Ex-Dividend Date: What Investors Need to Know

The ex-dividend date explained simply refers to the cutoff point for investors to be eligible for an upcoming dividend payment. When a company announces a dividend, it sets a record date, and the ex-dividend date typically falls one business day before that. Anyone buying the stock on or after the ex-dividend date is not entitled to the upcoming dividend, which is only paid to shareholders who owned the shares prior to that date. Understanding how the ex-dividend date works can help investors plan their trades and dividend strategies more effectively.

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Ex-Dividend Date Explained

The ex-dividend date for a stock determines which shareholders will receive 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 instead of the buyer. This rule applies even though the seller no longer owns the stock.

Investors often monitor ex-dividend dates when making trading decisions. Some seek to buy stocks before the ex-dividend date to collect dividends, while others may anticipate price adjustments that commonly follow. Since a stock’s price often drops by roughly the dividend amount on the ex-dividend date, short-term traders sometimes use this movement to their advantage.

Companies make it a priority to clarify dividend payout eligibility. For that reason, it’s not uncommon for companies that pay a dividend to notify investors in advance of the next ex-dividend date.

Ex-Dividend Date vs. Record Date

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.

However, before the ex-date, another key date comes into play: the record date. 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 are not listed as a shareholder on the company’s record date, you will not receive the upcoming dividend.

Typically, the ex-dividend date comes one business day 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?

Multiple dates exist for dividend payouts to ensure accurate shareholder records and payment distribution. 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 the ex-date, record date and dividend payout date helps companies avoid disputes over share ownership when issuing dividends. And it’s also helpful for investors who are interested in leveraging dividend stocks in their portfolios.

To qualify for a dividend payout, shares must be purchased at least one business day before the record date to allow for trade settlement. 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

Whether you’re looking for reliable payouts in retirement or a way to reinvest earnings for long-term gains, understanding how to invest in dividend stocks can help you make informed decisions. Here’s a closer look at key strategies and options for getting started.

Earning Income or Building Wealth

Dividend stocks can provide investors with a source of income or contribute to long-term wealth accumulation. For retirees, dividends can supplement withdrawals from a 401(k) or Social Security benefits. Younger investors, on the other hand, may choose to reinvest dividends to grow their holdings over time. This can be done manually or through a dividend reinvestment plan (DRIP), which automatically purchases additional shares using dividend payouts.

Dividend Stocks for Stability and Diversification

Companies that pay dividends are often well-established businesses with strong financials. Unlike newer companies that reinvest all profits into growth, dividend-paying firms prioritize returning value to shareholders. The Dividend Aristocrats are companies that have increased dividends annually for at least 25 years, while Dividend Kings have done so for 50 years or more. These stocks can add stability to a portfolio and reduce reliance on capital appreciation alone.

Investors can purchase dividend stocks through an online brokerage account, many of which allow accounts to be opened with as little as $100. When selecting dividend stocks, it’s important to consider the ex-dividend date and record date to ensure eligibility for payouts.

Mitigating Dividend Risk

Although dividend stocks are generally considered stable, companies can reduce or eliminate dividends, especially during financial downturns. However, firms with a long history of increasing payouts, such as the Dividend Aristocrats and Kings, are less likely to cut dividends unexpectedly. Investing in these stocks can provide a higher degree of confidence in receiving consistent payouts.

Investing in Dividend Funds

For broader exposure, investors can opt for mutual funds or exchange-traded funds (ETFs) that hold dividend-paying stocks. These funds offer diversification by bundling multiple dividend stocks into a single investment. However, investors should be mindful of expense ratios, as some funds carry higher costs than others.

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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A free, easy-to-use investment calculator can be an invaluable aid investors, whether they are dividend-focused or not.