What is 'Cum Dividend'
Cum dividend, which means "with dividend," is when a buyer of a security is entitled to receive a dividend that has been declared, but not paid. A stock trades cum-dividend up until the ex-dividend date, after which the stock trades without its dividend rights. Cum dividend is used to describe a share in which the investor who purchases it is entitled to the next dividend scheduled for distribution.
BREAKING DOWN 'Cum Dividend'With cum dividend, the seller is not only selling the right to the share, he is also selling along with it the rights to the next distribution. Often, this determination is made more by the timing of the sale than by a specific choice on the part of the seller.
In order to purchase a share sum dividend, it must be purchased by a certain point in the dividend period, to complete the recording of the transaction in time to receive the distribution. If the deadline is not met, the share may be sold ex-dividend, meaning without the right to the next distribution. The dates are set based on the declaration date and recording date chosen by the company whose stock is involved.
There is no specific schedule for the release of dividends, so the dates can vary from company to company. Some companies may offer quarterly dividends, while others may only pay dividends once or twice a year. While it is not considered common, some companies even pay dividends monthly.
Cum dividend rights include those associated with the next declared dividend. A declared dividend is the amount that has been agreed upon by the board of directors, through a motion authorizing the payments, and effectively functions as a liability for the company. As dividends are portions of a company’s profit, these amounts have the potential to fluctuate.
Once the dividend is declared, the company sets a recording date that must be met in order to receive the dividend. Often, a share must be purchased a minimum of two business days prior to the recording date to be entitled to the dividend. This cutoff date is referred to as the ex-dividend date, or ex-date. If the share is purchased after the ex-date, it is being sold ex-dividend instead of cum dividend.
Dividend Rights and Purchase Price
Depending on whether a share is available cum dividend or ex-dividend, the price of the share may be adjusted to compensate. In some cases, ex-dividend shares are sold with a discount equal to the dividend the buyer will not receive.