Of all of the terms and conditions involved with earning stock market dividends, going ex-dividend may be at the top of the list for investor confusion. When a company announces an upcoming dividend payment, the announcement does not even discuss the ex-dividend date. Investors must figure out when a stock goes ex-dividend for themselves.
Dividends can be an important portion of the total return earned from those stocks that pay regular dividends. Most U.S. stocks that pay dividends pay them four times a year, or quarterly. Each dividend payment is announced by a company's management or board of directors. Once a dividend is announced, investors owning shares on the appropriate dates will receive the next dividend payment. If shares are purchased too late, an investor will not receive the dividend.
The dividend declaration from a company includes the amount of the dividend, the record date and the payment date. The record date is the day on which the company determines all of the investors who will receive the dividend payment. Shares must be owned on the record date to earn the dividend. The payment date is when the actual dividend will be sent out or credited to an investor's brokerage account. The payment date will be a few days to several weeks after the record date. It is not necessary to still own shares on the payment date to receive the dividend.
U.S. stock market rules require a three-day settlement period. When shares are purchased through a broker, it takes three days for the purchase to become official or "settle." So to own shares on the dividend record date, the shares must be purchased at least three business days before the record date. Two business days before the record date, the stock goes ex-dividend. Investors who buy shares on the ex-dividend date or later are not entitled to receive the pending dividend payment.
Effects of Ex-Dividend
The ex-dividend date is not a published date. Investors must note the record date and count two business days back to find the ex date. If an investor wants to earn the dividend, shares must be purchased before the ex-dividend day. On the ex-dividend date, the shares will start trading at the previous day's closing price minus the amount of the dividend. An investor owning the shares will see his share value drop. However, he is entitled to receive the dividend on the payment date, so the total value of the stock investment -- share price plus dividend value -- is the same as for the day before the ex-dividend date.
- Jupiterimages/Photos.com/Getty Images