Ex-dividend, or the ex-dividend date, is the date on which shares being bought no longer are entitled to the next dividend payment. It usually is some weeks before the actual dividend payment. Often abbreviated "ex-div."
When companies announce a dividend, they declare the payment date, the amount of the dividend, and the date of record. In order to receive the dividend, one must be the official owner of the shares on or before the date of record. Given the daily fluctuation in a stock's ownership, there has to be a mechanism for easily deciding who gets the dividend. Because stock transfer transactions can take three days to finalize and record properly, the ex-dividend date falling two days prior to the record date allows a clear cut-off for recognizing dividend-payment status. If you buy the stock one day before the ex-dividend date (the "day before" being three days prior to the record date), you will get the upcoming dividend payment. If you buy on or after the ex-dividend date, you will not be considered the owner on the record date, and you will not receive the dividend, the seller will. Because of the delay in timing between when shares are purchased and when ownership officially transfers (the settlement date), the ex-dividend date is usually two business days before the date of record.
When a stock goes "ex-div," new purchasers are not entitled to the dividend. From the ex-dividend date forward, ownership of the shares is without the dividend, hence "ex" dividend. Just like talking about an "ex-boyfriend" or "ex-girlfriend," you are without them, and you are also without the dividend if you have purchased the stock on or after the ex-dividend date.
If you happen to sell the stock between the ex-div date and the payment date, don't worry. You'll get the dividend because you'll have been the owner of record. Your broker keeps track of those kinds of things and will make sure you get what is owed you. Of course, if you don't receive the dividend (on the payment date, remember), contact your broker immediately! After all, that's what they're paid to do, among other things.
The exchanges often, though not always, adjust the trading price downward by the amount of the dividend on the ex-div date. For most dividends, this adjustment is lost in the noise of the day's trading. For large dividends, on a historic price chart, it can look like a sudden drastic drop. For instance, on Jan. 25, 2006, TDAmeritrade's stock opened $6.44 lower than it had closed the night before. Six dollars of that drop was due to the adjustment for a special dividend.
This adjustment is to reflect the fact that the cash to cover the dividend amount no longer belongs to buyers of the shares. Instead, that cash has been set aside and will be paid out shortly to the owners of record.
For instance, if a stock is priced at $10.00 and there is a special dividend of $2.50, then upon adjustment, the owners of record will have $7.50 worth of stock and $2.50 worth of dividend for $10.00 total, just as before.
Limit orders are also usually adjusted downwards so that they won't artificially trigger.
Some people believe that investing in a stock just before the company pays a dividend is a neat trick. This especially is prevalent for those companies that are paying a large one-time dividend, such as that TDAmeritrade one, above. They'll buy the stock, get the dividend, and then sell the stock for close to what they paid and make a nice little profit from the dividend amount. Well, no such luck. Due to the adjustment, their net profit turns out to be real close to zero. As Snidely Whiplash would mutter, "Curses! Foiled again!"
Related Fool Articles
- "Ex-Dividend" Explained
- Dividend Myths Foolishly Debunked, Part 1
- Dividend Myths Foolishly Debunked, Part 2
- Don't Miss That Dividend
Recent Mentions on Fool.com
- 3 Prevailing Myths About Dividend Stocks
- 3 Ways to Avoid Taxes on Your Investments
- What "Ex-Dividend" Means and Why It Matters
- Dividend Calendar: How to Find Out When Your Stocks Are Paying Out Dividends
- Why Walt Disney Is Wrong to Pay Such a Small Dividend
- Dividend Aristocrats: Time to Buy Illinois Tool Works?