The ex-dividend date is important in income investing because it determines whether you as the stockholder are entitled to receive the upcoming dividend payment — or if you have to wait for the following one.
This directly affects the income you receive in the next month. Let’s make sure you fully understand this term so you can see how it influences your timing for purchasing a stock.
What’s An Ex-Dividend Date?
The term “ex-dividend” is derived from the Latin phrase “without dividend.”
If you buy a stock on or after the ex-dividend date, you won’t receive the next scheduled dividend payment. It goes to the person who sold it to you, but you’ll get all pay-outs that follow.
Let’s put this into a different context that might make it easier to understand. Pretend that prorating isn’t an option.
Say you own a rental property that’s tenant pays you rent on the 1st of every month. You decide to sell it, and someone else buys it on March 10th.
Because the asset changes ownership after the rent payment date, you get that month’s rent payment and the new owner isn’t entitled to receive rent payments until April.
When A Company Establishes A Dividend
To understand the significance of the ex-dividend date, it’s essential to grasp the timeline of dividend payments. When a company announces a dividend, it typically sets three important dates.
Declaration Date
This is the date when the company’s board of directors declares the dividend payment. The amount of the dividend per share is determined and announced on this day.
Ex-Dividend Date
This is the date that the stock starts trading without the dividend. An investor only receives a dividend if they purchased the stock before the ex-dividend date.
Record Date
The record date is the day the company reviews its records to determine who the shareholders of record are. Shareholders listed on the record date are eligible to receive the dividend.
How To Determine The Ex-Dividend Date Of A Ticker
If you go to YahooFinance, you can look up any ticker without needing to go into your brokerage account.
Type in your dividend stock’s ticker or use CWH if you don’t have one in mind.
You can see the Ex-Dividend Date is June 13, 2023, as I’ve outlined in the purple box. Keep in mind that each brokerage account displays their information differently.
How The Ex-Dividend Date Affects Trade Timing
Investors who seek regular dividend income pay close attention to the ex-dividend date and strategically time their stock purchases.
One strategy is to make sure you buy your planned shares before the ex-dividend date to make sure you get the next dividend payment.
The other strategy is what I like to do. I buy the day after, because I’ve noticed that the prices of dividend stocks drop in price by the dividend amount the day after their ex-dividend date.
The price adjusts because the dividend payment reduces the company’s assets, resulting in a corresponding reduction in the stock’s value.
Yes, this pushes the date that I receive a dividend out to the following pay-out cycle. But it decreases my buy-in price, which increases my share quantity and ROI in the long run.
This isn’t always the right approach if I’m buying a growth stock. I evaluate a number of factors before I decide which strategy to apply for a given stock acquisition.
To Sum Things Up
Understanding how the ex-dividend date works is an important factor for making informed decisions as an investor.
Your preferences may lead you to decide that buying before this date is always the right strategy. Or, they might cause you to use my approach that weighs multiple factors before deciding when to buy.
Want to understand more investing terms so you can make smarter investment decisions?
