For companies that pay dividends on their shares, the ex-dividend date is an important date for both current and prospective shareholders to be aware of.
What Is the Ex-Dividend Date?
The ex-dividend date for a stock is that date that the shares begin trading without the benefit of the next dividend payments for new shareholders. New shareholders who purchase shares on or after the ex-dividend date will not receive the dividend payment.
The ex-dividend date is one of several key dates surrounding the payment of the dividend. These dates are:
Dividend declaration date is the date the company notifies the shareholders and the public that is declaring a cash or a stock dividend. The board of directors will declare the payment per share or the number of shares that each shareholder will receive in the case of a stock dividend.
Ex-dividend date is the date after which the stock trades without the dividend. This means that those purchasing shares of the stock on or after this date will not be entitled to receive the dividend for those shares. The shares go ex-dividend one business day before the date of record. This is in accordance with stock exchange rules.
Record date is the date that shareholders must be on the company's records as being a shareholder. When a dividend is declared by the company's board of directors, they establish a date of record. These are the shareholders who will be in line to receive the dividend.
Payable date is the date the shareholders of record on the record date will receive their dividend payments.
Why Do Ex-Dividend Dates Matter?
The ex-dividend date for a stock is usually set to be one trading day before the date of record. In order to receive the dividend payment for that period, the investor would have to have their purchase of the stock completed by the ex-dividend date. If the shares are not purchased by this date, then the owner of record still retains the right to the dividend payment.
Conversely, if a shareholder sells their shares before the date of record on the stock, they will lose out on the dividend payment on the shares that were sold.
For stocks that pay sizable dividends, their price may rise in the trading days leading up to the ex-divided date if traders place a high value on that dividend.
When the ex-dividend date hits, the stock's ticker will often be marked with an "x" for ex-dividend on quote systems and on stock price listings in newspapers and online. The exchange may automatically reduce the stock's price, this will be reflected in the bid-ask price of the stock.
Most exchanges will also adjust the price on limit orders once the stock has gone ex-dividend. For example, if the dividend is $1, then limit orders placed on the stock will be reduced by $1 to reflect its having gone ex-dividend. However, investors may be able to submit their limit orders with "DNR" for do not reduce. None of this will matter greatly unless the share price is close to the trigger point for the order.
For long-term investors one could question whether the ex-dividend date matters at all. If your intent is to hold the shares of a company for a period of time, the ex-dividend date is probably pretty irrelevant to you. Ex-dividend dates come and go over time, these investors are looking for longer-term price appreciation and dividend payments.
However, even long-term shareholders will likely sell some or all of their shares at one or more points in time. When that time comes, these shareholders should pay attention to the ex-dividend date. The timing of their sell order around this date could result in a receiving a slightly lower price for their shares and/or could cause them to miss out in a dividend payment. These factors should of course be weighed in the broader context of their overall investment strategy.
Mutual funds that pay dividends will also have an ex-dividend date that works in a similar fashion. The same holds true with ETFs and other traded securities that declare and pay dividends.
What Happens on the Ex-Dividend Date?
The specialists on the stock exchange for the stock will mark down the price on the ex-dividend date by the amount of the dividend. This in and of itself can create a buying opportunity for investors looking to add shares of the stock. The price will be depressed at least temporarily. Investors can buy the stock on the dip and hold it until the next dividend date to earn the next dividend.
Buyers of a stock on or after the ex-dividend date will not receive the dividend payment for that quarter. The stock will trade lower on the ex-dividend date, but then will generally rise or fall based on the fundamentals of the stock, market conditions or specific issues regarding the industry that the company who issued the shares competes in.
Those who purchase the shares prior to the ex-dividend date will be entitled to receive the payment of the upcoming dividend.
Sellers are also impacted. If they sell and do not own the shares on the date of record, they will not receive the upcoming dividend payment.
For shares held in a taxable account, there can also be tax implications. Investors should consult with their financial or tax adviser for advice in this area.
Example of How the Ex-Dividend Date is Used
Let's look at an example of how the ex-dividend date might work with an individual stock.
- ABC distribution stock is trading at $50 a share.
- The quarterly dividend payout is $1 a share.
- The stock's ex-dividend date is June 16, a Monday.
- The stock's date of record is June 17.
- Joe buys 100 shares of the stock on June 16.
- Joe will not receive the dividend payout for this quarter.
- The stock will likely trade at $49 per share on the ex-dividend date.
- Joe buys the 100 shares on Friday June 13.
- Joe will receive the dividend.
Investors buying and selling share of stock should at least be cognizant of the potential impact on the ex-dividend date on the price paid or received for shares in involved in the transaction.
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