Ex-dividend date: Why it's important to know when investing in dividend stocks

• The ex-dividend date is the day in which you can buy a stock to get the upcoming dividend payment.
• If you own shares the day before the ex-dividend date, you receive the next dividend payment. 
• Investors use this to decide between getting the upcoming dividend at full share price or giving up the dividend for a discounted share price.

Investors looking for ongoing income from their investments often buy stock in dividend-paying companies for the earnings distributions they receive. To maximize profits, these investors must pay close attention to several important dates, one of which is the ex-dividend date.

When a company declares a dividend, a process is set in motion with precise rules about how those dividends will be disbursed and to whom. Here we will learn about that process and the role played by the ex-dividend date. 

What is an ex-dividend date? 

The ex-dividend date of a stock determines who receives an upcoming dividend payment. If you own shares of a dividend-paying stock the day before the ex-dividend date, you're entitled to the next dividend payment. If the stock is bought on the ex-date or any time after, the dividend payment is collected by the seller. 

Another very similar-sounding term you might hear is ex-dividend. This is not the same as the ex-dividend date.

Ex-dividend refers to a stock that trades without the value of the next dividend payment. A stock is ex-dividend if it trades on or after the ex-dividend date. If you buy a stock after it has gone ex-dividend, you will own the stock but will not get the next dividend payment for that stock. Instead, the payment will go to the person who sold you the stock.

Why is it important?

Dividend investing is a system that involves buying stocks that pay a portion of the profit the company has earned on a regular basis, called dividends. Dividend investors typically use a buy-and-hold strategy in which they buy reliable stocks in solid companies and collect the dividends over a long period, buying or selling only when they want to add new stocks or dump stocks that are no longer performing.

The ex-dividend date is important to dividend investors because of the role it plays in determining who gets the next dividend payment. If you own a stock and want to make sure you get the next dividend payment, don't sell the stock until the ex-dividend date or later. If you buy a stock and want to make sure you get the next dividend payment, buy the stock before the ex-dividend date.

How ex-dividend dates work 

The process begins when a company declares it will pay a dividend. As part of that declaration, the company states how much it will pay (dividend) along with four important dates including the declaration date, ex-dividend date, record date, and payment date.

But first: To completely understand the role of the ex-dividend date you should know four dates that are part of the dividend payment process. The US Securities and Exchange Commission (SEC) regulates the dates that relate to dividend payments.

• Declaration date: This is the date the company declares it will pay a dividend, how much it will pay, when it will pay it and, importantly, the ex-dividend date. By regulation, the declaration date must be at least 10 business days before the record date.
• Ex-dividend date: This is the cutoff date to decide who gets the next dividend payment. If you own the stock one business day before the ex-dividend date, you get the payment. If somebody else owns the stock on that date, they get the payment. Two methods are used to determine the ex-dividend date, which we cover below.
• Record date: This date is set by the company as the date it will determine who the stockholders of record are. These are the stockholders who will receive the upcoming dividend payment.
• Payment date: This is the day the company pays out the dividend.
• Settlement date: This is the date you actually own the stock if a buyer or receive payment if a seller. Stock settlement typically happens two business days after the order is placed.

The ex-dividend date acts as a buffer to make sure there's enough time to complete a transfer of stock ownership from the seller to the buyer. This is why in order to receive the upcoming dividend payment you must buy the stock before the ex-dividend date.

Let's take a look at two examples of how the ex-dividend date is used with the following dates:

On July 29, 2021, Company XYZ announced a $2 quarterly dividend payout to shareholders. The company declared a dividend payment date of September 17, 2021. The date of record for shareholders on the company's books is August 13, 2021. This means the ex-dividend date, one business day before the record date, will be August 12, 2021.

Example 1: On August 11, 2021, you purchase 100 shares of XYZ stock at $50 for $5,000. Since you initiated the purchase before the ex-dividend date, and assuming settlement occurs two business days later, you'll be the shareholder of record on the record date (August 13, 2021) and you will receive a dividend payment of $200 ($2 x 100 shares) on September 17, 2021.

Example 2: On the other hand, if you wait just one day and initiate the purchase on August 12, 2021, settlement will not occur until August 14, 2021, meaning the person you bought the shares from will be the owner of record on August 13. However, instead of paying $5,000 for the stock you will pay $4,800 ($5,000 - $200) since the stock would be trading ex-dividend.

An investing strategy: Dividend capture

According to Marc Lichtenfeld, chief income strategist at the Oxford Club, "Dividend capture is a strategy where an investor buys the stock before the ex-dividend date and sells on or right after the ex-dividend date in order to capture the dividend."

The idea is to purchase the stock, "capture" the dividend, and sell the stock on or after the ex-dividend date at no loss or a slight gain, keeping the dividend as profit. Advocates of dividend capture strategy sometimes use ex-dividend date tracking tools to search for stocks that are going ex-dividend during a specific date range. 

The more advanced tools offer additional information and analysis for a fee. There's a tool sponsored by NASDAQ that provides all the basic information, including declaration (announcement) date, ex-dividend date, record date, payable (payment) date, dividend amount, and more for free. 

When it comes to actually using dividend capture as a strategy, Lichtenfeld is not much of a fan. "The strategy doesn't work," he says. "If it did, large institutional investors would do it consistently and capture dividends every day."

Lichtenfeld says the strategy doesn't work because of that rule requiring stocks to go down by the amount of the dividend on the ex-dividend date. This, Lichtenfeld believes, creates "too much risk that the stock would fall as much as the dividend paid or more."

This risk analysis doesn't stop others from using the strategy to try to capture dividends as a way to make money. Capture advocates count on other factors to keep the price of the stock from falling, including positive earnings, economic factors, analysts expectations — and even rumors.

The financial takeaway

Since the ex-dividend date determines who gets the upcoming dividend based on who owns the shares the business day before that date, it's one of the most important dates to track for dividend investors.

Some investors employ the use of dividend capture, which is a strategy where an investor buys and holds a stock just long enough to get the next dividend, then sell the stock quickly for no loss. This is risky since the price of the stock is automatically reduced by the upcoming dividend.

Remember that if you wait until the ex-date or later to buy stock, you will get it cheaper, just without the next dividend. Some investors prefer the discount more than they do missing one dividend payment.