What is Ex-Dividend?

Buying a stock ex-dividend is kind of like waiting in line for a roller coaster…

There are only so many seats. Everyone behind a certain point will have to wait for the next trip (the next dividend). If you counted the people in front of you and the number of seats, you could determine that cut-off point. Then, you could tell the people waiting in line if they would be getting on the current ride or if they will have to wait for the next one. Missing the next trip (dividend) is a slightly worse deal; a stock’s price may temporarily reflect that.

While a stock is ex-dividend, it is traded knowing that a pending dividend payment is not included in the sale. The owner of the stock on the day before the ex-dividend date will receive the distribution regardless of whether or not they still own the stock when it is paid.

Because the value of the dividend distribution doesn’t get transferred while it is ex-dividend, the price of the stock will often drop by the dividend amount on the day it goes ex-dividend. This reduction in the stock’s price should not be confused with an indication that the value of the company has changed and should be considered when comparing value metrics such as the price to earnings ratio (P/E ratio).

A few important dates are related to a company’s dividend payout. They include:

The declaration date is the day the company announces a dividend distribution via a press release. The company’s board of directors will have decided to pay a dividend days or weeks earlier. But the declaration date is the first day the public is made aware of the upcoming distribution.

The payment date is the day that the dividend will be distributed to shareholders. This date is provided on the declaration date, so traders know when to expect the payment to reach their accounts.

The record date is the day the company closes its books on who is entitled to the pending dividend. Anyone owning shares on this date receives the payment on each share indicated by the company records.

The ex-dividend date (sometimes called the ex-date) is the first trading day for which any stock trades no longer include the pending dividend. Anyone purchasing the stock on or after the ex-date will not receive the upcoming payment.

You do not get a dividend on the ex-dividend date. When a company announces a dividend distribution, they provide two important dates. The payment date is the day you get the dividend. But the company also gives a record date that is a week or two before the payment date. Only the shareholders of record in the company books on the record date will get the dividend.

The ex-dividend date is at least one business day before the record date, which gives the company time to update its records.

Yes — Any sale that occurs on the ex-dividend date or later will exclude the pending dividend. You will still be the owner of record in the company books when they distribute the payment. So, if you sell a stock on the ex-dividend date, you will still get the dividend about two weeks later.

Say you own 100 shares of common stock in the fictional XYZ company, which is trading at $50 a share. The company announces a dividend of $0.50 per share with a payment date of March 15th. They also tell you that the ex-date is March 1st. If you sell your shares before March 1st, you will get $5,000 for the sale, but the new owner will get the dividend on March 15th. However, if you sell the shares on March 1st (or any day after that), you will likely get less value for the stock (maybe $4,950), but will still get a $50 dividend check on March 15th.

If you sell your stock even one day before the ex-dividend date, you are also selling the right to the pending dividend to the new owner.

Common stock does not have any type of vesting period. The person listed as a shareholder on the record date (the day the company checks its record of ownership) gets the dividend. Logistically this means you have to own the stock for two weeks or so before the payment date. But that is just because of the timing involved in distributing the money to the shareholders.

The record date is typically two weeks before the payment date. And because the transaction must clear before the record date, you usually have to initiate the purchase at least a few days before the record date.

Each company will provide different dates for when it will pay a dividend (the payment date) and when the record of ownership will be locked (the record date). Some companies also provide the day that transactions become ex-dividend (the new owner is not entitled to the dividend).

The record date is usually about two weeks before the payment date, and the ex-dividend date is typically one or two business days before the record date (depending on exchange rules).

Most companies tend to distribute dividends quarterly. They are usually declared after a quarterly board meeting and get distributed about 4-6 weeks later. While every company is different, you can approximate the next dividend payment by adding three months to the last one.

But remember that not all companies distribute earnings to stockholders. Companies that are growing are less likely to pay a dividend, as their profits are reinvested into the company. Companies that are well established are more likely to distribute earnings to shareholders. Also, a company that has a history of paying dividends is more likely to continue doing so.

Under normal circumstances, a dividend stock always goes ex-dividend (the purchase of the stock excludes a pending dividend payment) at least one business day before the record date (the day the company determines who will receive the distribution).

However, because a company’s stock price will usually drop by the amount of the dividend as soon as it goes ex-dividend, large distributions can cause problems on the stock market. For this reason, most stock exchange rules include an exception whenever a dividend amount is 25% or more of the stock price. In those circumstances, the stock is cum dividend (includes the dividend) up until it is paid.

In other situations, a company might provide a dividend of additional shares of the company stock rather than a cash dividend. In this case, it does not make much sense to distribute shares to someone that just expressed a desire to stop investing in the company. So, stock dividends don’t usually go ex-dividend until the shares are distributed. That means that if you sell a stock after the declaration of a stock dividend, you are selling your current shares plus the shares you are scheduled to receive.