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Ex-dividend date is the date till which the investor has to complete his purchase of the underlying stock to get the eligible dividend on the date listed for dividend payment and such date is generally decided as per the rules of stock exchange which says that the ex-dividend date should be the date which occurs one business day prior to record date.
What is the Ex-Dividend Date?
In layman’s language, “ex-dividend date” is just an “eligibility criterion” which needs to be fulfilled by a particular stockholder in order for him or her to receive either cash dividend or stock dividend.
This dividend date is the segregation criteria for stockholders to make them eligible to receive the next cash or stock dividend. If one purchases a stock on its dividend date or after, it will not receive the next dividend payment. Instead, the seller gets the dividend. While in contrast, if one purchases before the dividend date, they will be eligible to get the next dividend as per the company announcement.
We see above, ex-dividend date example. Steward Financial Corp will start trading ex-dividend on July 31, 2018. The cash dividend per share of $0.03 is scheduled to be paid on 15th August 2018.
Ex-Dividend Date Example
For the Ex-dividend date example, let’s say Company XYZ has shares trading at INR 50 as on date. This amount is referred to as “current market value” and can go up or down depending on how the market behaves and the company performs. When Company XYZ decides to buy back those shares, they offer a higher price, say INR 60 as an incentive for holders to sell it. This way, shareholders can safely earn profit against the risk of share prices going down in the future.
Cash dividend and stock dividends are processes wherein the shareholders receive either cash from the company or additional stocks from the company. While both cash dividends and stock dividends have many types and are quite technical in nature, in this article we will focus more on learning the “eligibility criteria” for receiving these dividends.
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While the definition looks pretty straightforward, let’s try to understand the chronology of the announcements here.
Chronology of Dividend Dates
#1 – Declaration Date
The day the company reports their earnings; they also “declare” their cash dividend or stock dividend announcement as decided by the senior management of the company.
#2 – Payment Date
This is the date when the company will actually make the cash dividend or stock dividend payments to their “eligible” stockholders.
Declaration date is the date when a company announces about the future cash or stock dividend payments, if at all. The payment date is the date when those announced cash or stock dividends are actually paid by the company.
#3 – Record Date
The record date is the cut-off date for shareholders to receive the next cash or stock dividend. In other words, everybody who is a “shareholder” as on “record date” is eligible to receive the next dividend by the company.
Where is the “Ex-Dividend Date” then!?
As we learned above, when the company makes the announcement to issue a dividend (called its declaration date), it also announces its record date (cut-off date) by which the stock holder’s name must be present on the company’s official records in order to receive the dividend.
One can further infer that as soon as the record date is announced, consequently the “ex-dividend date” is automatically fixed.
It is generally two working days prior to the record date. If the purchase of the stock is made on or after its ex-dividend date, that particular stockholder is not liable to receive any dividend benefits. While, if the purchase of stock is made before the ex-dividend date, the buyer of the stock is eligible to receive the announced dividend.
A Timeline of Ex-Dividend Date
When we buy shares of a company, we do it primarily because we are hopeful of making a profit out of it in the future. What that actually means is that we are expecting the company, of whose stock we are buying, to do well in business and make the profit.
When companies do make a profit, they, at times, return a part of that profit to its shareholders. Companies have various ways of returning that excess cash (profit earned during the business cycle) to its shareholders. They majorly do it in the following ways:
- Cash Dividends
- Stock Dividends
- Share Repurchase
Let us take an ex-dividend date example to understand the concept timeline of things in a better manner.
- Suppose a company ABC makes its earnings announcement on August 1, 2017. This will be termed as the Declaration Date. On this day, it will make an announcement of paying dividends on the 31st of August, 2017. Hence, the payment date is 31 August 2017.
- The dividends will be paid to stockholders which are on company records as on 20th August 2017, which is termed as “record date”.
- However, the settlement period is for 3 days. So to be on record date by 20th August 2017, one has to buy shares 3 days before the record date. This date is termed as “cum-dividend date”. In the above example, the “cum-dividend date” is August 17th, 2017.
- Those who will buy shares on 18th August 2017 will NOT be eligible to receive cash or stock dividend on August 31st, 2017. Hence it is called the “ex-dividend date”.
To summarize the entire discussion, if you buy a stock before the ex-dividend date, then you will receive the next upcoming dividend payment. If you purchase the stock on or after the ex-dividend date, you will not receive the dividend.
Ex-Dividend Date for Stocks Video
This has been a guide to what is Ex-dividend date? Here we discuss the chronology of dividend dates, timelines of ex-dividend date along with examples and its significance. You may learn more about Corporate Finance from the following recommended articles –