Don't Get Caught Off Guard by the Ex-Dividend Date

When trading stocks, it is important not to get caught off guard by the ex-dividend date. This is the date after which new owners of record will not receive a dividend payment because the transfer of ownership will not be completed in time. This is an important date because it affects how a stock trades as well as who will receive the dividend payment that has been declared by the company.

The Mechanics of Dividends

When a company declares a dividend, there are several important dates that impact the price action and the payment of that dividend. The terms that you should know are the record date; the payment date; and of course, the ex-dividend date. The record date indicates the date upon which the company will initiate payments to registered owners. If you are an owner of record on the record date, the company will initiate a payment to you. The payment date is the date upon which you can expect the payment process to be complete and by which you will have received your money.

The ex-dividend date is the first date upon which if you buy the stock you will not receive the declared dividend. This is because the transfer of ownership will not have been completed by the time the company has paid. For most U.S. stocks, settlement takes three days (also known as T + 3). This means that you do not officially own the stock for three days after placing a buy order that is filled. The ex-dividend date occurs on the date that, even with three-day settlement, you will own the stock in time to receive the dividend.

The Importance of the Ex-Dividend Date

One of the most significant effects of the ex-dividend date is that the price of the stock tends to drop by an equal amount at the opening of trading on that date. This means that if you own a stock that is trading at $30 the day before the ex-dividend date and the company has declared a $0.50 dividend, the next day the stock should be trading at $29.50. The reason for this is that if you buy the stock at that instant, it is worth $0.50 less because you are no longer entitled to the $0.50 dividend. If you own the stock throughout the process, there is no effect. Your stock position loses that exact same amount as you are receiving in a dividend payment. This is only significant if you are a new buyer.

It is important not to get caught off guard by these dates because doing so can lead you to make poor trading decisions. All things being equal, it is usually better to buy a stock before the ex-dividend date. What should be avoided, however, is buying a stock on a perceived dip, which is actually dividend driven. Stocks may behave somewhat differently after the ex-dividend date. This difference is usually minor and temporary, but you need to be aware of it to make sound decisions.

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