What Is the Ex-Dividend Date?
The ex-dividend date, or ex-date for short, is one of four stages that companies go through when they pay dividends to their shareholders. The ex-dividend date is important because it determines whether the buyer of a stock will be entitled to receive its upcoming dividend.
- The ex-dividend date or ex-date marks the cutoff point for shareholders to be credited a pending stock dividend.
- To receive the upcoming dividend, shareholders must have bought the stock before the ex-dividend date.
- There are four dates to know when it comes to companies' dividends: the declaration date, the ex-dividend date, the record date, and the payable date.
- On the ex-dividend date, stock prices typically decline by the amount of the dividend.
Understanding the Ex-Dividend Date
A dividend is typically a cash payment that a company pays to its shareholders as a reward for investing in its stock or equity shares. As companies generate a profit, they usually accumulate or save those profits in an account called retained earnings. Some companies reinvest those retained earnings back into the company, while others may take a portion of retained earnings and pay it back to shareholders through dividends.
To understand the ex-dividend date, we need to understand the stages companies go through when they pay dividends to their shareholders. Below are the four key dates during the process of issuing a dividend.
The first of these stages is the declaration date. This is the date on which the company announces that it will be issuing a dividend in the future.
The second stage is the record date, which is when the company examines its current list of shareholders to determine who will receive dividends. Only those who are registered as shareholders in the company’s books as of the record date will be entitled to receive dividends.
The third stage is the ex-dividend date, which is the date that determines which of these shareholders will be entitled to receive the dividend. Typically, the ex-dividend date is set one business day before the record date. Shareholders who bought the stock on the ex-dividend date or after will not receive a dividend. However, shareholders who owned their shares at least one full business day before the ex-dividend date will be entitled to receive a dividend.
The fourth and final stage is the payable date, also known as the payment date. The payable date is when the dividend is actually paid to eligible shareholders.
Ex-Dividend Date and the Stock Price
Many investors want to buy their shares before the ex-dividend date to ensure that they are eligible to receive the upcoming dividend. However, if you find yourself buying shares and realizing that you missed the ex-dividend date, you may not have missed out as much as you thought.
This is because share prices usually drop by the amount of the dividend on the ex-dividend date. This makes sense because the company's assets will soon be declining by the amount of the dividend.
Let's say a company announces a dividend equivalent to 2% of its stock price; its stock may decline by 2% on the ex-dividend date. Therefore, if you bought the shares on or shortly after the ex-dividend date, you may have obtained a "discount" of about 2% relative to the price you would have paid shortly before the ex-dividend date. In this way, you may not have been any worse off than the investors who purchased the stock before the ex-dividend date and received the dividend.
Because stocks usually decline in price on the ex-dividend date, investors who missed buying the stock before the ex-dividend date may be able to get the stock at a discount equal to the dividend on or after the ex-dividend date.
Example of an Ex-Dividend Date
To illustrate this process, consider a company that declares an upcoming dividend on Tuesday, July 30th. If the record date is Thursday, Aug. 8, the ex-dividend date would be Wednesday, Aug. 7, meaning anyone who bought the stock on Aug. 7th or later would not receive a dividend.
Conversely, shareholders who bought their shares on Tuesday, Aug. 6th (or earlier), would be entitled to receive a dividend since it's one business day before the ex-dividend date. The payable date can vary depending on the preferences of the company, but will always be the last of the four dates. The table below highlights what the key dividend dates might be in our example.
|Illustration of Key Stages of the Dividend Issuance Process|
|Declaration Date||Ex-Dividend Date||Record Date||Payable Date|
|Tuesday July 30th||Wednesday Aug. 7th||Thursday Aug. 8th||Sept. 7th|
Correction—Feb. 16, 2022: A previous version of this article misstated when the ex-dividend date falls relative to the record date.