The ex-dividend date is the first date immediately following the declaration of a dividend by a company's board of directors, when the purchaser of an entity's stock is not entitled to receive the next dividend payment.
The key date in calcuating the ex-dividend date is the record date, which is the date on which an entity issuing dividends records the names of all investors holding the entity's shares, with the intent of paying the dividend to those investors. Because it takes two days to transfer ownership records when shares are sold, the various stock exchanges set the ex-dividend date to be two days prior to the record date. If the record date falls on a non-business day (such as a weekend or holiday), then you count back two days from the immediately preceding business day to arrive at the ex-dividend date.
Thus, an investor who buys an entity's shares on or after the ex-dividend date will not receive any dividend that is declared but unpaid on that date. Conversely, the investor holding the shares immediately prior to the ex-dividend date will receive the dividend.
It is quite common for the price of a company's stock to increase by the amount of a scheduled dividend as the ex-dividend date approaches and then decline immediately thereafter by the same amount, which reflects the decline in value of the shares to investors once the dividend has been paid.
ABC Company declares a $1 dividend, payable to shareholders of record on January 11. The ex-dividend date is January 9. Several scenarios are:
- Mr. Smith buys 10 shares of ABC Company on January 8, and sells it on January 9. Mr. Smith is entitled to the $1 dividend on each of his shares, since he was the last owner of record prior to the ex-dividend date.
- Mr. Jones has held 500 shares of ABC Company stock for the last three years, and retains his ownership through the ex-dividend date. Mr. Jones is entitled to the $1 dividend on each of his 500 shares.
- Mr. Carlson buys 250 shares of ABC Company on January 10. This is after the ex-dividend date, so he is not entitled to the declared dividend.
The ex-dividend date is also known as the reinvestment date.