There are practically four dates associated with the payment of dividend to a company’s shareholders, either interim or final. One of these dates is the ex-dividend date or ex-date. Each date holds an individual significance for investors, but dates that critically matter are the record date and the ex-dividend date.
The ex-dividend date is a day on which stock goes ex-dividend. It means that a stock which goes ex-dividend does not carry the value of its next dividend payment. Such an ex-dividend date is the day from when a stock stops carrying the value of following dividend payment.
In general, the ex-dividend date is set two business days before the record date. Thereby, if a record date is set on 18th February, the ex-dividend date would be on 16th February.
The date particularly holds significance for investors as it is finalised at that date on which shareholders will receive the announced dividend payment. However, it is necessary to understand ex-date in correlation with other associated dates and not in isolation to form a proper understanding of it.
Types of Dates for Dividend Payment
There are four different dates pertinent to a dividend payment. A dividend is a form of reward a company distributes to its shareholders when it has excess profits. An organisation can pay dividends in two ways – cash and stock. When a company pays a stock dividend, additional stocks are either churned out from the company’s shares or its subsidiary. It can be either paid in the middle of a financial year or at its end.
As such, dividend payment shall be preceded by a protocol, conveniently distributed among four dates. These dates are –
- Announcement date
Also known as the declaration date, it is the day on which a company announces its intention to pay dividends to its shareholders. In that announcement, a company mentions the date on which it will make such payment and the amount of dividend it will disburse, expressed either in rupee denomination or percentage.
Following this announcement, an organisation needs to determine which shareholders shall receive dividend payments. In practice, it is a laborious task as stocks of a company are traded throughout business days with shareholders changing after every buy-and-sell order.
It makes room for the following dates associated with a dividend payment.
- Record date
The record date is a day on which a company determines which shareholders are eligible to receive the announced dividend payment. Shareholders’ names that appear on a company’s record at the end of a record date are considered for dividend payment. However, investors who purchase shares on the record date will not be entitled to receive dividends, as it takes T+2 days, i.e. 2 business days for stocks to be delivered and reflected in company shareholders’ records.
- Ex-dividend date
Although sequentially ex-dividend day comes before the record date, it is set based on the latter. As mentioned in the above section, the delivery of stocks and its reflection in records takes 2 business days.
Hence, ex-dividend date signifies the day by which investors can buy shares of a particular company to earn the next dividend payment. Thereby, it can also be viewed as a deadline for prospective shareholders who wish to receive the next dividend payment.
In case investors purchase stocks of a company after the ex-dividend date, they will not be eligible to receive a dividend payment, which will be paid to the seller in that case.
- Payment date
It is the date on which a company distributes dividends to its shareholders. It is the final stage in the process of dividend payment. In case of interim dividend, payment date shall be set within 30 days from the announcement date. If it is a final dividend, a company needs to distribute it within 30 days from its Annual General Meeting (AGM).
The following ex-dividend example demonstrates this process behind dividend payment:
Company Z announced on 20th February 2020 to pay a dividend to its shareholders on 16th March 2020. It set the record date on 13th March 2020 and thereby, ex-dividend date was set on 11th March 2020. These dates are represented in a tabular form below.
|Announcement Date||Ex-dividend Date||Record Date||Payment Date|
|Thursday, 20th February 2020||Tuesday, 11th March 2020||Thursday, 13th March 2020||Monday, 16th March 2020|
Ex-dividend date forms the crux of the entire process due to its superlative significance to investors. Ergo, it impacts the prices of shares as well.
Impact of Ex-dividend Date on Share Prices
The ex-dividend date is the deadline by which investors need to purchase a company’s shares if they want to enjoy their next dividend payment. Therefore, the days building up to ex-dividend date are quintessential for such investors.
During this period, a stock carries the value of the dividend, which causes its price to surge proportionately, in most cases. This phenomenon occurs because when an organisation declares dividend on its stocks, its demand in the open market goes up, which causes its price to surge as well. The scale of such growth in share price, however, depends on the rate of dividend an organisation has announced. If dividends are small, price fluctuation would be in tandem and vice versa.
For instance, if a company announces a dividend of 20% on the par value of stocks, its market price would also rise by approximately 20%.
Conversely, on the ex-date, prices of such stocks fall in proportion to the dividend amount or rate. It so happens because a stock loses the dividend value it carries this far. Such stock then begins trading ex-dividend, i.e. without the dividend value.
Therefore, investors who choose to purchase equity shares of a company on the ex-date can do so at an effective discount rate.
Importance of the Ex-dividend Date?
The ex-dividend holds superlative importance to shareholders of an organisation as well as investors.
The announcement of dividend payment creates a higher demand for a stock. This demand rises to its prime immediately before the ex-dividend date; thus, share price also goes up. If the rise in share price crosses the actual rate of dividend, shareholders can choose to earn higher profits by selling their share in the stock market. Conversely, an investor willing to earn dividends can earmark their funds to purchase shares of such companies.
However, if investors choose to invest in stocks right before the ex-dividend date, they might end up not profiting from the transaction. The scenario of ‘not profiting’, however, will only occur if a rise in share prices is equivalent to the dividend rate or higher than that. Furthermore, prices of stocks will fall on and post ex-dividend date; thus, such investors will not be able to realise capital gains from its sale.
Hence, individuals shall consider their investment objectives as well as the economy of a transaction before purchasing or selling stocks before its ex-dividend date.