When you own dividend stocks, it’s important to understand the dividend dates. Dividend announcements and changes can impact stock prices as well. Many investors look to make quick profits with changes in stock prices around the ex-dividend date through dividend capture.
Investors of mutual funds and ETFs receive periodic payments as well. Hence, a dividend announcement will also affect your investment in ETF or mutual funds.
What is an Ex-Dividend Date?
Ex-dividend date refers to a cut-off day when companies decide the beneficiaries of dividends. All stockholders before the ex-dividend date become entitled to dividends. Any stockholders buying stocks on or after the ex-dividend date do not qualify for the dividends.
Companies that pay dividends plan and announce them in time. Investors know the dividend payment and ex-dividend dates. Hence, they can also plan to take advantage of recently announced dividends as well as favorable stock price movements.
When companies announce a dividend, all shares become “cum-dividend”, meaning with dividends. On a particular date announced by the company, only existing shareholders up to that date become eligible for dividends. Any new investors buying shares on or after that date would not receive dividends. It is called, “ex-dividend” or without dividend situation.
Dividends are paid out quarterly, semiannually, or annually. It is important to know the ex-dividend date if you are planning to sell or buy dividend stocks. Usually, established companies that pay consistent dividends, follow a dividend calendar. Even if the dates are announced in advance, it will have impacts on share prices nearing these dates.
Important Dividend Dates
There are four important dividend dates that investors must follow.
Dividend Announcement Date
As the name suggests, it is the announcement date for dividends. The board of directors decides on the dividend. Companies paying consistent dividends announce a dividend calendar and other important decisions regarding dividends.
The company also announces ex-dividend, record, and payment dates. Importantly, the company announces the dividend per share. Usually, it is announced in dollar terms such as $1.0 per share or $0.50 per share.
Shareholders must be on the company’s record lists on this date to receive dividends. This date is usually set one working day after the ex-dividend date. The company then evaluates the eligibility of the existing shareholders to receive the dividends.
It is the cutoff date set by the company to receive dividends. All shareholders buying shares before this date become eligible to receive dividends. Any shareholders buying stocks on or after the date do not qualify.
Ex-dividend and record dates are set closely. Often, they are separated by just one working day to evaluate the qualifying shareholders.
It is the actual date of dividend payment. On this, all qualified shareholders would receive dividends. If the company announced a reinvestment plan, participating shareholders’ dividends will be automatically reinvested on this date.
Let us suppose a company ABC’s current share price is $ 60. Its board of directors meets and announces a dividend calendar. They announce a dividend of $ 0.50 per share.
|Announcement Date||Record Date||Ex-Dividend Date||Payment Date||Dividend Amount||Dividend Type|
Even if the company does not categorically announce an ex-dividend date, it is assumed to be one working day before the record date. All shareholders of the company before the ex-dividend date would be entitled to the dividend payment.
A shareholder with 1000 ABC shares would receive $500. If the shareholders sell any of these shares on or after September 7, 2021, they will still receive the dividends. Thus, new investors would not receive dividends if they buy shares after September 7, 2021.
Dividend Announcement Effects on Stock Prices
Although dividend payments are not an obligation for companies, many still follow a consistent dividend policy. Investors also favor such companies that pay regular and consistent dividends. Thus, dividend announcements can have various effects on a company’s share price.
If an established company announces a dividend with an inflation-adjusted rate, it will send a positive signal to the stock market. Contrarily, if a company fails to maintain its dividend growth rate, it sends a negative signal. Thus, a share price will likely be impacted by a dividend decision.
Similarly, for companies paying a one-off dividend, it will still send a positive signal. Investors would see it as a positive sign with improved profits for the company. Alternatively, some analysts may argue that the company couldn’t find reinvestment opportunities. Thus, sending a negative signal for such companies.
Ex-Dividend Date effects on Stock Prices – Dividend Capture
Dividend capture or dividend stripping is a trading strategy to make quick gains through buying and selling dividend stocks. Traders would buy dividend stocks just before the ex-dividend date and sell them after that date. However, this trading strategy is risky and difficult to execute.
The stock market adjusts the effects of dividend announcement and ex-dividend dates. In an efficient market, the stock price would already reflect the announced news. Thus, on an ex-dividend date, the stock prices will fall by the dividend amount. It means buying stocks on an ex-dividend date shouldn’t cost you much.
Initially, the stock price of a company will increase with a dividend declaration. However, if the declared dividend amount does not meet the expectations of investors, it may send a negative signal to the market as well. Once the share prices fully reflect the announcement effects, they’ll stabilize.
Stock prices tend to rise nearing the ex-dividend or record date. As investors willingly pay a premium on share prices to receive dividends. The share prices usually fall by the dividend amount on the ex-dividend date to reflect the detachment of the dividend.
How Soon After Ex-Dividend Date Can I Sell?
Technically, you can sell stocks on or immediately after the ex-dividend date. If you hold the shares on an ex-dividend date, you’ll be listed on the record date as well. Thus, you’ll receive the dividend amount even if you sell the shares immediately.
You should consider the share price movement before selling a share with an ex-dividend. As share prices fall by the dividend amount until the record date, they’ll appreciate by the same amount after that. Hence, you should hold these shares until the share prices start increasing and reach a stable mark.
Dividends also have tax implications for investors, unless you hold the investment in a tax-deferred account like a 401(k). If you bought shares for dividend income, you should carefully evaluate the tax implications.
As we discussed earlier, a dividend stripping strategy doesn’t always work. It may work counter-intuitively for many investors. Also, companies announcing dividends can impose restrictions on the immediate selling of the stocks just after the ex-dividend date.
As an investor, you should consider the broader context of dividend announcement. If the company meets investors’ expectations, the share prices will appreciate. Contrarily, a lower dividend payout will impact negatively the share prices. Thus, your decision to sell the stocks after the ex-dividend date must carefully evaluate the share price movement impacts.
Ex-dividend is the cutoff date for shareholders to be eligible for dividend payments. Shareholders buying stocks on or after this date do not receive dividends. This date has an impact on the share price of the company as well. Thus, selling shares immediately after the ex-dividend date must be considered carefully with share price movement anticipation.