Definition and Example of Ex-Dividend Date
The ex-dividend date is the last day a buyer can purchase a share that pays future dividends. If the share is sold on or after this date, it is considered “ex-dividend,” and the pending dividends will be transferred to the seller instead of the buyer.
How Ex-Dividend Date Works
The ex-dividend dates are determined at the time the company announces the dividend distribution. When the company announces its net income for the period (usually quarterly), it can declare a dividend to reward shareholders who have invested capital in the company.
This is done through a vote by the board of directors to convert part of the profits into cash dividends. The board decides how much cash the company can afford to distribute as dividends after accounting for expected debt service obligations and expansion plans.
Key Ex-Dividend Dates
Four specific dates are set at the time the board discusses the dividend distribution:
1. Declaration Date: This is the date the company announces it will pay a dividend, usually through a press release or an announcement on its website. On the declaration date, the record date and the ex-dividend date are also announced so that investors can plan accordingly.
2. Record Date: This is the date on which the company’s list of shareholders is frozen to determine who is eligible to receive the dividends. If you do not own the shares by the record date, you will not receive the specified dividend distribution, even if you purchased the share before it was distributed to shareholders.
3. Ex-Dividend Date: It takes time to change the records of the company’s shareholders. Purchase and sale information must be submitted to the transfer agent to ensure that the old shareholder’s rights (and dividend rights) are transferred to the new shareholder. To compensate for this delay, the ex-dividend date is added. In the United States, the ex-dividend date is usually one day before the record date.
4. Payment Date: This is the date when cash is distributed to shareholders, usually deposited into their brokerage accounts.
What It Means for Individual Investors
If you purchase a stock, mutual fund, or any security that has declared a dividend before the ex-dividend date, you are entitled to receive that upcoming dividend. This is because your information will update the records before the record date. As a new owner, the company will know to send you the money.
If you purchase a stock, mutual fund, or any security that has declared a dividend on or after the ex-dividend date, you will not receive the upcoming dividend distribution. The previous owner will continue to receive the scheduled dividends, even if they sold the asset to you.
To account for the value transfer that occurs on the ex-dividend date, the price of the stock or security will typically be adjusted downwards by the amount of the expected future dividends. This makes it difficult or impossible for speculators to exploit timing for profit.
Source: https://www.thebalancemoney.com/ex-dividend-date-definition-and-explanation-3866820
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