What is Ex-Dividend?
Ex-dividend is the time period between the announcement of dividend value and payment of that dividend. Therefore, it is when the stock is trading without the payment of its next dividend. The date is also called the “ex-date.”
If an investor buys the stock on or after the ex-dividend date, they will not be eligible for the dividend payment. Any investor who bought the stock before the ex-date will be eligible for the dividend payment.
In the past, the investor needs to purchase the stock two days before the record date or one day before the ex-date to qualify. However, as of September 2017, it was shortened to one business day before the record date or on the ex-dividend date.
- The ex-dividend date is when the stock starts trading without the value of the next dividend payment included with it.
- Any investors who purchase the stock or ETF before the ex-date is entitled to its dividend.
- Other important dates include the record date, which is “T+1” of the ex-dividend date, the declaration date, and the payment date.
What is a Dividend
A dividend is determined by the board of directors of a company and is the distribution of a percentage of the company’s retained earnings for the period. Shareholders are not entitled to a dividend, and it is determined period by period. Periods are set by the board and are usually monthly, quarterly, or annually.
Many fast-growing companies will choose not to distribute dividends but rather reinvest the retained earnings into the company to increase growth. The shareholder’s value will be through company growth and, hopefully, the appreciation of stock value and future returns and dividends.
Dividends usually come in cash form; however, they can also be property, additional stock, and various other forms. On top of companies, mutual funds and other ETFs can pay dividends to their owners. It is compensation for their share of ownership and investment in a company.
The record date or date of record is when investors must own the stock to be eligible to receive dividends. The company identifies who the investors are on the said date. It is when the dividends that have been declared will legally belong to the owner of the shares (rather than the seller). Any investor not on the list will not receive the dividend.
The U.S. Securities and Exchange Commission imposes a T+1 rule that is securely entitled to the compensation. It means the share must be purchased one or more days before the record date to be guaranteed the dividend benefit. It is also known as the “T+1 settlement” and must be kept in mind by potential investors so they don’t end up with an unexpected loss.
For example, if an investor bought the stock one day before the record date and sold the stock the next day, they would still be considered the record holder and receive the dividends when the payment date came.
Other Noteworthy Dates
Other noteworthy dates that coincide with the ex-dividend date include the “declaration date” and the “date of payment.”
The declaration date is when the board of directors announces a dividend that will be paid to their shareholders. The record date and ex-dividend date are also set simultaneously on the declaration date. Declarations will most often be announced in a press release and directly to shareholders.
The dividend payment date is when the dividend is paid out to the owners of the company stock. The cash is recorded when the confirmation and checks are received in the mail. It is also when the payment is credited to the investors’ accounts.
Below is an example of a dividend timeline starting at the declaration date and ending with the dividend payment.
Stock Reaction to Ex-Dividend
A stock’s price will usually fluctuate as the ex-dividend nears. As it approaches the date, the stock will typically increase in price by the expected dividend amount. After the ex-dividend, when future investors will not receive the dividend, the stock price will usually fall by the estimated dividend payment amount.
It is logical because the investor can be expected to gain the dividend’s value as the payment nears. Hence, their reasoning behind paying more for the stock, and then less value directly after the ex-dividend date because they can no longer receive the dividend payment.
Shorting the Stock
Investors can choose to short stocks. Shorting a stock is the act of selling it and then repurchasing it at a future price. The stock must be “borrowed” from a shareholder so that the individual shorting it can sell it without owning it.
A third-party brokerage generally handles the process. If the price of the stock falls, then the shorter will profit. If the price goes up, then they will incur a loss.
It should be noted that the person borrowing the stock will need to pay the dividend and a borrowing. As a result of the borrower paying the dividend, the borrower cannot gain off shorting a stock right before the ex-dividend date unless there are other factors at play.
CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: