Investing in dividend-paying stocks can make sense if you’re interested in creating current income or using dividends to buy more shares. It’s important to know the ex-dividend date before you invest to ensure that you’ll receive a dividend payment. In simple terms, the ex-dividend date marks the end of a cutoff period in which you can purchase a stock to receive its next dividend payment. This is different from the record date. Being aware of these dates matters for including dividend stocks in your investment plan.
Work with a financial advisor to explore the full range of securities that generate passive income.
Ex-Dividend Date, Definition
The ex-dividend date for a stock determines who receives an upcoming dividend payment. If a stock is sold on the ex-dividend date, also referred to as the ex-date, any pending dividend payment would go to the seller versus the buyer. This rule applies even though the seller no longer owns the stock.
Here’s another way to think of it. The ex-dividend date is the date that a stock begins trading absent of the value of its next dividend payout. Stocks that are sold on or after this date are considered to be ex-dividend. So an investor who buys the stock on the ex-date or after wouldn’t be able to receive any upcoming dividend.
Companies understand that it’s important to be clear about who receives a dividend payment. For that reason, it’s not uncommon for companies that pay a dividend to notify investors in advance of the next ex-dividend date.
How Ex-Dividend Date Works
Dividends represent a percentage of profits paid out to shareholders. If a company anticipates a net profit, the board of directors can opt to pay a dividend to shareholders. This is where the ex-dividend date, along with several other key dates, comes into play. Prior to the ex-date, the company will first announce that a dividend payout is upcoming. The date that this happens is sometimes referred to as the dividend declaration date. This announcement may also mention the ex-dividend date to allow investors time to prepare.
Before the ex-date itself, however, there’s another date to observe. This is the record date or date of record. This marks the date that you must be on the company’s books as a shareholder in order to receive a dividend payment. If you’re not a shareholder on the company’s record date then you won’t benefit from any upcoming dividend payment.
Typically, the ex-dividend date comes one business date before the record date or date of record. So to distill it down you need to buy shares of a dividend stock prior to the ex-date in order to be on the books by the record date to get the payment. The date you receive dividend distributions is simply known as the payment date.
Why Do Companies Use Ex-Dividend Date?
You may be wondering why it’s necessary to have so many different dates surrounding dividend payouts. The answer is timing. It takes time for companies to properly record the sale of shares. And it also takes time – usually one business day – for trades of dividend-paying stocks to settle.
Announcing an ex-date, record date and dividend payout date can help the company avoid any sticky issues about who owns which shares when the time comes to pay dividends. And it’s also helpful for investors who are interested in leveraging dividend stocks in their portfolios.
Again, in order for you to benefit from a dividend payout, you’d need to purchase shares at least a full day before the date of record to allow time for the trade to settle. Say, for example, that a stock sets its ex-dividend date for June 1. The date of record is June 2. In order to qualify for a payout, you would have to have owned shares of the stock prior to June 1.
How to Invest in Dividend Stocks
Investing in dividend stocks can offer some advantages to investors. First, there’s the dividend itself. Depending on where you are in your investment journey, dividends can be a source of income or they can be used to generate wealth. If you’re close to retirement or already retired, for instance, you may rely on dividend payouts from stocks you own to supplement withdrawals from a 401(k) or Social Security benefits.
If retirement is still years away, then you may choose to use dividends to increase your holdings in a particular stock. You can do this by reinvesting dividends yourself or through a dividend reinvestment plan (DRIP). This strategy can be useful for purchasing additional shares of the same stock without requiring you to invest any additional money directly out of your pocket.
Dividend stocks can also help with diversification and stability. Companies that pay dividends are typically older and more established, versus newer companies that reinvest all profits into growth. The Dividend Aristocrats, for example, represent the companies that have consistently increased their dividend payouts over the last 25 years. The Dividend Kings, meanwhile, are companies that have increased dividend payouts for 50 years running or more.
While it’s possible that companies may reduce or eliminate a dividend entirely, the odds of that happening with the Aristocrats or Kings tends to be low. So if you purchase shares in these companies, you have the reassurance that a dividend payout is likely to arrive on schedule.
If you’re interested in buying into dividend stocks, online brokerage accounts offer an easy entry point. You can open a brokerage account online in minutes, often with $100 or less. You can then choose individual dividend stocks you’d like to purchase, being mindful of the ex-dividend date and record date for each one.
Another option is to invest in mutual funds or exchange-traded funds that hold dividend stocks. This allows you to own a basket of dividend stocks. Just be mindful of the expense ratios you’ll pay for individual funds as some may have higher costs than others.
The Bottom Line
If you’re a dividend investor or you hope to be, knowing when to mark your calendar for the ex-dividend date, record date and payout date matters. If you happen to buy shares on or after the ex-dividend date, you won’t get the dividend payment for that period. But remember that you can benefit from future dividend payments as long as you’re on the company’s books as a shareholder.
Tips for Investing
- Consider talking to a financial advisor about how to choose dividend investments and where they might fit into your portfolio. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready then get started now.
- A free, easy-to-use investment calculator can be an invaluable aid investors, whether they are dividend-focused or not.
Photo credit: ©iStock.com/gorodenkoff, ©iStock.com/gorodenkoff, ©iStock.com/alvarez