What Is Cum Dividend?
A stock is cum dividend, which means "with dividend," when a company has declared that there will be a dividend in the future but has not yet paid it out. A stock will trade cum dividend until the ex-dividend date — after which the stock trades without its dividend rights. Cum dividend describes a share whereby the buyer will receive the next dividend scheduled for distribution.
Cum Dividend Explained
Before the announcement of year-end results for companies, dates are set out for the closure of register for dividend payments and scrips. These dates will determine the qualification for dividends and scrips. A scrip is a document acknowledging debt; companies short on cash often pay scrip dividends instead of cash dividends.
Cum dividend is the status of a security when a company is preparing to pay out a dividend at a later date. The seller of a stock cum dividend is selling both the right to the share and the right to the next dividend distribution. This often results from the timing of the sale rather than the preference of the seller.
To buy a share cum dividend, the buyer must complete the purchase by a certain point in the dividend period, called the record date. Often, companies will require the sale to be completed two business days before the end of the period, but some corporations will push the deadline to the last day of the period. If the buyer completed the recording of the transaction in time, they will receive the eventual distribution. But if the buyer missed the deadline, or the seller does not want to sell the security cum dividend, the seller may sell the share ex-dividend, or without the right to the next distribution. The dates are set based on the declaration date and recording date chosen by the company that issues the stock involved.
There is no specific schedule for the release of dividends, and the payment dates can vary from company to company. Some companies offer quarterly dividends, while others may only pay dividends once or twice a year. While it is not typical, some companies pay dividends monthly.
Cum dividend rights include those associated with the next declared dividend. A declared dividend is the amount the board of directors has agreed upon through a motion authorizing the payments; this effectively functions as a liability for the company. As dividends are a portion of a company’s profit, these amounts can fluctuate.
A company declares the dividend on the "declaration date." Next, it sets a recording date that the buyer must meet in order for it to transfer the dividend. Often, a buyer must purchase a share at least two business days before the recording date to get the dividend. This cutoff date is the ex-dividend date or ex-date. If a buyer purchases a share after the ex-date, the seller sells it ex-dividend instead of cum dividend. In this case, the buyer would get the stock but would not be entitled to the distribution.
Dividend Rights and Purchase Price
Depending on whether a share is available cum dividend or ex-dividend, the seller may adjust the share price to compensate. In theory, the seller should offer the share at a higher price cum dividend than ex-dividend, but this is not always the case. However, in certain cases, sellers offer ex-dividend shares with a discount equal to the dividend the buyer will not receive.
Let's say an investor owns 100 shares of eCommerce firm PricedToSell and the company's board of directors has declared a quarterly dividend of $0.10 per share. The ex-dividend date is 10 days away. The investor is considering selling their shares so as to finance another purchase. If they sell cum dividend, the buyer would receive the 100 shares at the current price and would be entitled to the $10 in dividend payouts ex-dividend dates. However, the seller holds off on selling during the cum dividend period, waiting to see if other investments pan out. Those investments don't end up panning out and the seller is forced to sell the 100 shares of PricedToSell. However, now the cum dividend date has passed and the shares are ex-dividend. To reflect the loss of the dividend, the seller prices the shares at a $10 discount and finds a buyer. While the buyer won't receive that quarter's distribution, if they are still holding the shares at the next quarter's distribution, they will be entitled to the payout.