Without an ex-dividend date, the issue of who earns a dividend could become thorny when a stock is sold. For this reason, a company announces this cutoff in advance.
Alternate name: Ex-date
Here’s how this works in action. On April 19, 2022, Johnson & Johnson (JNJ) announced that it was going to pay a quarterly dividend of $1.13 per share. This particular dividend announcement included three important dates:
The dividend payable date of June 7, 2022The dividend record date of May 24, 2022The ex-dividend date of May 23, 2022
If you wanted to receive the dividend on June 7, you must have owned the stock before May 23. If you bought it on or after May 23, you’d have to wait until the next dividend is announced, which means that if you sold your shares on or after May 23, you would receive the dividend, even though you won’t own the stock on the day dividends are distributed. If you’re looking to purchase stocks that pay a dividend, the ex-dividend date is an important piece of information to know. Companies announce these and other significant dates on a specific schedule. Here’s how the process works.
How the Ex-Dividend Date Works
Ex-dividend dates are established at the time a company announces a dividend. When a company reports a net profit for the period (usually a quarter), it can announce a dividend payment to reward the owners who have risked their capital by investing in the business. This is done by a vote of the board of directors 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 such as expected debt servicing obligations and expansion plans. At the time the dividend is discussed by the board, four specific dates are scheduled.
The Dividend Declaration Date
This is the date on which the company announces that 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.
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.
The Ex-Dividend Date
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, the ex-date was added. In the United States, the ex-dividend date is usually one business day before the dividend record date.
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 such as stock dividends. As an example, anytime a dividend is 25% of the stock’s value or more, the ex-date is deferred until one day after the payment date. A good company tends to have a long-established record of raising the dividend by a rate substantially higher than inflation over many decades. It can do that, thanks to a 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 are known as “blue-chip stocks.”
What It Means for Individual Investors
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 former owner will still receive the scheduled dividend, even though they sold the asset to you. 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. That makes it difficult or impossible for arbitragers to exploit the timing in order to make a profit.
