Understanding dividends requires a bit of education when it comes to the practice of distributions. Though a person may be aware that a dividend is a pre-approved amount of company earnings paid to shareholders, he or she may not understand how and when this money is distributed. The answer to the “how” is via cash or additional shares of stock. The answer to “when” requires an understanding of the dividend ex-date.
In order to understand the ex-date, individuals should first learn about the declaration date. This is the date that the company board of directors makes the announcement that the company will pay a dividend. The ex- date is the date shares of stock begin trading without the dividend. Investors who purchase shares on or after the ex-date will not receive the dividend. Sellers must sell their shares on or after the ex-date to receive dividend payments.
The ex-date occurs on the second business day prior to the date of record. The day the company reviews its records and identifies shareholders is the day of record. Only investors listed as shareholders on the date of record will receive dividend payments. The date of payment is the date these payments are mailed to shareholders.
The ex-date is required to make sure the dividend payments are sent to the correct people. When investors purchase a stock, three business days are required from the transaction date to enter the change onto the company books. To make sure that an investor is listed on the books on the date of record, the stock purchase must occur three business days prior to the record date. This date equates to the day before the ex-date.
There is one exception to the rule for dividends that are 25 percent or more than the value of the stock. In this case, the ex-date will be the first business day that follows the payable date. Investors cannot make free profits on ex-dates because the price of the stock will drop by an amount approximate to the dividend payment.
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