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. The ex-dividend date is the last day to buy the shares if you want to receive the dividend.
The following day 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 exceptional stong 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.
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.