What Is an 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. Typically, the ex-dividend date for a stock is one business day before the record date, meaning that an investor who buys the stock on its ex-dividend date or later will not be eligible to receive the declared dividend. Rather, the dividend payment is made to whoever owned the stock the day before the ex-dividend date.
- Ex-dividend is when a company's dividend allocations have been specified.
- The ex-dividend date of a stock is the day on which the stock begins trading without the subsequent dividend value.
- Investors who purchased the stock before the ex-dividend date are entitled to the next dividend payment while those who purchased the stock on the ex-dividend date, or after, are not.
- The ex-dividend date occurs before the record date because a stock trade is settled "T+1" meaning that the record of that transaction isn't settled for one business day.
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, they will not receive the next dividend payment. Since 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 one business day. This is known as the "T+1" settlement. Thus, if an investor-owned the stock on Thursday, April 7 but sold the stock on Friday, April 8, they would still be the shareholder of record on Monday, April 11 because the trade hasn't fully settled. However, if the investor had sold the stock on Thursday, April 7, then the trade would have settled on Friday, April 8, which is before the record date of Monday, April 11, and the new buyer would be entitled to the dividend.
Investors need to buy a dividend-paying stock at least one day before the record date since trades take a day 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 getting a "discount" for the dividend they will not receive.
Example of Ex-Dividend
For example, Walmart (WMT) paid $0.53 per share dividend on January 2, 2020. The payment went to shareholders who had purchased Walmart stock prior to the ex-date of December 5, 2019. The company had previously declared the dividend on February 19, 2019, and the record date was set as December 6, 2019. Only shareholders who had purchased Walmart stock prior to the ex-date were entitled to the cash payment.
On average, a stock can be expected to drop by a little less than the dividend amount. Given that 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.
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.
Key Dividend-Related Dates
The ex-dividend date is surrounded by other important dates in the dividend distribution process.
- Declaration Date - 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 and record date will occur after the declaration date.
- Record Date - The record date is when the company looks to see who the shareholders of record are. The record date is one business day after the ex-date but shouldn't be a major factor for an investor's decision-making process.
- Payment Date - 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.