Ex-dividend means “without the dividend”. When a stock sells ex-dividend it is trading without the dividend added to its stock price. A simple example can help explain this.
Company A’s stock is selling for $150 per share, and it announces a $5.00 annual dividend that will be paid in quarterly installments. On the ex-dividend date (see below), at the opening of trading, Company A’s stock will be marked down by $1.25 ($5/4 = $1.25).
Any investor buying stock will be purchasing it at the discounted price, $148.75. However, they will not be able to receive the upcoming dividend if they were not a shareholder of record before the ex-dividend date.
In this article, we’ll help investors understand what they need to know about the ex-dividend date including a strategy that traders can use around the ex-dividend date (or ex date).
The Ex-Dividend Date is a Non-Event for Current Shareholders
For many investors, collecting a dividend is something they don’t even think about. They may have owned the stock for years and are accustomed to collecting or reinvesting their dividends on a regular schedule. These buy-and-hold investors don’t concern themselves with missing an ex-dividend date.
However, for an investor looking to take a new position in a dividend stock, it’s important to know when the stock is selling ex-dividend. That’s because an investor has to be a shareholder of record BEFORE the ex-dividend date if they want to receive the dividend.
Key Terms That Dividend Investors Need to Know
There are four key dates that are part of the dividend issuing process.
Record Date – This is the date set by a company’s board of directors once they decide to issue a dividend. An investor must be on the company’s record as a shareholder on this date to receive the dividend. Currently, the record date is set for one day after the ex-dividend date.
Ex-Dividend Date – once the record date is set the stock market will automatically set the ex-dividend date. As mentioned above, this date will typically be two days before the record date.
Declaration Date – this is simply the day the company announces to the public that they are issuing a dividend. In this announcement, the company will list how much the dividend will be, the ex-dividend date and the payment date. Chronologically, this would occur after the record and ex-dividend date have been set.
Payment Date – the payment date is the day when a company distributes dividend payments to shareholders. This is typically at least two weeks after the record date.
Let’s look at an example of how these dates work together.
On August 16, 2018 Tiffany & Co. declared a dividend of $0.55/share (the declaration date) to be paid on October 10 (the payment date). The ex-dividend date was set for September 19, 2018 making the record date September 20, 2018.
Other Terms That Dividend Investors Should Understand
A dividend payment represents a share of a company’s profits. Investors can choose to accept their cash dividends as a direct payment or they can reinvest the dividends to buy additional shares of the company’s stock. When deciding on dividend stocks to buy, investors need to distinguish between the dividend yield and the dividend payout.
A company’s dividend yield is a measure of how much money per share a company pays out as a dividend. The yield is expressed as a percentage. The formula for dividend yield is:
Annual dividend per share/price per share
When it comes to dividend yield higher is not always better. A strong dividend yield in one sector may be weak in another. And since a rising or falling share price affects dividend yield, it is a less reliable measure.
A better metric for many investors is the payout ratio. A dividend payout (or annual dividend per share) is the amount an investor will receive in the form of a dividend on a per share basis. For example, if a company pays out $5 per share on an annual basis, an investor who owns $100 shares of the stock will receive $500 a year in dividend payments.
Why is the Ex-Dividend Date Different from the Record Date?
Although many stock transactions happen instantaneously, most trades take two days to “settle”. This settlement time can cause an investor to not be a shareholder of record on the record date. For this reason, the stock market requires companies to set an ex-dividend date that is typically two business days before the record date.
Can Investors Collect Fractional Shares?
The advent of zero-commission trading is bringing many retail investors into the market. And many of these investors are taking advantage of the opportunity to buy fractional shares. This allows investors to take a relatively small amount of money and spread it over several stocks. However, instead of buying full shares, they buy fractions of shares.
However, that doesn’t take away the appeal of dividend stocks. Any shareholder of record is entitled to a dividend that is proportionate to the amount of their investment. Even if they only own 0.25 shares, an investor can receive 25% of the company’s dividend per share.
How Can Investors Find Ex-Dividend Dates?
Companies are proud of their ability to issue a dividend and will typically have this information available to shareholders and prospective investors on their website, probably in an area called “Investor Relations” or something similar. In addition, many financial websites will have ex-dividend calendars that will provide a list of all announced ex-dividend dates.
This is an easy way for investors to see not only the ex-dividend date of a company they may be interested in buying, but a comparison of dividend amounts for similar companies. Once the ex-dividend date arrives you’ll see an X next to the stock symbol to indicate that it is trading ex-dividend.
How do Traders Execute a Dividend Capture Strategy?
For most investors, dividend investing is a straight-forward investment strategy. However,
when turned into an aggressive trading strategy it can carry high risks and possible tax consequences. Dividend capture seeks to trade on the fact that stocks don’t always move precisely according to a formula or by conventional logic. Here’s how it works:
On the ex-dividend day, the stock will start trading at the discounted price, but it will typically not maintain that adjusted price, meaning it could go higher or lower. And although investors usually factor in the anticipated decline in price as the ex-dividend day draws closer, many stocks have been known to go through a period of heightened interest prior to the ex-dividend date as more investors seek to get the dividend.
So for example, let’s say a stock was selling for $100 and announced a $0.50 dividend. On the ex-dividend date, the stock’s price would drop by $0.50, but if a significant amount of investors bought shares of the stock, the stock’s price could have been driven up to $102. So even with the discount factored out of the stock price, it is still trading above where it was on the declaration date.
These market anomalies can make it difficult to make dividend capture a profitable strategy, but here’s where it can sometimes, and the emphasis is on the word sometimes, work. There are times when a stock, for any number of reasons, may not be marked down to the expected amount dictated on the declaration date. In our example above let’s say the stock that was expected to drop by $0.50 only dropped by $0.25. An investor could go through the following process:
- Buy the stock prior to the ex-dividend date for $100
- Sell it on the ex-dividend date for $99.75
- They collect the dividend of $0.50 on the payment date
- They realize a total return of $0.25/share. They lost $0.25 on the stock, but gained $0.50 on the dividend distribution.
In theory, this is true, but realistically it would require a much higher spread between the expected ex-dividend price and the actual ex-dividend price to make this a profitable trade. This is for two reasons. The first one is taxes. Qualified dividends receive preferential tax treatment. However that’s only if the stock is owned for more than 61 days. In our example, the stock was not so it gets no such treatment. The second issue has to do with trading costs. In many cases, it’s going to cost an investor more than $0.25/share to execute a trade and they’re paying that cost on both ends, you can see why what looks on paper to be a profitable trend could easily be a losing trade.
A better approach for investors looking to profit from dividend capture would be to use either fundamental analysis or technical analysis to predict which stocks may be more likely to trade higher prior to their ex-dividend date. By purchasing the stock well in advance of the ex-dividend date (preferably more than 61 days for tax purposes); investors could turn a profitable trade by selling the stock on or before the ex-dividend date.
Some Final Thoughts on the Ex-Dividend Date
Despite the presumption that dividend investing is only for conservative investors, savvy investors frequently buy dividend stocks because the benefits that come from receiving regular dividends help them accomplish other investment objectives. Among these is the benefit that comes from reinvesting dividends to buy more shares which allows compounding to take place. However, if the time comes for an investor to rebalance their portfolio, they may find that they have to swap out one dividend stock for another.
When this happens, they’ll need to know the ex-dividend date for the stock they wish to purchase. By purchasing the stock before the ex-dividend date, they will be considered a shareholder of record by the record date and receive the scheduled dividend. The ex-dividend date is a firm date and once the date arrives, any new investors that buy the stock will not receive the upcoming dividend. Plus, once the ex-dividend date arrives, the stock price of the company will be adjusted downward typically for the same amount as the dividend, although there are times when it is different.
Investors that are wondering when a company is issuing a dividend can usually find this information on a company’s website or other financial site. Dividend-issuing companies are usually very proud of this fact and make the information readily available to investors.
