Even in this era of high-risk growth stocks and alternative investments, market players still appreciate good old-fashioned dividend stocks.
A company that issues dividends to its shareholders is usually perceived as a stable, dependable success. Investors often buy shares in dividend stocks to “ground” their portfolio with solid commodities that thrive year after year.
Getting a cash dividend every quarter is another bonus, especially for someone who owns a lot of shares in the company.
The dividend payout process isn’t complicated. Still, novice investors in dividend stocks can get tripped up by the calendar when strategizing their buying and selling. Two dates, in particular, are the basis for a lot of confusion: the ex-dividend date and record date. These dates are also respectively called the “ex-date” and “date of record.”
In this post, the experts at Gorilla Trades will help you parse out these two terms.
The basic difference between the ex-date and record date relates to the shareholder’s eligibility to receive a dividend payout on a given stock.
If a shareholder wants to earn the next scheduled dividend payout on a certain commodity, they must buy or hold the stock in their portfolio on the ex-dividend date. This date almost always falls one day before the date of record, the day on which the company verifies the shareholders who are about to receive the dividend.
That’s the primary difference between ex-dividend date vs. record date. Granted, if you’re just getting into dividend stocks, it’s still a bit confusing.
To make it clearer, let’s take a deeper look at the whole cycle of a dividend payout.
Most companies issue dividends quarterly, once every three months. To understand the dividend payout cycle, let’s work with a quarterly calendar. The process is the same every quarter.
For this example, we’ll use Q2, which is April through June for companies whose fiscal years start in January. We’re going to give our business the super-creative title of Example Company.
The declaration date is the day when a company’s board of directors announces they’ll be issuing dividends at the end of the current fiscal quarter. The company announces how much each shareholder will get in dividend payouts and when they’ll get them. It will also announce the dates mentioned below.
The declaration date isn’t all that important, since it’s basically nothing more than a proclamation or a press release. It has no real bearing on shareholders, other than to let them know something’s going to happen on a future date.
Let’s say that on April 19, Example Company announces they’ll pay dividends of $0.35 per share on June 20. To receive this dividend, shareholders must have stock in the company on May 15. May 15 is the record date, which we’ll explain in a second.
Chronologically, the next day in the dividend payout cycle is the ex-date. This marks the day that share purchases in the stock no longer apply to the next dividend payout. The ex-date commonly comes one business day before the record date. In our example, the ex-date would be May 14.
Let’s say you’re interested in buying a bunch of shares in Example Company. You heard that they’re paying dividends on June 20, and you want to get a piece of them. To get your dividend, you must buy your shares in Example Company no later than May 13.
If you miss that deadline and buy your shares in Example Company on the ex-date, May 14, you won’t get that June 20 dividend. Instead, you’ll get dividends on your shares at the end of the next quarter — probably around the middle of September — if you hold onto them that long.
Investors get confused about the ex-date for a couple of reasons. For one thing, it’s not set by the company itself — it’s set by the exchange on which the commodity is sold. Since it’s one business day before the date of record, that can mean it’s actually three calendar days before if the record date falls on a Monday or the day after a holiday.
Just think of the ex-date as the cutoff point to earn dividends on the current quarter and the first date for which dividends of the next quarter will apply.
The date of record is nothing more than a clerical occasion. It’s the day that the company looks at its records to identify and confirm all its shareholders. Everybody on the list on the record date will get the next dividend payout.
On its previously announced record date of May 14, Example Company will review its list of active shareholders. If you bought stock in Example Company before or on May 13, you will be on this list. You will get your payout on or around June 20.
This is probably the biggest source of confusion between ex-date and record date. That’s because the ex-date comes before the stock dividend record date.
One might think as long as they execute their stock purchase the day before the date of record, they’re good to go for the next dividend payout, but they won’t be.
The simplest explanation for this hang-up is that a stock transaction takes two business days to officially get on a company’s records. If you bought Example Company shares on Tuesday, it will officially be on Example Company’s books on Thursday.
Furthermore, the company announces the date of record. The stock exchange is responsible for announcing the ex-date. When you’re getting different dates from different sources, it’s easy to see how novice traders get these deadlines mixed up.
Keep it simple: Pay attention to the company’s announcements first. To make sure you’re buying a stock with the next scheduled payout date, just make sure you enter into it at least two business days before the date of record the company sets.
No real mystery here — the stock dividend payout date is when the company issues its dividends. If they’re paying cash dividends, the company will either direct deposit them in your bank or brokerage account or mail you a check. If they’re paying stock dividends, you’ll see an increase in shares on your brokerage account.
Your sweet Example Company dividend will show up in your electronic account on June 20 — or a few days afterward if it’s a physical check.
One way investors build their trading strategies to earn profits is to time their sales to correspond to the ex-dividend date and record date of a certain commodity — primarily the ex-date.
If somebody sells their shares on ex-date, they will get money for the share price from whoever buys them. However, the seller will still be on the shareholder list on the date of record, so they’ll get the next dividend payout, as well.
Remember, as of the day before the ex-date, the seller was still a shareholder. They remained on the company’s books. Their transaction on ex-date will not be reflected on the date of record because it takes two days for it to appear on the company’s ledger.
Not only will the trader get paid for their shares, but they’ll also reap the profits from the dividends for these shares that they technically no longer own. This is why you might see a lot of trades happening with a given company on its ex-date.
So, you, the crafty investor, are looking to switch up your investments a bit and decide to sell your Example Company shares — maybe you want to invest in a company with a better name — but Example Company had a great year and announced a higher-than-usual dividend on declaration day. You don’t want to cash out too early or you’ll miss that payout.
The answer is simple: Sell your Example Company shares right on ex-day, which is May 14. You will still receive the dividend payout on June 20. The party you sell to, however, will not unless they previously bought shares from someone else.
Keep in mind, though, that if you sell your shares on the ex-date, it will almost certainly be for a lower price than they traded for the day before. Investors are willing to pay higher premiums for stocks in the days leading up to the ex-date because they’ll get them in time to earn the next dividend. That volume drives stock prices higher.
On ex-date, that incentive disappears, so the stock price goes lower. But it still may be wise to sell your shares on the ex-date, especially if you’ve held them long enough to realize a substantial profit already. A one-day price dip won’t hurt your overall worth that much.
Concepts like record date vs. ex-dividend date can be confusing, but Gorilla Trades makes finding stock market winners easy. To find out more about how we can help your portfolio, sign up for a free trial.