What Does Ex-Dividend Mean

Ex-dividend is a term that seems to have a lot of people I speak with confused. Many people I talk with on a pretty regular basis think it means the date that the dividends are paid out to shareholders of the company. This is not correct.

The easiest way for me to explain ex-dividend is simply to refer people to this submission over at wikipedia.

In essence, the ex-dividend date is 2 days prior to the record date – with the record date being the date that shareholders must be on “record” in order to receive the dividend. It is used because of the 3 days of settlement for stock trades.

For someone who does not trade a lot (like me), I could usually care less about the ex-dividend date. But for those of you who trade, it can be important to know as often a stock sees a run-up in price prior to a dividend payment.

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Comments

  1. anon says

    “often a stock sees a run-up in price prior to a dividend payment”

    Can you elaborate? When does this run-up occur? I thought it happens gradually over a long time.

  2. says

    There’s a saying: people buying into stocks with the intent of only getting the dividend and getting out are simply getting themselves an unnecessary tax bill!

    Stock valuations still operate on supply and demand and somehow there’s always a supply and demand in favour of the seller when dividend approaches. So prices go up. But once a dividend is no longer in sight, the valuation of the stock will take into consideration that the cash no longer belongs to the company, and the price dips right after a dividend is no longer available/paid. Essentially it a wash-transaction! And you got to report those dividends as income now!

    I always explain ex-dividend using the ENGLISH language. What is “ex”? Think… ex-girlfriend, ex-spouse… ex means “no longer” (I’m not checking dictionary.com!) So ex-dividend date simply means date of no longer dividend!

  3. JERRY says

    If the official record date is May 01,06 of the ex-dividend payout is Monday and I purchase the stock this morning April 27,06 will I qualify?
    Did I have to own the stock as of close yesterday April 26,06 Wednesday?

    Thanks, Jerry

  4. Brian says

    If you just look at the press release of the di vidend announcement – they will tell you when you would have needed to be a shareholder in order to qualify for the dividend. Sometimes this can be up to 30 days before the actuall dividend is paid out. Take a look at this explantion from the sec. As you can see there really 3 dates – the record date, the ex-dividend date, and the payment date.

    The ex-dividend date is 2 business days before the record date. You must be a shareholder before this date to be entitled to the dividend.

    Prices will sometimes run up just before the ex-dividend date – as investors are looking for some quick cash – however – share prices usually go down right after a dividend because of the new valuation based on less cash that the firm just distributed – this dip usually doesn’t last long for strong companies.

    Brian

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