What is an ex-dividend date, and can you profit from it?

What exactly is the ex-dividend date of an ASX dividend share? Is it something you can profit from for a bit of extra cash?

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You will hear terms such as 'ex-dividend' and 'ex-dividend date' quite frequently in the course of investing in ASX dividend shares. Shares will periodically be described as 'going ex-dividend', or perhaps blamed for a price drop using this excuse. So what is meant by this term, and what does it mean for your investing. Perhaps more importantly, is this fabled date something you can use to your advantage as an ASX dividend investor?

An ex no one wants to break up with

Let's start from the start. A dividend is a payment that a company makes to its shareholders. In Australia, this is normally carried out every six months, although some companies pause or defer dividends for various reasons.

But how long do you have to own the shares to receive a dividend if the company pays one out? Well, that's what the 'ex-dividend date' tells you. When a company announces a dividend, it will normally give investors 3 dates: an ex-dividend date, a record date, and a payment date. To receive the dividend, investors must buy shares in the company before the ex-dividend date.

The day after the ex-dividend date is normally the record date, and that's when the company will note who owns its shares and who will be receiving the payments. The payment date is when the dividends are officially dished out.

Can you trade the ex-dividend date?

The more entrepreneurial readers out there might be wondering if it's possible to somehow jump into a share before the ex-dividend date, hop on the record, and then sell out after the dividend share goes 'ex-dividend'. Good thinking. But unfortunately, this strategy rarely works, if ever. See, the market is fairly efficient with these things. All investors know when a particular ex-dividend date is for (usually) weeks before it occurs. As soon as the company goes ex-dividend, the market assumes that the cash that is about to be paid out has left the company forever (which is true). Thus, the company immediately becomes less valuable. And this is reflected in the said company's share price with immediate effect.

Say a company with a share price of $20 tells investors it will pay out a dividend of $1 per share. You can reasonably expect that the first day after this company goes ex-dividend, it's share price will open $1 lower at $19. Of course, this is by no means guaranteed. The market could be having an exceptionally strong day and the share price actually rises. But most of the time, it will normally play out along this line. It's certainly not some kind of loophole you can efficiently and repeatedly exploit.

If you want a real-life example, just look at the Platinum Asset Management Ltd (ASX: PTM) share price this week. Platinum went ex-dividend on 1 March. On 2 March, Platinum shares opened 2.1% lower, which is almost exactly half of the company's current dividend yield of 5.2%. Exactly what should logically happen.

As the famous saying goes, there's no such thing as a free lunch. That extends to ASX dividend shares and ex-dividend dates too.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ How to Invest

A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.

Building a share portfolio as a young investor? Here's where I'd start

I think investing in ASX shares is a great idea. But where to begin?

Read more »

nerdy looking guy with glasses peeking out from under bed sheets
⏸️ How to Invest

How to avoid this costly ASX investor trap – it's harder than you think

Emotional investing is one of the most common mistakes people make. Here's how to avoid it.

Read more »

Young female investor holding cash ASX retail capital return
⏸️ How to Invest

How to turn $20,000 into $300,000 in 10 years with ASX shares

$20,000 investments in Domino's Pizza Enterprises Ltd (ASX:DMP) and these ASX shares 10 years ago would have made you rich...

Read more »

Five stacked building blocks with green arrows, indicating rising inflation or share prices
⏸️ How to Invest

What is reflation, and why is everyone talking about it?

Investors are starting to talk about the dangers of 'reflation' for the ASX share market. Here's what that means for…

Read more »

asx share price on watch represented by investor looking through magnifying glass
⏸️ How to Invest

Here's why Warren Buffett prefers buybacks to dividends

Berkshire Hathaway Inc (NYSE:BRK.A)(NYSE:BRK.B) has been buying back its own shares. Why is that better than paying a dividend for…

Read more »

⏸️ How to Invest

Why I think Warren Buffett is right to think a market crash is always coming

Following Warren Buffett’s lead in planning for the next market crash could be a profitable long-term move, in my opinion.

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

asx share price on watch represented by young man looking intently through magnifying glass
⏸️ How to Invest

How I'd find the best shares to buy now

Focusing on company fundamentals and assessing the outlook of specific industries may lead to finding the best shares to buy…

Read more »