There are two primary ways to make money through the stock market: by selling the stock for more than you paid—also known as capital gains—and by collecting a dividend. A dividend is a payment made by a company to its shareholders, most often out of the profits it generates.
For investors, dividends can be an important part of your investing strategy whether you're reinvesting them back into a stock or using the dividends as an additional income stream. "Dividends are kind of like a bonus to investors for owning the stock. They are paid regularly, usually quarterly, so investors are consistently compensated for owning the stock, even if the stock price falls," says Kevan Melchiorre, certified financial planner and co-founder of Tenet Wealth Partners. In order to receive dividend payments there is a key date you must know, the ex-dividend date.
What is the ex-dividend date?
The ex-dividend date determines if a shareholder will receive an upcoming dividend payment. "Shareholders who own the stock before the ex-dividend date will be paid the next dividend," says Sabina Smailhodzic Lewis, certified financial planner and founder and financial Planner at Avant-Garde Wealth. This is because dividend payments are sent out based on who owns the shares on a specific date, known as the record date, which is typically one business day after the ex-dividend date.
It's also important to note that dividend payments are generally not guaranteed, meaning that a company may choose to suspend or reduce its dividend payments at any time. While some companies have built a reputation for paying dividends for decades, others have had to suspend or cut dividends in times of economic uncertainty. For example, Exxon Mobil (XOM) has paid a dividend for more than 100 consecutive years. General Motors (GM) suspended its dividend payments in 2020 because of the coronavirus pandemic and didn't resume until August 2022.
How ex-dividend dates work
When a company announces that it will pay out a dividend, it will also announce how much will be paid to shareholders, and the date that investors must own shares to receive the dividend payment, which is known as the record date. The ex-dividend date serves as a cutoff date after which new investors to the company must wait for the next dividend.
"Existing shareholders will receive a notification from the company, while potential investors can find the information online, on popular investor information websites," adds Smailhodzic Lewis.
- Declaration date: On this day, the company will usually issue a press release announcing the dividend amount and important dates that shareholders should be aware of.
- Ex-dividend date: This is the day after which dividend payments will no longer be paid to investors who purchase a stock.
- Record date: The dividend record date is the date which one must own shares in order to be eligible for dividend payments.
- Payment date: On this day, dividend payments are made to shareholders who held their shares prior to the ex dividend date.
- Settlement date: The settlement date is the day the shareholder officially owns the stock if you purchased shares, or the date you receive payment if you sold shares. This is typically two business days after a buy or sell order is executed.
Example
On February 1, Company A declares a dividend that will be paid to its shareholders on March 30; this is the payment date. Company A also says that shareholders who own the stock on or before February 10 will be entitled to the dividend; this is the record date. The stock will trade ex-dividend one day before the record date, which in this example would be February 9. In this case anyone who buys the stock before the ex-dividend date of February 9 will receive the March 30 dividend. Those who purchase shares on the ex-dividend date or after will have to wait until the next dividend is declared.
The takeaway
Understanding the ex-dividend date, dividend record date, and dividend payment date are important for any investor who wants to take advantage of dividend payouts as part of their strategy. "Staying mindful of the ex-dividend date whenever trading stock can be the difference between capturing the upcoming dividend income or not," Melchiorre says.
