What are the three important cash dividend dates?
When a company decides to pay a cash dividend to its shareholders, there are three important dates to know:
- The declaration date
- The ex-dividend date
- The payment date
Let’s go through each of these dates and what they mean.
The declaration date
The declaration date is the day that a company’s board of directors announces and approves a dividend payment. On the declaration date, the company will put out a press release saying how much the dividend will be per share, when the ex-dividend date is, and when the payment date is.
The company will also say that the dividend is payable to shareholders “on record” or “of record” as of a certain date. This date is called the “record date”. To be a shareholder on record, you have to own the stock before the ex-dividend date, which we’ll talk about next.
The ex-dividend date
The ex-dividend date, or “ex-date” for short, is usually set one business day before the record date. The ex-date is important because it determines who gets the dividend.
Here’s how it works. If you own shares of the company on the ex-date, then you will get the dividend payment. But if you buy the stock on or after the ex-date, the previous owner will get the dividend, not you.
Why is it set up this way? When you buy or sell a stock, the transaction takes a couple days to settle. The ex-date accounts for this settlement period.
So if the record date is a Friday, the ex-date will usually be set as the previous Thursday. That way, if you buy the stock on Wednesday (before the ex-date), the trade will settle on Friday and you’ll be a shareholder of record in time.
But if you wait and buy the stock on Thursday (the ex-date) or later, the trade won’t settle until the following Monday. So you’ll be too late—you won’t be on the shareholder record in time to get the dividend.
The payment date
The payment date is the day the company actually pays the declared dividend to shareholders. The payment is made to all shareholders who owned the stock before the ex-date.
If the dividend is paid by check, the company will mail out checks to arrive on or shortly after the payment date. These days, many dividends are paid electronically as a direct deposit into your brokerage account. These electronic payments usually show up on the exact payment date.
The payment date is usually a couple weeks or so after the record date. This gives the company time to make sure its list of shareholders is correct and get all the payments ready. The exact length of time between the record date and payment date varies from company to company.
An example of the three dividend dates
Let’s look at a quick example to see how the three dates fit together.
Imagine a company’s board of directors meets on January 3rd and declares a dividend of $0.50 per share. They set the record date as January 13th and the payment date as January 27th.
Working backwards from the dates the board sets, we can figure out that the ex-date will be January 12th, the day before the record date.
That means if you own shares on January 11th, you’ll get the dividend, because January 11th is before the ex-date.
But if you wait and buy the shares on or after January 12th, you’ll miss out on the dividend – the person who sold you the shares will get it instead.
Then, as long as you held on to the shares and didn’t sell them before January 12th, the company will pay you the $0.50 per share dividend on January 27th.
The impact of the ex-date on stock prices
There’s an important effect that the ex-date has on a stock’s price. On the ex-date, the stock exchange reduces the stock’s price by the amount of the dividend per share.
Why does this happen? Think about what buying a stock gives you: a small ownership share of the company, plus the right to any declared dividends. The stock price reflects both of these things.
Right before the ex-date, the stock price still includes the value of the upcoming dividend payment. But as soon as the ex-date hits, the next buyer isn’t entitled to that declared dividend. It will go to the previous owner instead.
So the exchange reduces the stock price by the amount of the dividend to account for that. The company is paying some of its cash to shareholders, so the company is worth a little less, and the stock price goes down to reflect that.
Here’s an example. If a stock closes at $50 the day before the ex-date, and the dividend is $0.50 per share, then the stock will open on the ex-date at $49.50 per share, all else being equal.
Now, stock prices move around a lot for other reasons too, so you won’t always see a price drop that exactly matches the dividend amount. But the effect is definitely there – it’s just mixed in with all the other factors that move stock prices.
The ex-dividend date and short-term traders
Some short-term traders will try to buy a stock just before the ex-date so they can get the dividend, and then sell the stock on or after the ex-date.
In theory, ignoring any other stock price movements, this could be a way to make a quick profit, since you’re buying to get the dividend and then selling at a price that’s been reduced by the dividend amount.
But in practice, it’s not really that profitable. First of all, the profit is usually pretty small compared to the amount of money you have to invest.
For example, if you buy 1000 shares of a $50 stock to get a $0.50 dividend, you’re putting $50,000 at risk to try to get a $500 dividend. There are much easier ways to make $500!
Secondly, there are tax implications. If you hold a stock for less than 61 days around the ex-dividend date, you may have to pay a higher tax rate on the dividend.
And finally, the stock price doesn’t always behave exactly as the theory predicts. If the market is rising on the ex-date, the stock price might not fall by the full dividend amount, meaning you don’t get to buy it at quite the discount you were expecting.
For most long-term investors, it’s best not to worry too much about trying to time your buys and sells around dividend dates. If a stock you own pays a dividend, great! Think of it as a little bonus, but don’t make it the main focus of your investing strategy.
Summing it all up
In conclusion, the three key dates to remember about dividends are:
- The declaration date: when the company announces the dividend
- The ex-date: the first day new buyers won’t get the dividend
- The payment date: the day the company sends out dividend payments
As an investor, the most important date to watch is the ex-date. That’s the cutoff for being eligible to receive the dividend.
The other two dates are still important to know, but they don’t require any action on your part, other than making sure you own the stock before the ex-date if you want to receive the dividend.