What Is Ex-Dividend?
A dividend is a cash payment to shareholders as a reward for investing in company stock orequity shares. Ex-dividend means a company's dividend allocations have been specified. The ex-dividend date or "ex-date" is usually one business day before the record date.
Investors who purchase a stock on its ex-dividend date or after will not receive the next dividend payment. Instead, the seller gets the dividend. Investors only get dividends if they buy the stock before the ex-dividend date.
Key Takeaways
- Ex-dividend means a company's dividend allocations have been specified.
- The ex-dividend date is when the stock begins trading without the subsequent dividend value.
- Investors who purchase stock before the ex-dividend date are entitled to the next dividend payment while those who purchase stock on or after the ex-dividend date are not.
Ex-Dividend Date
A stock trades ex-dividend on andafter the ex-dividend dateor ex-date.Investors who buy a stock on the ex-dividend date or after will not receive the next dividend payment. Since buyers aren't entitled to the next dividend payment on theex-date, the stock will be priced lower by the amount of the dividend by the exchange.
Some broker platforms might use an XD suffix to the stock's ticker to indicate it is trading ex-dividend.
Declaring Dividends
When a company declares a dividend, its board of directors establishes arecord date when investors must be on record as shareholders to receive the dividend payment. Once the record date is set, the ex-dividend date is also determined according to the exchange ruleson which the stock is traded.
The ex-dividend date is one business day before the record date. For example, if a company declares a dividend on March 3 with a record date of Monday, April 11, the ex-dividend date would be Friday, April 8, because it’s one business day before the record date. The ex-dividend date is before the record date because of how stock trades are settled.
After a stock trade, the transaction isn't settled for one business day, known as the "T+1" settlement. Investors with stock on Thursday, April 7 that is sold on Friday, April 8 would still be the shareholder of record on Monday, April 11, because the trade hasn't settled. However, if the stock sold on Wednesday, April 6, the trade would be settled on Thursday, April 7, before the ex-dividend date of Friday, April 8, and the new buyer would be entitled to the dividend.
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Stock Price and Ex-Dividend
On average, a stock price will drop slightly less than the dividend amount. Given that stock prices move daily, 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 differ. With a stock or large cash dividend, the ex-dividend date is set on the first business day after the dividend is paid.
Key Dividend-Related Dates
- Declaration date: This is the date when a company's board of directors announces the dividend distribution. Any change in the expected dividend can cause the stock to rise or fall quickly as traders adjust their expectations. The ex-date and record date will occur after the declaration date.
- Record date: This is when the company reviews who the shareholders of record are. The record date is one business day after the ex-date.
- Payment date: Dividend checks are sent or credited to investor accounts.
What Is an Example of a Dividend Payment?
Suppose Company XYZ pays a $0.53 per share dividend on June 2, 2024. The payment goes to shareholders who had purchased stock before the ex-date of May 5, 2024. The company declared the dividend on Feb. 19, 2024, and the record date was set as May 6, 2024. Onlyshareholders who purchased the stock before the ex-dividend date are entitled to the payment.
Why Does the Stock Price Fall on the Ex-Dividend Date?
The price of a stock tends to fall by the amount of the dividend on its ex-dividend date, reflecting that its assets will soon be dropping by the amount of the dividend.
How Does the Ex-Dividend Date Help Investors?
If an investing strategy is focused on income, knowing when the ex-date occurs helps investors plan their trade entries. However, because the stock's price drops by about the same value as the dividend, buying a stock right before the ex-date shouldn't result in any profits. The same applies if investors buy on or after the ex-date and get a "discount" for the dividend they won’t receive.
The Bottom Line
The ex-dividend date is one of four steps a company follows when paying dividends. The declaration date is when a company states its plans to issue a dividend. The record date is when the company determines which shareholders are entitled to a dividend. The ex-dividend date is usually the day before the record date. The payment date is the day when dividend payments are made.
Correction—Nov. 28, 2023: This article has been corrected to state the date when a new buyer would be entitled to a dividend.
