What is Ex Dividend Date?
A dividend is a portion of the company’s profit distributed among the shareholders. A company can pay dividends in the form of cash or stock. There are four dates associated while declaring the interim or final dividend, which hold its significance for investors. One of those important dates is the ex dividend date.
Types of Dates in Dividend
There are four different types of dates related to the dividend payment. These dates help understand how much dividend the shareholder is eligible to receive and when they will receive the dividend. The following are types of dates in dividend.
Announcement date is also known as the declaration date. It is the date when the company announces and approves the payment of dividend to its shareholders. During this declaration, the company mentions the date of dividend distribution, the size of dividend the company will disburse, how much dividend will the shareholder receive for their portion of shareholding and the record date.
The company announces the record date on the dividend declaration day. The record date is when the shareholder’s name should be on the company’s books to receive dividends. However, shareholders who are not registered until this date in the company’s book will not receive a dividend. Also, those investors who purchase shares on the record date will not be eligible to receive dividends because it takes T+2 days for stocks to be delivered and reflected in their book record.
Ex Dividend Date
The ex dividend date usually occurs two days prior to the record date. For the investor to avail of the dividend, they must purchase the stock before the ex dividend date. If they purchase the stock on or after the ex dividend date, they will not be eligible for dividend payment. Therefore, the ex dividend date is viewed as a deadline for prospective investors to receive the next dividend.
After the company sets the record date, the ex dividend date is also set on the stock exchange. During these two days, the stock exchange gives the list of shareholders to the company. Investors who have purchased on or after the ex dividend date will not be listed in the company book records. Therefore, such investors will not receive dividends until the next dividend is declared for the next time period.
The payment date is when the company distributes dividends to its shareholders. This is the final step in the process of dividend payment. In the case of the final dividend, the company needs to pay a dividend within 30 days from the Annual General Meeting (AGM). For interim dividend, the company has to set the payment date within 30 days from the announcement date.
Example for Dividend Dates
A company ABC announced on 20th April 2021 to pay a dividend to its shareholders on 17th May 2021. The company set the record date as 13th May 2021 and pay dividends to those who are entitled to them. The following are the dates in the tabular form below
|Tuesday, 20th April 2021||Announcement Date|
|Tuesday, 11th May 2021||Ex-dividend Date|
|Thursday, 13th May 2021||Record Date|
|Monday, 17th May 2021||Payment Date|
Importance of an Ex Dividend Date
Compared to other dates, the ex dividend date is very important from an investor’s and organisation perspective. During the announcement of a dividend, it creates a demand for that company’s stock. This demand leads to an increase in stock prices. In such a case, the shareholders have an option to sell the stock to earn higher profits. However, they will not earn dividends as their name will not be there on the company book records.
Some investors purchase a stock just before the ex dividend date to enjoy the benefit of dividend payment. However, such investors will not realise capital gains from this sale as the stock prices fall after the ex dividend date.
Hence ex dividend date is essential for investors to know while purchasing a stock. Investors looking to enjoy dividend payments may purchase the stock before the ex dividend date. On the other hand, investors looking for long term capital appreciation may invest after the ex dividend date to get the stock at a discounted price. Therefore, knowledge of ex dividend date plays a crucial role in making an informed decision.