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.
- There are four dates to know when it comes to companies' dividends.
- These are the declaration date, the ex-dividend date, the record-date, and the payable date.
- To receive the upcoming dividend, shareholders must have bought the stock before the ex-dividend date.
- On the ex-dividend date, stock prices typically decline by the amount of the dividend.
Understanding the Ex-Dividend Date
To understand the ex-dividend date, we need to understand the four stages companies go through when they pay dividends to their shareholders.
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 two business days before the record date. Only those shareholders who owned their shares at least two full business days before the record date will be entitled to receive the 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.
To illustrate this process, consider a company that declares an upcoming dividend on Tuesday July 30th. If the record date is Thursday August 8th, then the ex-dividend date would be Tuesday August 6th. In this scenario, only shareholders who bought their shares on Monday August 5th (or earlier) would be entitled to receive a dividend. The payable date can vary depending on the preferences of the company, but of course it will always be the last of the four dates.
|Illustration of Key Stages of the Dividend Issuance Process|
|Declaration Date||Ex-Dividend Date||Record Date||Payable Date|
|Tuesday July 30th||Tuesday August 6th||Thursday August 8th||Monday August 12th|
Many investors want to buy their shares before the ex-dividend date in order 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.
The reason for this is that 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.
Because stocks usually decline in price on the ex-dividend date, you may not be worse off if you missed your chance to buy beforehand.
For example, if a company announces a dividend equivalent to 2% of its stock price, its stock will typically decline by 2% on the ex-dividend date. Therefore, if you bought the shares on or shortly after the ex-dividend date, you probably obtained a “discount” of about 2% relative to the price you would have paid shortly before. In this way, you may not be any worse off than the investors who received the dividend. (For related reading, see "Selling Shares Before the Ex-Dividend Date")