A share's ex-dividend date is the cut-off date for investors to buy the share with the entitlement to receive the upcoming dividend. Those who purchase company shares on or after this date are not eligible for the dividend payment.
In this article, we look at the ex-dividend date's impact on a company's share price and what it means for you as an investor.
Some background on dividends
Companies have several different options for using their profits. Smaller companies may reinvest their earnings back into growing their businesses. In contrast, more mature companies with consistently high profits tend to distribute some of that cash to their shareholders as dividends.
ASX-listed companies that pay regular dividends to their shareholders typically do so twice a year in the form of interim and final dividends. However, companies are not limited to paying dividends only twice a year.
Some companies pay dividends more or less frequently than that, and sometimes they might declare a 'special dividend', a one-off extra dividend payment.
Many exchange-traded funds (ETFs) pay quarterly distributions, and some Australian real estate investment trusts (REITs) even pay out monthly.
Four important dividend dates
If you are a shareholder in a company or ASX-listed fund that pays a dividend, you need to be aware of four key dates.
1. Declaration date
This is when the company announces its upcoming dividend. The company informs the market of the dividend payment size and key dates for investors. These include the ex-dividend date, record date, and payment date. Often, the declaration date coincides with the company's half-yearly or yearly financial results announcement.
2. Ex-dividend date
This is the first day a share trades without its upcoming dividend payment included in any purchases. If you purchase a share on or after its ex-dividend date, you will not be entitled to receive the upcoming dividend.
Conversely, if you own a share before its ex-dividend date and decide to sell it on or after this date, you will still be entitled to the share's dividend, even if you no longer own the share by the time the dividend is paid.
Between the declaration date and the ex-dividend date, a share is said to be trading 'cum dividend' (CD). If you purchase shares during this period and hold them until at least the ex-dividend date (XD), you will be entitled to receive the upcoming dividend.
3. Record date
The record date typically occurs the next business day after the ex-dividend date. Buy and sell orders placed on the ASX usually take two business days to settle, so this allows time for investors who bought shares on the business day before the ex-dividend date to appear on the company's share register.
The company will tally up a list of all shareholders eligible to receive the dividend on the record date.
4. Payment date
This is when the company actually pays the dividend to eligible shareholders. It can be several weeks after the record date. The company sets the record date when it announces the details of the upcoming dividend to the market. The exchange — the Australian Securities Exchange (ASX), in our case — then sets the ex-dividend date.
What the ex-dividend date means for you as an investor
Apart from informing investors of the deadline to buy a share and qualify for its dividend, the ex-dividend date also impacts the share price.
With new investors willing to pay a premium to receive the dividend payment, a company's share price typically lifts in the lead-up to its ex-dividend date. Conversely, once the ex-dividend date has arrived, the share price may fall because the right to the dividend payment is no longer attached to purchases.
Investors who purchased additional shares simply to receive the dividend may sell some or all of their shares, pushing the share price down.
Understanding how the ex-dividend date can affect the value of your shares can help you ride out any short-term fluctuations in price. Some volatility in share prices around their ex-dividend dates is entirely expected and shouldn't worry long-term investors.
Beware the short-term trading strategy
Given that share prices exhibit predictable patterns around their ex-dividend dates, some investors might be tempted to earn short-term profits by pursuing a 'buying dividends' strategy.
This involves purchasing shares a few days before their ex-dividend dates and selling them once the date has been reached. The idea is to rotate your money through several different dividend-paying shares, profiting from any short-term appreciation in their price while also pocketing the dividend.
Unfortunately, this strategy rarely works out in the long run. Share prices typically fall on their ex-dividend date by about the value of the dividend. This means that once the dividend is considered, the most likely outcome for investors pursuing this strategy is to break even.
However, that's before taking into account the transaction fees on both trades, which could easily put them in the red. For these reasons, most ex-dividend-targeted trading strategies aren't profitable.
Key takeaways
As an investor, you should know what the ex-dividend date means because it determines whether or not you are entitled to receive a share's upcoming dividend payment.
However, you should always consider market and other factors when trying to time your trading activity. While pursuing a 'buying dividends' investment strategy might be tempting, market forces dictate that it is rarely profitable over the long run.
