Dividend-paying companies can be great investments that create wealth over time. Such companies not only offer capital appreciation but can also provide you with regular income through the payment of dividends.
However, before investing in a dividend-paying company, you must understand how dividends work. Along with the announcement date, record date, and payment date, the ex-dividend date is one of the four key dates you need to know as a dividend investor. Let's look at ex-dividend date meaning, how ex-dividend dates work and their effect on stock prices, and how to take advantage of them when investing.
What is the Ex-Dividend Date?
A company's ex-dividend date specifies which stockholders will receive the company's dividend on that particular date. Stocks of the company go ex-dividend on this day, meaning they do not carry the dividend value associated with their next dividend payment.
The investor will be documented on the dividend record date if they invest before the ex-dividend date. A shareholder who purchases shares on or after the ex-dividend date is not considered a shareholder at the record date. Dividend payments will be made to the seller, who remains the owner of the record.
Ex-dividend dates serve as buffers to ensure there is sufficient time to transfer ownership of the stock from a seller to a buyer. Therefore, you must purchase the stock before the ex-dividend date to receive the upcoming dividend payment.
Types of Dates for Dividend Payment
Now that you know what dividend ex-date means, let’s understand other types of dividend-paying dates. The four important dates to remember are
1. Declaration Date
Declaration dates are the dates when the directors approve and announce dividend payments. While stating the dividend amount to be paid, the declaration also specifies the record and payment dates.
For instance: On September 16, 2019 (declaration date), XYZ Co. declared a dividend of INR 200 per stock (dividend size) payable on November 13, 2019 (the payment date) to stockholders of record as of October 30, 2019 (record date).
2. Ex-Dividend Date
As mentioned above, ex-dividend dates refer to the first day on which a stock trades sans a dividend. The stock exchange where the company's stock is traded sets the ex-dividend date, not the company. Ex-dividend dates typically occur up to three days before record dates. Dividends are not payable to shareholders who purchase shares on or after the ex-dividend date.
For example, the ex-dividend date for XYZ Co. is October 28, 2019, which is two days before the record date.
3. Record Date
To receive a dividend, investors must be on the company's books on the record date, also called the date of record.
Record dates and ex-dividend dates are often confused. Remember that the company sets the record date and the stock exchange sets the ex-dividend date. Stock trades on exchanges have a settlement period, which makes the ex-dividend date earlier than the record date.
If an investor purchases stock on an exchange, it takes time for the company's records to reflect the investor's information. The settlement period for most financial products in India is t+2. This means that the settlement of a stock trade takes two business days.
For example, XYZ's ex-dividend date is October 28, 2019, while its record date is October 30, 2019.
4. Payment Date
Dividends are paid to shareholders on the payment date. Shareholders may receive dividend payments by mail or electronically.
For example, XYZ pays dividends on November 14, 2019. A dividend of INR 200 would be paid to XYZ shareholders on November 14.
After discussing what is ex date in the share market, let’s see an example of an ex-dividend date.
Let's say that there's a company named ABC Limited. Equity shareholders of the company will receive dividends. The declaration date of the company is November 03, 2020, the record date is November 08, 2020, and the ex-dividend date is December 07, 2020.
To become eligible for dividends, you need to purchase the shares by November 06, 2020. Why is that so? This is how it works.
You will receive your shares after t+2 days, which in this case is November 08, 2020, when you buy the shares of the company on November 06, 2020. Your name would be on the company's book on November 08, 2020, which means that you would receive dividends on that date if you are a shareholder.
Instead, if you buy the shares at the ex-dividend date (November 07, 2020), the shares will be credited to your account only on November 09, 2020, which is beyond the record date. Dividends would not be available to you since you would not be a shareholder on the record date.
Impact of Ex-dividend Date on Share Prices
Investors often pay a premium for stocks because they know they will receive dividends if they buy them before their ex-dividend date. Hence, when a stock is approaching its ex-dividend date, its price often increases.
Normally, a stock's price will drop by the amount of the expected dividend when the market opens on the ex-dividend date. Even though the decrease is primarily driven by market sentiment rather than a set rule, it still makes sense since the dividend comes from the company's reserves, diminishing the company's value technically.
If you buy security right before the ex-dividend date, you shouldn't see any gains because its price drops by about the same amount as the dividend. Additionally, investors buying after or on the ex-dividend date get a discount to compensate for not receiving the dividend.
Importance of the Ex-dividend Date
For the company and its investors, the days before the ex-dividend date are essential since the company loses its dividend value after the date. Anyone who buys the shares before the ex-dividend date will be able to benefit from the dividend value of the stocks.
As a result, the stock price increases based on the rupee value of the dividend announced. Stock prices crossing dividend values can provide current investors with a good opportunity to profit. Therefore, the ex-dividend date provides a temporary capital gain along with the promise of receiving the dividend when it becomes payable.
Who Sets the Ex-Dividend Date?
The stock exchange (where the company’s stock is traded) determines the ex-dividend date.
Which Is More Important, the Record Date or the Ex-Dividend Date?
Ex-dividend dates are more important than record dates. Investing in shares before this date will make investors owners of record for the current dividend. At the record date, shareowners' names are simply compiled. When you seek dividends, it's important to know the ex-dividend date so you can plan your transaction accordingly.
When is the Ex-Dividend Date of a Company Relative to its Record Date?
Ex-dividend dates are usually one to three business days before record dates.
A company’s ex-dividend date is essential when investors are adjusting and managing their holdings. Additionally, the ex-dividend date also assists investors who want to make quick profits in determining when to purchase shares of companies that are paying dividends. You must decide on an investment strategy based on the ex-dividend date and purchase shares of these companies.