If you’re thinking about investing in stocks that pay dividends then you need to know the meaning and importance of “record date” or “date of record” and the “ex-dividend date” or “ex-date.”
Why? Because these dates determine when a stock purchaser is entitled to dividend payments. If you don’t know what those terms mean you may be losing out on an income opportunity or mis-reading the significance of a stock’s price fluctuation.
For example, if a stock pays a significant dividend that stock’s price may fall – by at least the amount of the dividend – on the ex-dividend date. Why? Because the opportunity to lock in that extra bit of cash reward has now passed.
But why does that matter? Isn’t the company going to again pay a dividend in the future? That’s correct but just not to you IF you sell before the next dividend date.
Those who bought in the days leading up to the ex-dividend date and held until that date are free to sell and yet still pocket the dividend. It’s like collecting rents on an apartment you no longer own.
So, when are you entitled to dividends?
You must start by researching the “record date” or “date of record” and the “ex-dividend date” or “ex-date.”
When Exxon-Mobil (XOM) declares a dividend it sets the date when you must be “on the books” (on the company’s record keeping system) as a shareholder” to receive a dividend payment.
XOM sets the record date and then the ex-dividend date is set based on stock exchange rules.
Usually the ex-dividend date is 2 business days BEFORE the record date.
So, if you buy XOM on its ex-dividend date or immediately thereafter you will NOT receive the very next dividend payment. Whomever sold the stock TO YOU in that time period gets the dividend. You acquired everything EXcept the right to the dividend.
If you place a purchase or buy order without accounting for the ex-dividend effect what YOU often get is a drop in the stock’s price at lease equivalent to the dividend.
So, if a $.75 dividend is declared you can expect the stock’s price to fall at least $.75 on the ex-dividend date.
If you purchase before the day before the ex-dividend date, you get the dividend AND the likely drop in the stock’s price.
Caveat: If the dividend is 25% or more of the stock value, special rules apply. If you are buying a stock which pays a divident equal to 25%+ of its share price either you or the stock is special. If a dividend is paid in stock, rather than cash, there are other rules. So, you must first research the nature of a company’s dividend before making or timing a purchase. In other words, when in doubt consult with your financial advisor.