What does 'ex-dividend' mean?

A share's ex-dividend date is the cut-off date for investors to buy the share with the entitlement to receive the upcoming dividend. Those who purchase company shares on or after this date are not eligible for the dividend payment.

In this article, we look at the ex-dividend date's impact 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 using the profits from running their businesses. Smaller companies may reinvest their earnings back into growing their businesses. In contrast, more mature companies with consistently high profits tend to distribute some of that cash to their shareholders as dividends.

ASX-listed companies that pay regular dividends to their shareholders do so typically twice a year in the form of an interim and final dividend. However, companies are not limited to paying dividends only twice a year. 

Some companies pay dividends more or less frequently than that, and sometimes they might declare a 'special dividend', a one-off extra dividend payment. 

Many exchange-traded funds (ETFs) pay 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 pays a dividend, there are four key dates that you need to know about. 

Declaration date

This is when the company announces its upcoming dividend. The company will inform the market of the dividend payment size and key dates for investors. These include 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 announcement. 

Ex-dividend date

This is the first day a share trades without its upcoming dividend payment included in any purchases. If you purchase a share on or after its ex-dividend date, you will not be entitled to receive the upcoming dividend. 

Conversely, if you own a share before its ex-dividend date and 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 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 typically occurs the next business day after the ex-dividend date. Buy and sell orders placed on the ASX usually take two business days to settle, so 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 eligible to receive the dividend on the record date.

Payment date

This is when the company actually pays the dividend to eligible shareholders. It can be 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 investors of the deadline to buy a share and qualify for its dividend, the ex-dividend date also impacts the share price.

With new investors willing to pay a premium to receive the dividend payment, a company's share price typically lifts in the lead-up to its ex-dividend date. 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.

Beware the short-term trading strategy

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 a few days before their ex-dividend dates, only to 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 in the long run. Share prices typically fall on their ex-dividend date by about the value of the dividend. This means that once the dividend is considered, the most likely outcome for investors pursuing this strategy is to break even. 

Although, that's before taking into account the transaction fees on both trades, which could easily put 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 2023 earnings season, many ASX companies declared and paid interim or final dividends to their shareholders. Let's look at a couple of examples to see how this impacted their share prices.

Santos Ltd (ASX: STO)

The ongoing war in Ukraine and a ramp-up in demand post-COVID as economies restarted have kept energy prices high. This has resulted in record earnings for energy companies, including Australian oil and gas producer Santos. And, like many other energy companies, Santos has returned some of these bumper profits to shareholders through higher dividends.

In its FY22 financial results, for the 12 months ending 31 December 2022, Santos announced it would increase its final dividend by a whopping 78% (to 15.1 US cents per share).

The record date was 28 February, which was a Tuesday, so the ASX set the ex-dividend date for the previous business day, Monday 27 February. 

In the five days leading up to the company's ex-dividend date, the Santos share price gained 4%, from $6.77 to $7.01. Then, on the day it went ex-dividend, it reversed a large chunk of those gains, sliding 2% lower to $6.89. 

Investors hoping to 'buy the dividend' may have been able to make a small profit on this trade if they timed it right (which wouldn't have been easy, given recent volatility in the Santos share price).

Commonwealth Bank of Australia (ASX: CBA)

Banks also reported substantial profits over this period thanks to rising interest rates. To try and curb high inflation, the Reserve Bank of Australia has been rapidly hiking the official cash rate. This causes bank margins to expand, as they can earn more interest from their loans than they have to pay on their customers' deposits.

In its 1H23 results, for the six months ending 31 December 2022, CBA announced a 20% increase in its interim dividend to $2.10 per share. The record date was 23 February, which was a Thursday, which meant the ASX set the ex-dividend date for Wednesday 22 February.

The CBA share price fell quite sharply in the lead-up to the ex-dividend date, likely indicating that aspects of the bank's results, other than the dividend, were driving investor behaviour. In the five trading days prior to going ex-dividend, CBA shares fell 7%, from $109.25 to $101.52.

They fell further on the day they went ex-dividend, dropping another 2%. This fall was likely to have been partially driven by the dividend. However, investors hoping to buy the dividend and profit from short-term fluctuations in the CBA share price would have most likely lost money on this trade, given the sharp fall in the share price while it was still trading cum dividend.

Key takeaways

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 consider market and other factors when trying to time your trading activity. While pursuing a 'buying dividends' investment strategy might be tempting, market forces dictate that it is rarely profitable over the long run.