A stock’s ex-dividend date is the day on which it begins trading without the subsequent dividend value. Those who bought the stock before the ex-dividend date will get the next dividend payment.
What Is Ex-Dividend?
An ex-dividend stock is one that trades without the value of the next dividend payment. The ex-dividend date, also known as the “ex-date,” is the day on which a stock begins trading without the value of its next dividend payment.
The ex-dividend date for a stock is typically one business day before the record date, which means that an investor who purchases the stock on or after the ex-dividend date will not be eligible to receive the declared dividend. Rather, the dividend is paid to the person who owned the stock on the day before the ex-dividend date.
Understanding the Ex-Dividend Date
On and after the ex-dividend date, a stock trades ex-dividend (ex-date). If a trader buys a stock on or after the ex-dividend date, they will not receive the next dividend payment. Because buyers are not entitled to the next dividend payment on the ex-date, the stock will be adjusted lower by the exchange by the amount of dividend.
When a company’s board of directors decides to declare a dividend, it establishes a record date. To receive the dividend payment, a person must be on the company’s record as a shareholder on this date. Once the record date is determined, the ex-dividend date is determined in accordance with the rules of the stock exchange where the stock is traded. This typically indicates that the ex-date is one business day prior to the record date. For example, if a company declares a dividend on March 3 with a record date of Monday, April 11, the ex-date is Friday, April 8, because it is one business day before the record date.
Because trades take a day to settle, investors should purchase a dividend-paying stock at least one day before the record date. Knowing when the ex-date occurs will help you plan your trade entries if your investing strategy is focused on income. However, because the stock price drops by roughly the same amount as the dividend, purchasing a stock right before the ex-date should result in no profits. The same is true for investors who buy on the ex-date or after receiving a “discount” for a dividend they will not receive.
Because of the way stock trades are settled, the ex-date occurs before the record date. When a trade occurs, the transaction record is not settled for one business day. This is referred to as the “T+1” settlement. As a result, if an investor owned the stock on Thursday, April 7, but sold it on Friday, April 8, they would still be the shareholder of record on Monday, April 11, because the trade had not yet settled. If the investor sold the stock on Thursday, April 7, the trade would have settled on Friday, April 8, before the record date of Monday, April 11, and the new buyer would have been entitled to the dividend.
Example of Ex-Dividend
Walmart (WMT), for example, paid a $0.53 per share dividend on January 2, 2020. The payment was made to shareholders who purchased Walmart stock before the ex-date of December 5, 2019. The dividend was previously declared by the company on February 19, 2019, with the record date set for December 6, 2019.
Only shareholders who bought Walmart stock before the ex-date were eligible for the cash payment.
Other Factors to Consider
On average, a stock will fall by slightly less than the dividend amount. Given the daily movement of stock prices, the fluctuation caused by small dividends may be difficult to detect. Larger dividend payments can have a more visible impact on stocks.
If a company pays out a dividend in stock rather than cash (or if the cash dividend is 25% or more of the stock’s value), the ex-dividend date rules are slightly different. The ex-dividend date for a stock dividend or a large cash dividend is the first business day after the dividend is paid.
Dividend-Related Dates
- The declaration date, also known as the announcement date, is the date on which the board of directors of a company announces a dividend distribution. This is a critical date because any change in the expected dividend payment can cause the stock to quickly rise or fall as traders adjust to new expectations. The ex-dividend and record dates will follow the declaration date.
- The record date is the date on which the company determines who the shareholders of record are. The record date follows the ex-date by one business day, but it should not be a major factor in an investor’s decision-making process.
- The payment date is the date on which dividend checks are mailed or credited to investor accounts. Because the payment date is known ahead of time, the event should have no effect on the stock price.