What Is Ex-Dividend
Ex-dividend describes a stock that is trading without the value of the next dividend payment. The ex-dividend date or "ex-date" is the day the stock starts trading without the value of its next dividend payment. A buyer who purchases a stock on or after its ex-dividend date is not entitled to the declared dividend – it is owned by whoever owned the stock the day before the ex-dividend date.
BREAKING DOWN Ex-Dividend
A stock trades ex-dividend on and after the ex-dividend date (ex-date). If a trader purchases a stock on its ex-dividend date or after, she will not receive the next dividend payment. Because buyers aren't entitled to the next dividend payment on the ex-date, the stock will usually drop in price by the amount of the expected dividend.
When a company decides to declare a dividend, its board of directors establishes a record date. This is the date when a person must be on the company's record as a shareholder to receive the dividend payment. Once the record date is set, the ex-dividend date is also set according to the rules of the stock exchange on which the stock is traded. This usually means that the ex-date is one business day before the record date. For example, if a company declared a dividend on March 3 with a record date on Monday, April 11, the ex-date would be Friday, April 8, because that is one business day before the ex-date.
The ex-date occurs before the record date because of the way stock trades are settled. When a trade occurs, the record of that transaction isn't settled for two more business days. This is known as the "T+2" settlement. Thus, if an investor owned the stock on April 7 but sold the stock on April 8, he would still be the shareholder of record on April 11 because the trade hasn't fully settled. However, if the investor had sold the stock on April 7, then the trade would have settled by April 11, and the new buyer would be entitled to the dividend.
If a company issues a dividend in stock instead of cash (or the cash dividend is 25% or more of the value of the stock), the ex-dividend date rules are slightly different. With a stock dividend or large cash dividend, the ex-dividend date is set on the first business day after the dividend is paid.
For example, Walmart Inc. (WMT) announced in a press release dated March 7, 2018, that its stock would begin trading ex-dividend on March 8. Meanwhile, the record date was set as March 9. The firm had previously declared the dividend payment of $0.52 per share scheduled for April 2, so shareholders who purchased Walmart stock prior to the ex-date of March 8 were entitled to the cash payment.
Is the Ex-Dividend Date Important?
Investors need to buy a dividend-paying stock at least two days before the record date, since trades take two days to settle. If your investing strategy is focused on income, knowing when the ex-date occurs will help you plan your trade entries. However, because the price of the stock drops by about the same value of the dividend, buying a stock right before the ex-date shouldn't result in any profits. Similarly, investors buying on the ex-date or after get a "discount" for the dividend they will not receive.
Stock Price Movement on the Ex-Dividend Date
On average, a stock can be expected to drop by a little less than the dividend amount. Because stock prices move on a daily basis, the fluctuation caused by small dividends may be difficult to detect. The effect on stocks from larger dividend payments can be easier to observe.
Important Dividend-Related Dates
The ex-dividend date is surrounded by other important dates in the dividend distribution process.
The declaration date, also known as the announcement date, is the date when a company's board of directors announces a dividend distribution. This is an important date, as any change in the expected dividend payment can cause the stock to rise or fall quickly as traders adjust to new expectations.
The ex-dividend date occurs after the declaration date and one day before the record date. This is the day the stock starts trading without the value of its next dividend.
The record date is when the company looks to see who the shareholders of record are. The record date is one day after the ex-date but shouldn't be a major factor for an investor's decision-making process.
The payment date is the date when dividend checks are sent or credited to investor accounts. Since the payment date is known in advance, the event shouldn't have any impact on the stock's price.