Some investors looking to make short-term profits purchase shares of dividend-paying stocks for the sole purpose of capturing dividend income and then sell the stock soon after the payout. Being aware of the record date and ex-dividend date helps investors take advantage of this investing strategy. Delaying the purchase of a stock until just before the pay date will cause the investor to lose out on the upcoming payout. Knowing the chronology of the procedure allows investors to make the most of dividend income.
When a firm pays a dividend, the board of directors makes an announcement or "declares" a dividend. In the U.S. markets, this is called the "declaration date." The firm’s board will set a “record date,” which means shareholders of record – those who own stock on the record date – are entitled to receive the dividend on the distribution date, the day dividends are actually paid to shareholders.
After the record date is set, an ex-dividend date is set by the exchange on which the stock is traded or by the National Association of Securities Dealers. The ex-dividend date is often two trading days before the record date. For example, if the record date is September 7, the ex-dividend date might be September 5, if neither date falls on a weekend or holiday. Traders who purchase shares after the ex-dividend date will not receive the upcoming dividend, but will be eligible for the next quarterly payout if they choose to hold the stock until the next dividend is declared.
Shareholders of Record
Suppose Ms. Prosper wants to benefit from JKL Radio Corporation's quarterly dividend. First, she would scrutinize the information provided in the declaration of the dividend by the company’s board of directors. Next, she will want to know the record date – that is, when she must own shares to be a stockholder of record. If Ms. Prosper wishes to cash in on the upcoming distribution, she must purchase shares of JKL prior to the official record date.
Ex-dividend dates are set to ward off volatility in a stock created by investors manipulating share prices through large volumes of buying and selling. Investors will say a stock is "selling ex-dividend" during the period from the ex-dividend date to the record date, usually two trading days. The term "ex-dividend" or "ex-date" should not be confused with an extra dividend. Occasionally, some firms will pay shareholders an extra and unexpected dividend if profits are particularly good.
- "Finance: Investments, Institutions, Management"; Stanley G. Eakins, 2005
- U.S. Securities and Exchange Commission: Ex-Dividend Dates
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.