Ex-Dividend Date Definition and Explanation
Understanding How the Ex-Dividend Date Works
When you begin to invest in stocks, one of the things you're going to need to know about is the ex-dividend date, otherwise known as the ex-date. These dates come into play whenever you own a stock that issues regular cash dividends at some point. The ex-date helps determine who is entitled to those dividends.
Ex-Dividend Dates Clarify Dividend Recipients
You might think that when a company's shares are traded over-the-counter or on a stock exchange, it could become a thorny legal question to determine who is entitled to an upcoming dividend. Should it go to the seller who owned the stock at the time the dividend was announced or to the new owner who now owns the stock?
These days, it isn't a big deal at all. No matter how quickly shares trade hands or how many owners hold a stock between the date the dividend is announced and the date it is actually sent out, the United States has settled upon a multi-date system that takes the guesswork out of the equation. One of these dates is called the ex-dividend date.
Establishing the Ex-Dividend Date
Ex-dividend dates are established at the time a company announces a dividend. The first step in that process is for a company to generate a net profit by selling goods or services for more than it costs to provide those goods and services.
Next, to reward the owners who have risked their capital by investing in the business, the board of directors votes to take some of the profit and send it out as a cash dividend. The board of directors decides how much cash the firm can afford to pay out in dividends after accounting for things like expected debt servicing obligations and expansion plans. This is the reason that growth stocks, issued by relatively young companies with rapid rates of expansion, often pay no dividends. Mature businesses with steady profits, on the other hand, may pay considerable dividends.
A good company tends to have a long-established record of raising the dividend by a rate substantially higher than inflation over many decades. These companies can do this thanks to their strong core economic engine that frequently enjoys high returns on capital. If you hold the stock long enough, and the dividend growth record is sufficient, then at some point, you will get back more than the money you invested. Companies with the best dividend records come to be known as blue-chip stocks.
At the time the dividend is discussed by the board, four specific dates are scheduled. First, there is the dividend declaration date. This is the date on which the company announces it is paying a dividend, often through a news release or announcement on its website. On the dividend declaration date, the dividend record date and ex-dividend date are also announced so investors can make plans.
Next, there is the dividend record date. This is the date on which the corporation's shareholder roster will be frozen to determine who is eligible to receive the dividend. If you do not hold shares on the dividend record date, you will not get that specific dividend distribution, even if you buy the stock before it is paid out to shareholders.
It takes time to change a corporation's shareholder records. The buy and sell information has to be submitted to the transfer agent to make sure the old owner's shares (and dividend rights) are transferred to the new owner. To account for this delay, a third date was developed, known as the ex-dividend date. In the United States, the ex-dividend date is usually one business day before the dividend record date. This provides the necessary time to get the paperwork and electronic records sorted.
If you don't own a dividend-issuing stock on the ex-dividend date, you won't be recorded on the dividend record date, and you won't receive the dividend on the dividend payment date.
Finally, there is the dividend payment date. This is the date when the cash shows up for stockholders—often in their brokerage account.
There are exceptions to these rules, including cases of special dividends, stock splits, and other distributions. As an example, anytime a dividend is 25% of the stock's value or more, the ex-dividend date is deferred until one day after the payment date.
What Happens on the Ex-Dividend Date?
If you buy a stock, mutual fund, or other financial security that has declared a dividend before the ex-dividend date, you are entitled to receive that upcoming dividend. That is because the books will be updated with your information before the record date. As the new owner, the company will know to send you the money.
If you buy a stock, mutual fund, or other financial security that has declared a dividend on or after the ex-dividend date, you won't receive the upcoming dividend payment. The old owner (the entity who sold you the stock) will still receive the scheduled dividend even though they sold the asset to you. That is because the books won't have been updated with your information before the record date, so the company won't know to send you the money.
To account for the transfer of value that occurs on the ex-dividend date, the quoted value of a stock or other security will typically be adjusted downward by the amount of the expected upcoming future dividend. This makes it difficult or impossible for arbitragers to exploit the timing. The system has become so efficient, investors who have trades pending (such as stop, stop limit, or good-until-canceled limit orders) don't need to do anything—at the close of trading the day prior, stock trades that are not specifically designated as "do not reduce" should be adjusted downward by the amount of the upcoming dividend.
A Real-World Example of How the Ex-Dividend Date Is Used
On Jan. 2, 2020, Johnson & Johnson announced that it was going to pay a quarterly dividend of $0.95 per share.
This particular dividend announcement included three important dates:
- The dividend payable date of March 10, 2020
- The dividend record date of Feb. 25, 2020
- The ex-dividend date of Feb. 24, 2020
This means, if you want to receive the dividend on March 10, you must own the stock before Feb. 24. If you buy it on or after Feb. 24, you'll have to wait until the next dividend is announced. This also means that if you sold your shares on or after Feb. 24, you will receive the dividend, even though you won't own the stock on the day dividends are distributed.
Office of Investor Education and Advocacy. "Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends?" Accessed Feb. 4, 2020.
Office of Investor Education and Advocacy. "Dividend." Accessed Feb. 4, 2020.
Office of Investor Education and Advocacy. "Stocks." Accessed Feb. 4, 2020.
Fidelity Investments. "Why Dividends Matter." Accessed Feb. 4, 2020.
NASDAQ, Inc. "Do Not Reduce Order (DNR Order)." Accessed Feb. 4, 2020.
Johnson & Johnson. "Dividend History." Accessed Feb. 4, 2020.