Dividends—payments that companies make to shareholders when stocks perform well—can make a stock more enticing to investors, increasing their profit and making them feel valued.
But an investor can’t necessarily just buy a stock one day and collect dividends on it the next. Investors need to know and plan for the ex-dividend date of any company they invest in, or may plan to invest in.
What is the ex-dividend date? It’s the date on which an investor needs to be registered as a shareholder in order to receive the dividend. It falls after the company declares the dividend, and one day before the “record date,” or “date of record.”
Here’s how dividends work with ex-dividend dates: If an investor buys a stock on its ex-dividend date or after, they won’t get the next dividend payment. That’s why it’s important to investors that they get their purchase orders in before the ex-dividend date, in order to receive the dividend.
This date has other important implications, beyond just who receives dividend payments. The ex-dividend date is also when companies determine who receives proxy statements, financial reports, and other information. While the latter two may be publicly available, proxy statements can be very important when a company is in the throes of a significant transition.
To fully understand the ex-dividend date, it helps to broadly answer the question, what is a dividend?
Dividends are the company’s way of allowing its investors to share in its profits, without having to sell their stakes.
The dividend can come in the form of cash or even more stock. But in the U.S., they’re usually paid as cash. As a result, dividends are taxed as income, according to the investor’s tax bracket. The returns from long-term stock returns are taxed, when sold, as capital gains. (That’s just one reason it’s helpful to know the current capital gains tax rate.)
How Often Are Dividends Paid?
Most companies with dividend-paying stocks offer their dividend payments on a quarterly basis. Many investors, especially retired investors, see dividends as an income source. It allows them to collect regular payments without having to sell their investments.
Unlike the interest payments from a bond, dividend payments can vary from quarter to quarter. A company might boost its dividend because it’s doing well, or simply because it can’t find a better use for its profits. On the flip side, a company might cut its dividend because it’s struggling, or because it’s found a great opportunity to invest in new business.
During the COVID-19 crisis, many companies that had offered dividends for years and even decades either slashed or eliminated their dividends because of the bad message it would send if they paid cash to investors while eliminating hundreds or thousands of jobs. It was one more reminder that dividends are not a sure thing.
What Does Ex-Dividend Date Mean for Trading?
For interested investors, there is a formula that calculates the dividend payout ratio of a stock—which can be helpful in comparing one company to another. The key questions to ask about a potential dividend are “when” and “how much”. That’s why the ex-dividend date makes a difference.
For example, let’s say an investor wants to buy shares of a company that, after a strong quarter, declares a dividend of $1 per share. The record date of the dividend is December 19. That means the ex-dividend date would likely be a business day before, on December 18. An investor who buys the stock on December 17 would receive the $1 dividend. If they were to wait until December 18, they wouldn’t be entitled to the $1 dividend.
It’s also important to note that the market adjusts for this fact. The math would dictate that the stock is actually worth $1 less per share after the ex-dividend date than it was the day before, because that $1 per share has been taken out of the company in the form of dividend payment. As a result, the price of a dividend-paying stock typically drops by roughly as much—though that’s not always a guarantee.
Benefits of Tracking the Ex-Dividend Date
There are a number of reasons investors may want to look at a company’s ex-dividend date of a stock when considering buying or selling it.
1. They may want to sell just ahead of the ex-dividend date to get the best price without having to pay income taxes on the dividend payment.
2. They may want to buy a stock just ahead of its ex-dividend date, in order to participate in the dividend payments as soon as possible.
3. They may want to hold onto the stock just until the ex-dividend date to get the last dividend payment.
4. They may want to wait until after the ex-dividend date to buy that stock after it drops—assuming that it does—after its dividend payment.
Not Every Ex-Dividend Date Is the Same
Every investment is unique, and so is every ex-dividend date. Research into the company and its stock can help an investor form educated expectations about how dividend payments impact its performance.
But there are always special circumstances. If a company offers a dividend that’s equal to 25% or more of the stock price, then the ex-dividend date can be delayed until one business day after the dividend is paid.
There are also occasions when a company decides to pay a dividend not in cash, but in its own stock. That may be in additional shares or possibly even in a new subsidiary that it is spinning off from the core business. In these unusual circumstances, the procedures will vary, and that includes the setting of the ex-dividend date.
What Does Ex-Dividend Date Mean for Taxes?
Dividends are taxed as long-term cap gains in many cases.
In retirement, dividend income can be especially welcome. Some investors might even plan for living off dividend income after retirement. And though most retirees don’t spend their days trading the market, buying ahead of a stock’s ex-dividend date may make sense for income-focused investors.
Exactly when and how a stock pays its dividend can make a big difference to an investor’s plans, and taxes, at every stage of their lives. That’s why investors who are considering buying or selling a stock that pays dividends should know what is the ex-dividend date for that stock.
With knowledge of the ex-dividend date—the date on which an investor must officially be a shareholder, in order to receive the upcoming dividend payout—an investor can make an informed decision as to whether to buy or sell that stock.
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