What Is Ex-Dividend Date? Role & Its Importance

Mutual funds

To determine when and if you will receive dividends, you will need to look at two important dates — date of record and ex-dividend date. Whenever a company announces the issuance of dividends, it sets a record date to determine which shareholders’ names appear in its records. Then, it sets an ex-dividend date based on a stock exchange’s rules. 

This date determines if you will receive a company’s dividends announced on a specific date. You will need to hold shares of this company before this date to be eligible for getting the dividend income. 

Read on to know the meaning and importance of this ex-dividend date.

What Is an Ex-Dividend Date?

Ex-dividend date, ex-date or reinvestment date refers to the cut-off point when investors can get their pending stock dividend if they hold the company’s shares. In India, organisations generally set this date two business days before the record date. Investors who hold shares before this date will receive dividends, while those who sell these will lose their right to it. After this date, these shares become ex-dividend.  

You will receive dividends from a share if you buy it a day before the ex-dividend date. In comparison, if you buy it after this date, dividends will go to the person selling it and not to you. You will be able to own the stock at a discounted price for buying shares after this date.

The price of shares usually falls by the total dividend expenses as the company is left with fewer profits. These expenses are reflected in the company’s accounting books which lower its value by the amount paid.

Let us understand the meaning of ex-dividend date with an example. 

Suppose ABC is a company that declares dividends payable on January 10 2022 for its shareholders. The dividends would go to any shareholder holding shares before the ex-dividend date.

In this example, the record date falls on a Monday. The ex-dividend day would fall two business days before this, excluding weekends, i.e. Thursday, January 6. Shareholders holding shares before this day, on January 5 2022, will be eligible to receive dividends.

Also Read: Dividend Yield: Meaning & How To Calculate

Role of Ex-Dividend Date

Companies pay dividends to all shareholders whose names appear in their accounting books before the record date. Registrar and transfer agents maintain the shareholders’ records of companies to decide the entitlement of their dividends. Only shareholders whose names appear in these records can receive dividends.

However, there is a problem when recording the names of shareholders whose names appear at the very end of the record date. These shareholders do not own shares as it takes 2 business days to receive shares after purchasing them. That is why businesses set up the ex-dividend date to address the issue of T+2 delivery date.

You will have to buy shares before the ex-dividend date so that you get the delivery by the record date. This ensures that only investors owning the shares receive dividend income.

Other Important Dates for Dividend Payment

The process of declaring dividends begins with the company deciding to reward its shareholders. Besides ex-dividend dates, the following are other important dates to know for dividend investment:

• Announcement/declaration date: This is the date on which an organisation announces how much dividend it will pay, when and to which shareholders. The declaration date is usually 10 business days before the record date.
• Record date: Shareholders’ names that appear in the company’s records before this day are eligible for dividend payment.
• Payment date: On this date, the company issues its dividend to shareholders in cash or stocks. For interim dividends, the payment date needs to be within 30 days from the announcement date. In the case of final dividends, a company needs to distribute dividends within 30 days from its Annual General Meeting (AGM).
• Settlement date: This is the day when you get to own shares after purchasing them. It takes at least two business days for such a transaction gets completed.

Ex-Dividend Date and Share Price

The ex-dividend date is important for dividend investors because of its role in determining share price and who gets to keep dividends. Before this day, stock prices surge based on the rupee value of dividends issued. This happens because anyone buying these stocks before the ex-dividend date has assured profits. 

If the price of these stocks appreciates over that of the dividend paid, investors holding them can get good profits by selling them. Hence, knowing the ex-dividend date is essential as it offers the benefits of temporary capital appreciation or promised dividends. 

On the next day, the stocks lose their value due to a decrease in the company’s assets. Companies do not take any direct action to make sure this happens. Instead, buying and selling automatically adjust the pricing in an efficient market.

Strategies for Dividend Investments

In dividend investing, investors buy stocks of companies that regularly pay a portion of their profits as dividends. Investors typically follow a ‘buy and hold’ strategy to buy stocks known for their reliability and solid fundamentals. Then, they collect the dividends earned over long periods. 

These investors usually buy to add new stocks to their portfolio and sell stocks due to underperformance. The ex-dividend date plays a vital role in this strategy, deciding who gets the next dividend payout. Some investors prefer to wait till the ex-dividend date to get the stocks for a lower price while missing the dividend payment.

Another investment is the dividend capture, where investors attempt to collect the dividend before the ex-dividend date and sell it immediately. This strategy can be successful in a strong bull market, where prices are constantly rising. However, it is a risky strategy as it requires exact timing. 

Some experts claim that this strategy does not work. They point out that large institutional investors would have used it consistently to capture dividends. Moreover, the rule requiring stocks to go down by the dividend amount puts too much risk. That said, these risks do not prevent many investors from trying to capture dividends. 

Also Read: What Is Dividend Reinvestment Plan (DRIPs): Types, Benefits, Tax And Disadvantages

Final Word

The ex-dividend date decides whether shareholders will receive their dividend payments or not. It is crucial for investors to know this date if they want to buy shares or sell them for quick profits. If you have considered buying/selling stocks offering dividend payments, you will also need to assess its risks, your investment objectives, etc.

FAQs On Ex-Dividend Date

1. What is the book closure date for shares?

 This refers to the cut-off date, which determines the investors who will receive a dividend payment/bonus issue or stock split. If you buy stocks during or prior to book closure, you will get them delivered only after the end of book closure. 

2.  How do I receive the actual payment of dividends?

If you have bought shares within the ex-dividend date, you are eligible to receive dividends. The amount is credited directly to your bank account provided that it is registered with the registrar. In case you do not have a registered bank mandate or you hold physical shares, you will receive the dividends by cheque.    

3. When do companies issue dividends to shareholders?

Companies pay dividends when they book profits and do not require funds for its use. The schedule for paying dividends varies from one company to another. Some issue dividends to shareholders on a quarterly basis after declaring their quarterly statements. Others offer it once every six months or a year. 

4. Does any company have to issue dividends mandatorily?

No, it is not mandatory for any company to issue dividends. Dividends are a part of a company’s profits, so companies do not offer dividends when there are no gains. Firms can also skip paying dividends when they face a cash crunch or need funds for reinvestments.

5.  What is a special dividend?

Sometimes a firm can issue dividends outside its regular payment schedule. Companies issue these special dividends usually when they have accumulated considerable profits over a few years. If they do not need such excess cash at the given moment, they often pay this type of dividend. 

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.