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A stock's ex-dividend date, or "ex-date," is the first trading day where an upcoming dividend payment is not included in a stock's price. In order to receive the dividend, an investor must purchase shares before the ex-dividend date.
Three important dividend dates
In order to understand how the ex-dividend date works in the context of dividend investing, there are three key dates you need to know.
Ex-dividend date: The first day a stock trades without its dividend included in the share price. Investors who buy shares before the ex-dividend date are entitled to the upcoming dividend payment, while those who acquired shares on or after this date are not. From a seller's perspective, as long as you sell your shares on or after the ex-dividend date, you'll still receive the dividend, whether or not you own shares when the dividend is actually paid.
Date of record: Since it takes a few days three for stocks before a trade is settled or finalized, this is the date when the company looks at its shareholders to determine who gets the dividend and who doesn't. For stocks, the date of record is always two trading days after the ex-dividend date.
Pay date: This is the date when the dividend is actually paid to shareholders, and is generally several days (or even weeks) after the date of record.
What the ex-dividend date means to you as an investor
As an example, consider the following sentence:"On April 26, 2016, Wells Fargo declared a dividend of $0.38 per share, payable on June 1, 2016 to shareholders of record as of May 6, 2016."
Since the ex-dividend date is always two trading days before the date of record, this means that shares will trade without the $0.38 dividend as of Wednesday, May 4. In order for a shareholder to be eligible to receive the dividend payment, he or she must own shares as of May 3 or earlier. On May 4, Wells Fargo's stock price can be expected to drop by approximately $0.38, in addition to any price drop or increase that occurs as a result of market activity.
A word of caution
One misguided strategy often used by newer investors involves buying stocks shortly before the ex-dividend date, only to sell them on or shortly after the date, in an attempt to pocket the dividend payment.
Unfortunately, this rarely works out in the investor's favor. As we've seen, the share price is adjusted by the amount of the dividend on the ex-dividend date, so theoretically, the trade will break even. Plus, this involves paying a round-trip commission, which makes the majority of ex-dividend targeted trading unprofitable.
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