Ex-Dividend Date

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Ex-Dividend Date Definition and Explanation

Understanding How the Ex-Dividend Date Works

When you begin to invest in stocks, one of the things you’re going to need to know about is the ex-dividend date, otherwise known as the ex-date.   These dates come into play whenever you own a stock that issues regular cash dividends at some point. The ex-date helps determine who is entitled to those dividends.

Ex-Dividend Dates Clarify Dividend Recipients

You might think that when a company’s shares are traded over-the-counter or on a stock exchange, it could become a thorny legal question to determine who is entitled to an upcoming dividend. Should it go to the seller who owned the stock at the time the dividend was announced or to the new owner who now owns the stock?

These days, it isn’t a big deal at all. No matter how quickly shares trade hands or how many owners hold a stock between the date the dividend is announced and the date it is actually sent out, the United States has settled upon a multi-date system that takes the guesswork out of the equation.   One of these dates is called the ex-dividend date.

Establishing the Ex-Dividend Date

Ex-dividend dates are established at the time a company announces a dividend. The first step in that process is for a company to generate a net profit by selling goods or services for more than it costs to provide those goods and services.

Next, to reward the owners who have risked their capital by investing in the business, the board of directors votes to take some of the profit and send it out as a cash dividend.   The board of directors decides how much cash the firm can afford to pay out in dividends after accounting for things like expected debt servicing obligations and expansion plans. This is the reason that growth stocks, issued by relatively young companies with rapid rates of expansion, often pay no dividends.   Mature businesses with steady profits, on the other hand, may pay considerable dividends.

A good company tends to have a long-established record of raising the dividend by a rate substantially higher than inflation over many decades. These companies can do this thanks to their strong core economic engine that frequently enjoys high returns on capital. If you hold the stock long enough, and the dividend growth record is sufficient, then at some point, you will get back more than the money you invested. Companies with the best dividend records come to be known as blue-chip stocks.

At the time the dividend is discussed by the board, four specific dates are scheduled. First, there is the dividend declaration date. This is the date on which the company announces it is paying a dividend, often through a news release or announcement on its website. On the dividend declaration date, the dividend record date and ex-dividend date are also announced so investors can make plans.

Next, there is the dividend record date. This is the date on which the corporation’s shareholder roster will be frozen to determine who is eligible to receive the dividend. If you do not hold shares on the dividend record date, you will not get that specific dividend distribution, even if you buy the stock before it is paid out to shareholders.

It takes time to change a corporation’s shareholder records. The buy and sell information has to be submitted to the transfer agent to make sure the old owner’s shares (and dividend rights) are transferred to the new owner. To account for this delay, a third date was developed, known as the ex-dividend date. In the United States, the ex-dividend date is usually one business day before the dividend record date.   This provides the necessary time to get the paperwork and electronic records sorted.

If you don’t own a dividend-issuing stock on the ex-dividend date, you won’t be recorded on the dividend record date, and you won’t receive the dividend on the dividend payment date.

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Finally, there is the dividend payment date. This is the date when the cash shows up for stockholders—often in their brokerage account.

There are exceptions to these rules, including cases of special dividends, stock splits, and other distributions. As an example, anytime a dividend is 25% of the stock’s value or more, the ex-dividend date is deferred until one day after the payment date.

What Happens on the Ex-Dividend Date?

If you buy a stock, mutual fund, or other financial security that has declared a dividend before the ex-dividend date, you are entitled to receive that upcoming dividend. That is because the books will be updated with your information before the record date. As the new owner, the company will know to send you the money.

If you buy a stock, mutual fund, or other financial security that has declared a dividend on or after the ex-dividend date, you won’t receive the upcoming dividend payment. The old owner (the entity who sold you the stock) will still receive the scheduled dividend even though they sold the asset to you. That is because the books won’t have been updated with your information before the record date, so the company won’t know to send you the money.

To account for the transfer of value that occurs on the ex-dividend date, the quoted value of a stock or other security will typically be adjusted downward by the amount of the expected upcoming future dividend.   This makes it difficult or impossible for arbitragers to exploit the timing. The system has become so efficient, investors who have trades pending (such as stop, stop limit, or good-until-canceled limit orders) don’t need to do anything—at the close of trading the day prior, stock trades that are not specifically designated as “do not reduce” should be adjusted downward by the amount of the upcoming dividend.  

A Real-World Example of How the Ex-Dividend Date Is Used

On Jan. 2, 2020, Johnson & Johnson announced that it was going to pay a quarterly dividend of $0.95 per share.  

This particular dividend announcement included three important dates:

  • The dividend payable date of March 10, 2020
  • The dividend record date of Feb. 25, 2020
  • The ex-dividend date of Feb. 24, 2020

This means, if you want to receive the dividend on March 10, you must own the stock before Feb. 24. If you buy it on or after Feb. 24, you’ll have to wait until the next dividend is announced. This also means that if you sold your shares on or after Feb. 24, you will receive the dividend, even though you won’t own the stock on the day dividends are distributed.

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Ex-Dividend Date, Record Date, & Pay Date Explained | The Dividend Payment Process

Updated on December 9th, 2020
By Bob Ciura, David Morris, & Ben Reynolds

The dividend payment process may seem simple. You invest in a dividend paying stock, and then the dividends end up in your brokerage account when payments are made (typically quarterly).

There’s actually four steps to this process that often go unnoticed by dividend investors:

  1. Declaration date
  2. Ex-Dividend date
  3. Record date
  4. Payment date

Investors should become familiar with all four terms before buying a dividend stock, as being able to identify these dates will help avoid any potential confusion.

This article will discuss each term in detail, and use two examples to show how these dates can be easily found for specific companies.

Table of Contents

Overview Of The 4 Step Dividend Payment Process

Step #1: First, a company declares they are paying a dividend. This is the dividend declaration date.

Step #2: Then, a company decides which shareholders will receive a dividend. Shareholders who own shares before the ex-dividend date will receive the next dividend payment.
Important Note: The ex-dividend date is two days before the record date.

Step #3: The record date is the date when the corporation actually looks at its records to determine who will receive the dividend.

Step #4: Finally, the payment date is the payment date, when the dividend is actually paid to shareholders.

What really matters for shareholders is receiving the dividend in question. And three important dates determine who receives the dividend (and who doesn’t).

The first important date is your purchase (transaction) date. When shares trade hands, they actually do so on the actual purchase date, even though the formal settlement date is typically delayed by a few days time. For dividend purposes, the purchase date can make a difference. You must purchase one day in advance of the ex-dividend date to receive the dividend payment in question.

As discussed above, the ex-dividend date determines whether it is the buyer or the seller who receives the dividend. Investors who purchase shares on or after the ex-dividend date will not be paid that quarter’s dividend. Investors who purchase shares before the ex-dividend date will be paid that quarter’s dividend.

And finally, the payment date is the date the dividend payment is actually sent. Depending on the medium through which you own your shares, dividends may be mailed to you as a check, wired into your bank account, or deposited into your brokerage account as cash.

Dividend Declaration Date

The declaration date is the date on which the company’s Board of Directors announces the next dividend payment to shareholders. It is simply an announcement – no dividends are paid on the declaration date.

Generally, dividends are paid quarterly, so declaration dates are quarterly as well.

While dividends are in no way guaranteed, it is generally a goal of company management to grow their dividend payments over time. This is a shareholder-friendly activity that is seen as a sign of underlying business strength, and is certainly discussed in great detail at Board of Directors meetings.

Companies will generally make it very clear when their dividends are announced via a press release on their Investor Relations website.

Record Date Versus Ex-Dividend Date

The record date and the ex-dividend date determine which shareholders are eligible to receive company dividends.

If shares trade hands in the time leading up to a dividend payment, these two dates determine whether it is the buyer or the seller who receives the dividend.

The record date is the date on which company management looks at their shareholder records to see who is eligible to receive the company’s future dividend payment. However, this date is of little importance to investors. Buying the company’s stock on the record date does not mean that you will receive the company’s next dividend.

Practically speaking, the most important date for dividend investors to be aware of is the ex-dividend date. This date, which is two days before the record date, has much greater implications for portfolio management.

Investors who purchase shares on or after the ex-dividend date will not be paid that quarter’s dividend (although they will be entitled to future dividends, assuming they still hold the shares). Investors who purchase shares before the ex-dividend date will be paid that quarter’s dividend.

The reason why the ex-dividend date is two days earlier than the record date is because it takes three days for a trade to ‘settle’ – for cash and shares to legally trade hands.

This seems counterintuitive. Anyone who has placed trades before knows that cash is deposited to your account on the day that you sell shares. Often, this is simply because your broker is willing to front you the money in advance while they wait to receive money from the counterparty. The actual process takes three days to complete.

This is why you must purchase three days in advance of the record date (or one day in advance of the ex-dividend date) to receive the dividend payment in question.

The Payment Date

The payment date is the date on which corporate cash is actually paid to shareholder as a dividend. Depending on the medium through which you own your shares, dividends may be mailed to you as a check, wired into your bank account, or deposited into your brokerage account as cash.

Many companies also offer a Dividend ReInvestment Plan (or a DRIP, for short). These plans allow investors to use dividends to purchase more company shares.

You can view the 15 best DRIP stocks here (each of the stocks in that article charge no fees for their DRIPs), or alternatively, watch them covered in the video below.

Two Real-Life Examples of the Dividend Payment Process

Suppose an investor is looking to initiate a position in high-quality dividend growth stock AbbVie Inc. (ABBV), which is one of our top-ranked dividend stocks and a member of the Dividend Aristocrats.

An investor purchasing the stock today would likely want to make sure he or she is eligible for the company’s next quarterly dividend payment. As such, investors need to purchase before the company’s ex-dividend date.

The easiest way to find this date is by looking directly on the company’s Investor Relations page, which can be easily found via a Google search.

AbbVie’s Investor Relations site reveals that the company’s next ex-dividend date is in mid October. This can be seen in a related press release from June 20th in which the company announced its next quarterly dividend payout.

Or, investors can see AbbVie’s dividend history in the Stock Information portion of its Investor Relations page. There, investors will find that AbbVie has declared three dividend payouts so far this year, the next of which will be paid on August 15th, 2020 to shareholders of record on July 15th.

Applying the same methodology yields identical results for industrial giant 3M Company (MMM), which has an even longer dividend history than AbbVie. 3M has paid dividends for over a century, and has increased its dividend each year for the past 60 years in a row. 3M is a Dividend Aristocrat, and a Dividend King as well.

First, search for 3M’s dividend information on Google. While the company’s Investor Relations page might not be the first result, it is still on the first page of the search engine and thus very easy to find.

Once there, scrolling down leads to a table that is similar to AbbVie’s Investor Relations page.

In contrast to AbbVie, 3M has declared only two dividends so far in 2020, with two more to come. Its most recent dividend payment was made on June 12th, to investors that held the stock before May 23rd. It is likely that 3M will announce its third quarterly dividend payout of the year over the next two or three weeks.

These two examples show precisely how easy it is to find information on record dates, ex-dividend dates, and pay dates for corporate dividends.

Final Thoughts

As investors, there are many other more important issues that we should be concerned with, instead of simply the timing that a specific company uses to pay its dividends.

On a company’s ex-dividend date, shares generally drop by an amount approximately equal to the company’s next dividend payment.

Investors wanting to ‘lock in’ the gain of that dividend, but who do not purchase before the ex-dividend date can still purchase shares on the ex-dividend date at a discount approximately equal to the dividend amount.

Because of this, there is no advantage to waiting to purchase shares.

Instead, focus on developing a long-term systematic investing plan that will be successful regardless of your timing of dividend payments.

Additionally, make sure a company’s dividend is sustainable for the long run. This requires a company to have durable competitive advantages, a steadily profitable business model even during recessions, and a positive growth outlook.

If you find a company that ranks favorably according to a proven system such as the Sure Analysis Research Database, buy some shares and focus on holding the stock over the long-term.

Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends

To determine whether you should get a dividend, you need to look at two important dates. They are the “record date” or “date of record” and the “ex-dividend date” or “ex-date.”

When a company declares a dividend, it sets a record date when you must be on the company’s books as a shareholder to receive the dividend. Companies also use this date to determine who is sent proxy statements, financial reports, and other information.

Once the company sets the record date, the ex-dividend date is set based on stock exchange rules. The ex-dividend date for stocks is usually set one business day before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.

Here is an example:

On September 8, 2020, Company XYZ declares a dividend payable on October 3, 2020 to its shareholders. XYZ also announces that shareholders of record on the company’s books on or before September 18, 2020 are entitled to the dividend. The stock would then go ex-dividend one business day before the record date.

In this example, the record date falls on a Monday. Excluding weekends and holidays, the ex-dividend is set one business day before the record date or the opening of the market—in this case on the preceding Friday. This means anyone who bought the stock on Friday or after would not get the dividend. At the same time, those who purchase before the ex-dividend date on Friday will receive the dividend.

With a significant dividend, the price of a stock may fall by that amount on the ex-dividend date.

If the dividend is 25% or more of the stock value, special rules apply to the determination of the ex-dividend date. In these cases, the ex-dividend date will be deferred until one business day after the dividend is paid. In the above example, the ex-dividend date for a stock that’s paying a dividend equal to 25% or more of its value, is October 4, 2020.

Sometimes a company pays a dividend in the form of stock rather than cash. The stock dividend may be additional shares in the company or in a subsidiary being spun off. The procedures for stock dividends may be different from cash dividends. The ex-dividend date is set the first business day after the stock dividend is paid (and is also after the record date).

If you sell your stock before the ex-dividend date, you also are selling away your right to the stock dividend. Your sale includes an obligation to deliver any shares acquired as a result of the dividend to the buyer of your shares, since the seller will receive an I.O.U. or “due bill” from his or her broker for the additional shares. Thus, it is important to remember that the day you can sell your shares without being obligated to deliver the additional shares is not the first business day after the record date, but usually is the first business day after the stock dividend is paid.

If you have questions about specific dividends, you should consult with your financial advisor.

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