What does ex-dividend mean?

[Paul Beck]

[Steve Walters]

One of the questions new investors have when buying a dividend bearing stock is when they get to collect the dividend. The answer is more involved than the company just handing out cash the day they declare a dividend and requires an understanding of the term “ex-dividend.” The ex-dividend date is a date that is two days before the date of record, which is the day on which they pay the dividend. The term ex-dividend means the stock now trades without its dividend. That means anyone who buys the stock on or after the ex-dividend date is not entitled to receive the dividend. It’s only those who own the stock before the ex-dividend date who are entitled to receive the declared dividend. People who learn about the ex-dividend date for the first time almost always think it would be smart to buy the stock before the ex-dividend date, collect the dividend, and then sell the stock again and get to keep the dividend as free money. While this sounds great in theory the reality is the market adjusts the price of stocks downward ahead of the ex-dividend date to account for the upcoming dividend payment. The Importance of the Ex-Dividend Date While the record date is when the dividend is paid, investors who are expecting to collect a dividend need to purchase the stock at least two days before the record date. This is because stock sales take two days to settle. With the ex-dividend date set for two days before the record date it is important for investors to know when a stock is scheduled to go ex-dividend. It’s also necessary to understand that the price of a stock will almost always fall to compensate for the upcoming dividend, so buying before the ex-dividend date will rarely result in an immediate profit. Those who buy on or after the ex-dividend date get a discount on the stock to make up for the dividend they aren’t receiving. It’s not always easy to see these movements when dividends are small, but with larger dividends the movement is usually easy to observe.