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What is the ex-dividend date? The ex-dividend date is one of several important dates in a company's dividend schedule, and tells investors whether or not they're entitled to an upcoming dividend payment. Here's what it means to you when shares of your stocks go ex-dividend.
Several important dividend dates to know
To a dividend investor, the ex-dividend date is certainly important, but it is one of several dates you should be aware of:
1. Trade date: This refers to the date you actually buy shares of stock. In other words, if you log on to your brokerage account on Jan. 15 and hit the "buy" button for 100 shares of Microsoft, that is the trade date.
2. Settlement date: This is the date when your purchase is actually finalized. Although the shares show up in your account, they technically haven't been delivered until the trade settles. Think of this like closing on a house -- you agree to buy a house and sign a contract for a certain price, but the sale isn't finalized until some time later. For stocks, the settlement date is three business days after the trade date. If you buy a stock on Monday, the trade will settle on Thursday.
3. Declaration date: This is the date a company declares a dividend payment. Companies preannounce dividend payments, so this generally occurs a few weeks or more before the dividend is actually paid.
4. Ex-dividend date: The important date that determines whether or not you will be entitled to an upcoming dividend payment. The name "ex-dividend" means that this is the first day a stock trades without the upcoming dividend attached to the shares. For example, if Company XYZ declares a $1.00 dividend with an ex-dividend date of Jan. 24, this means that shares acquired on Jan. 23 or before are entitled to the dividend, while those purchased on this date or after are not.
5. Record date: This is an important date from the dividend-paying company's perspective, but isn't of much concern to individual investors. This is the date that the company determines its shareholders of record for the purposes of dividend payment. For a shareholder to be entitled to the dividend, the trade must settle on or before the record date. For dividend stocks, this date is two business days after the ex-dividend date.
6. Payment date: This is the date when the dividend is actually paid to shareholders, and can be considerably later than the ex-dividend date. The payment date has no relevance to who receives a dividend -- that is all determined by the other dates. This is simply the date when the money shows up in the accounts of shareholders who bought before the ex-dividend date.
What the ex-dividend date means to you: An example
To illustrate how this works, let's take a look at a real-world example involving one of my personal favorite dividend stocks, Realty Income. On Sept. 8, 2016, Realty Income issued a press release declaring its latest dividend payment.
According to the press release, the dividend of $0.202 per share is payable on Oct. 17, 2016, to shareholders of record as of Oct. 3, 2016. So, if you are a new investor in Realty Income, your purchased shares must settle on or before Oct. 3. Based on what we know about dividend dates, this means that the ex-dividend date is Sept. 29 (Oct. 3 falls on a Monday), and to be eligible for the dividend payment, shares must have been purchased on or before Sept. 28.
A word of caution: Beware of this misguided strategy
One strategy that is unfortunately used from time to time by new investors involves trying to game the system by purchasing stocks the day before the ex-dividend date and selling it on its ex-dividend date. This may sound like a good idea in principle -- after all, if a company pays a $1.00 dividend and I use this strategy to buy and sell 1,000 shares, this should be an easy $1,000 payday, right?
Unfortunately, it doesn't work this way. The dividend comes out of the stock's price on the ex-dividend day. If a stock trades for $100 the day before going ex-dividend for a $1.00 dividend payment, it should open at $99 on the ex-dividend date, all other things being equal. In a nutshell, this strategy should (theoretically) break even, and do nothing but cost you a bunch of trading commissions.
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Matthew Frankel owns shares of Realty Income. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.