The ex-dividend date is the first date that a stock trades without the dividend included in its stock price. In a completely efficient market, the stock would drop by exactly the amount of the announced dividend on the ex-dividend date.
To illustrate how this works, let’s use McDonald’s (NYSE:MCD) stock. For this example, we’ll assume that the company pays a quarterly dividend of $1.38 and the stock price the day before the ex-dividend date is $240. With those variables, MCD stock would, theoretically, trade at $238.62 when trading begins on the ex-dividend date.
Investors looking to collect the company’s dividend must be shareholders of record by the company’s record date. The record date is typically one day after the ex-dividend date to allow trades to close.
Key Dates to Understand
The process of how a dividend is issued follows a predictable pattern. Investors need to pay attention to four key dates.
Declaration Date - This is the date the company’s Board of Directors announces it will pay a dividend. On this day, the Board of Directors will also announce the date of record and the payment date.
Why this date is important to investors: There are four possible outcomes on the declaration date. A company can maintain its dividend, it could raise its dividend, it can cut its dividend, or it can suspend its dividend. All of these outcomes are usually communicated by the company in advance of the declaration date. However, if a company announces it is raising its dividend it frequently results in the stock price going up as investors anticipate that more investors will want to collect the dividend.
Ex-Dividend Date – This is the day that an investor must own the stock in order to be eligible to receive a dividend payment. For a shareholder to collect the dividend they must own the stock before the ex-dividend date. So if the ex-dividend date is on a Monday, investors need to buy the stock no later than the previous Friday. The ex-dividend date is set automatically once the date of record is announced.
Why this date is important to investors: It is a firm date. If a shareholder does not own shares (or fractional shares) before the ex-dividend date, they will not be eligible for that quarter’s dividend. Of course, if an investor likes the long-term outlook for the company they can continue to own the stock to collect future dividends.
Date of Record - This is the day a company reviews its records in order to identify its shareholders. Sometimes this is the same day as the ex-dividend date, but frequently it is a day or two later.
Why this date is important to investors: Most trades are now able to be closed within seconds, but it still takes a day for the record of the trade to close. That’s why an investor needs to buy shares before the ex-dividend date.
Payment Date - This is the day a shareholder receives the dividend payment electronically or when the dividend payment is sent if the shareholder is receiving a paper check.
Can an Investor Sell Shares Before the Payment Date and Still Collect the Dividend?
An investor can choose to sell shares before the payment date and still collect the divided. They will receive a dividend based on the number of shares they held as of the ex-dividend date.
The larger question is why would investors do this? There is a sophisticated investment strategy known as dividend harvesting. This is a strategy that relies on the fact that the market does not operate under the efficient market hypothesis. This allows investors to benefit from price anomalies and capture those gains.
Fractional Shares and Ex-Dividend Date
The surge of retail investors and trading apps means there are many shareholders who can buy fractional shares. An investor with $1,000 or less to invest in the market can build a diversified portfolio of companies, but they would be unable to buy one full share of any single company.
That shouldn’t steer them away from dividend stocks. That’s because an investor who is a shareholder of record on the ex-dividend date is entitled to a dividend that is proportionate to their investment. If they own 0.5 shares (or 50% of one share) they are entitled to 50% of the dividend price per share. That means if a dividend pays a quarterly amount of 80 cents per share, that investor will collect 40 cents for the fractional share they own.
With zero-commission trading now the norm, there really is no downside to owning fractional shares. And as it relates to the ex-dividend date, investors can get a small benefit without a big risk. For example, if a stock they want to buy is coming up on its ex-dividend date, but they don’t have the cash available to buy a full share or more, they can buy a fractional share and still collect a fraction of the current divided. Then when cash allows, they can increase their investment and the dividend they collect.
The Last Word on the Ex-Dividend Date
The ex-dividend date serves two purposes for investors. First, from a technical standpoint it is the day on which the company’s stock price will reflect the upcoming dividend. Second, on this date, investors who do not own shares of the stock will be ineligible to collect the current dividend.
Investors can still invest in the stock between the ex-dividend date and the payment date, but they will have to hold the stock until the next dividend cycle to begin collecting the dividend.
Dividend investing is an important consideration for every portfolio. And even investors who don’t have the money to buy full shares can buy fractional shares of a stock prior to the ex-dividend date and collect a proportional “fraction” of the dividend.