If you are looking to adopt a dividend capture investing strategy, there are different trading software tools and systems that you can get to track them.
The NASDAQ also offers a dividend calendar allowing you to track the upcoming dividend payments.
What Is Ex-Dividend Date Takeaways
So, there you have it folks!
What is ex-dividend date?
Will you get dividends if you buy shares on the ex-dividend day?
If you want to know whether or not you will be entitled to receive dividends, you should consider two important dates: the “record date” and the “ex-dividend date”.
To be entitled to receive dividends, you must be a shareholder on the company’s books by the record date.
As a result, you’ll need to buy your shares at least one business day before the established record date so your transaction settles and you are booked as a shareholder by the date of record for the dividend.
If you purchase your stock after ex-dividend date, you will not be entitled to the next dividend payment.
Here is a quick example of a typical dividend distribution:
- Dividend declaration date: Monday August 9th
- Ex-dividend date: Friday September 15th
- Record date: Monday September 18th
- Payable date: Tuesday October 18th
If you buy your shares on Friday September 15th, your transaction will only settle after the record date of September 18th and you will not be entitled to dividends.
If you buy your shares by Thursday September 14th, then you’ll be a shareholder of record by Monday September 18th and you will receive dividends.
I hope that I was able to answer your question on what is the ex dividend date, how it works, and why it’s important.
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