What does ‘ex-dividend’ mean?
A share’s ex-dividend date refers to the cut-off date for investors to buy the share and still be entitled to receive its upcoming dividend. On and from this date, the right to receive the dividend payment is no longer included in any purchase of shares.
In this article, we take a look at what impacts this might have on a company’s share price and what it means for you as an investor.
Some background on dividends
Companies have a couple of different options for how to use the profits they make from running their business. Smaller companies may choose to reinvest their earnings back into growing their business, while more mature companies with consistently high profits tend to distribute some of that spare cash to their shareholders in dividends.
ASX-listed companies that pay regular dividends to their shareholders generally do so twice a year in the form of an interim and final dividend. However, companies are not limited to only paying dividends twice a year. Some companies pay dividends more or less frequently than that, and sometimes they might declare a ‘special dividend’, which is a one-off dividend payment. Many exchange-traded funds (ETFs) have quarterly distributions, and some Australian real estate investment trusts (REITs) even pay out monthly.
Four important dividend dates
If you are a shareholder in a company or ASX-listed fund that does pay a dividend, there are four key dates that you need to know.
Declaration date: This is when the company announces its upcoming dividend. The company will inform the market of the size of the dividend and the key dates for investors, including the ex-dividend date, record date, and payment date. Often the declaration date will coincide with the company’s half-yearly or yearly financial results.
Ex-dividend date: This is the first day a share trades without its upcoming dividend payment included in any purchases. This means that if you purchase a share on or after its ex-dividend date, you will not be entitled to receive its upcoming dividend. Conversely, if you owned a share before its ex-dividend date and then decide to sell it on or after this date, you will still be entitled to the share’s dividend, even if you no longer own the share by the time the cash dividend is paid.
Between the declaration date and the ex-dividend date, a share is said to be trading ‘cum dividend’ (CD). If you purchase shares during this period and hold them until at least the ex-dividend date (XD), you will be entitled to receive the upcoming dividend.
Record date: The record date normally occurs the next business day after the ex-dividend date. Because buy and sell orders placed on the ASX normally take two business days to settle, this allows time for investors who bought shares on the business day before the ex-dividend date to appear on the company’s share register. The company will tally up a list of all shareholders who are eligible to receive the dividend on the record date.
Payment date: This is when the cash dividend is actually paid to eligible shareholders. It can often be up to several weeks after the record date.
The company sets the record date when it announces the details of the upcoming dividend to the market. The exchange then sets the ex-dividend date – the ASX in our case.
What the ex-dividend date means for you as an investor
Apart from informing you of your deadline to buy a share and qualify for its dividend, there are other things you should understand about the ex-dividend date, including its potential impact on the share price.
A company’s share price may increase in the lead-up to its ex-dividend date, as new investors may be willing to pay a premium to receive the dividend payment. Conversely, once the ex-dividend date has arrived, the share price may fall because the right to the dividend payment is no longer attached to purchases. Investors who purchased additional shares simply to receive the dividend may sell some or all of their shares, pushing the share price down.
Understanding how the ex-dividend date can affect the value of your shares can help you ride out any short-term fluctuations in price. Some volatility in share prices around their ex-dividend dates is entirely expected and shouldn’t worry long-term investors.
Given that share prices exhibit these predictable patterns around their ex-dividend dates, some investors might be tempted to try and earn short-term profits by pursuing a ‘buying dividends’ strategy.
This involves purchasing shares in the few days leading up to their ex-dividend dates, only to instantly sell them once the date has been reached. The idea is to rotate your money through several different dividend-paying shares, profiting from any short-term appreciation in their price while also pocketing the dividend.
Unfortunately, this strategy rarely works out over the long run. Share prices typically tend to fall by about the value of the dividend on their ex-dividend date. This means that, once the cash dividend is taken into account, the most likely outcome for investors who pursue this strategy is they will simply break even.
Although, that’s before taking into account the transaction fees they owe on both trades, which could easily wind up putting them in the red. For these reasons, most ex-dividend targeted trading strategies aren’t profitable.
Examples of companies that have gone ex-dividend recently
In the February 2022 earnings season, many ASX 200 companies declared and paid interim dividends to their shareholders. Let’s take a closer look at a couple of examples to see what impact this had on their share prices.
SEEK Limited (ASX: SEK)
Online job listings company Seek declared a bumper interim dividend of 23 cents per share when it reported its first-half FY22 results to the market in mid-February. The record date was 24 March 2022, which was a Thursday, meaning that the ASX set the ex-dividend date as the previous business day, Wednesday 23 March 2022.
In the three business days leading up to the company’s ex-dividend date, the Seek share price increased by 18 cents, or 0.6%, from $30.69 to $30.87. Then, on the day it went ex-dividend, it reversed those gains, sliding 1.7%, or 52 cents lower to $30.35. Investors hoping to buy the dividend and profit from short-term fluctuations in the Seek share price would have most likely lost money on this trade.
Contrast this with longer-term investors who purchased Seek shares three years ago when they were trading for just $17, based on their belief in the company’s business model and growth potential. These investors would now be sitting on gains of more than 75% – despite the havoc wrought on the Seek share price throughout the COVID-19 pandemic – and they would have collected dividend payments throughout.
ResMed Inc (ASX: RMD)
Share prices won’t always fall on their ex-dividend date. Take the example of ResMed Inc, which manufactures medical devices that treat sleep apnoea and other respiratory conditions. When its shares went ex-dividend on 9 February 2022, their price actually increased 1.7% to $33.86.
This indicates that factors other than the dividend caused the share price to rise. It may suggest that investors generally thought ResMed shares were still undervalued at that price, even considering their ex-dividend status.
This shows that, even when a ‘buying dividends’ strategy is profitable, it’s probably not really the dividend itself that’s the cause of it. So, if you’re thinking about when to buy shares – even if you are buying them for their dividend income – always consider more than simply the timing of their ex-dividend date.
As an investor, you should know what the ex-dividend date means because it determines whether or not you are entitled to receive a share’s upcoming dividend payment.
However, you should always take more into consideration when trying to time your trading activity. While it might be tempting to pursue a ‘buying dividends’ investment strategy, market forces mean that it is rarely profitable over the long run.
Last updated 13 April 2022. Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended ResMed. The Motley Fool Australia has recommended ResMed Inc. and SEEK Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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