Understanding Dividend Dates
This page is a fairly thorough explanation
of how dividend dates work. For those
who find details distracting, click on
Understanding Dividend Dates, Light
Or, to find the answer to a specific
question more quickly, click on
Dividend Dates FAQ
Dividend dates can be very confusing. A great many stock investors do not understand them at all and other investors are under the faulty influence of many popular misconceptions. The following explanation will simplify the technical language of the rules that govern dividend dates and in the process clear up the popular misconceptions. It will also provide links to several stock exchange Websites so readers can see the official technical language for themselves.
Note: This explanation page is for publicly traded stocks and exchange-traded funds. Mutual funds use different rules, the ex-date usually being the first business day after the record date.
There
are two categories of cash dividends recognized by the exchanges, the difference being
the
relative size of the distribution.
Normal dividends are those that amount to less than 25% of
a company's stock price. Normal
dividends represent
over 99% of all dividends paid, and as a result are the only ones most
stock
investors are familiar with. Dividends
of 25% or more of a company's stock price represent a fraction of one
percent of all
dividends paid and are handled quite differently from normal dividends.
Normal Dividends
This
is the date the company declares the dividend.
This is the day a buyer of a stock becomes
the registered
owner; also called the Owner of Record. The buyer of a
stock must be on the
company's books as the Owner of Record to
receive a normal dividend. The company
itself sets this date.
Because of the T+3 settlement rule, stock trades must be
settled in three
business days, meaning that to be an Owner of
Record, a buyer of the stock must buy the stock three
business days before the record date.
This is when the dividend payment will be made.
It is also set
by the company.
This is the only date of
the four that directly affects
investors,
as it determines when the right to a dividend is
no longer
transferred with the sale
of a stock.
For this reason,
it's also
the date that causes all the confusion.
There is another complication caused by weekends and holidays, and that is when the record date falls on a weekend or an exchange holiday. In such a case, the ex-date is sooner than it otherwise would have been. For example, if Friday is the record date, normally Wednesday would be the ex-date. But if Friday is an exchange holiday, the ex-date in that circumstance would be Tuesday. Record dates that fall on weekends are handled in a similar manner, but while a record date that falls on a Saturday would have an ex-date one day sooner than if it were on a weekday, a record date that falls on a Sunday would have an ex-date two days sooner than it otherwise would be. The purpose of advancing an ex-date in such circumstances is to assure that shareholders of record are established no later than the declared record date. The three day settlement rule still applies but because the exchanges are not open on holidays or weekends, the ex-date must be advanced for the trade settlement to be made before the record date, as the following Monday would be too late. It is not common that a record date falls on an exchange holiday or a weekend but it happens on occasion. The primary reason is that a few companies have a policy that the record date for their dividends will always be on the same date of the month in which they are paid, for example, the 15th. Of course the 15th (or any specific date) will not always fall on the same day of the week, so on occasion it will land on a Saturday or a Sunday.
Note: The three day settlement period (T+3) does not apply to ex-dividend dates, as they are real-time dates - buy before the ex-date, you qualify for the dividend; buy on or after the ex-date, you don't qualify for the dividend.
Extended Hours Trading
Another area of confusion about dividend dates is how extended hours trading affects dividend rules. The answer to that question is a simple one: extended hours trading (both pre-market trading and after hours trading) does not affect dividend rules. The statement in the previous paragraph still applies: buy before the ex-date (no matter if in pre-market trading, regular hours trading or after hours trading) you qualify for the dividend; buy on or after the ex-date (whether in pre-market trading, regular hours trading, or after hours trading) you don't qualify for the dividend.
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Another common misconception is that a dividend is free money. Many uninformed investors scramble to get into a stock before the ex-dividend date in the mistaken belief that they will somehow end up ahead for having done so. This is not true because on the ex-dividend date the previous day's closing price will be reduced by the amount of the dividend.* This is because the rights to the dividend are no longer transferred with the sale of the stock and since the payment of the dividend has reduced the net value of the company by the same amount, the net value of a share of stock is proportionally less. For example, a stock that pays a dividend of fifty cents per quarter and trades at $10.00 on the last trade of the day before the ex-dividend date will then have that closing price adjusted down at the open the next trading day (the ex-dividend date) to $9.50. The fifty cent dividend is no longer available to buyers on the ex-dividend date, so that amount is deducted from the stock's price. Theoretically, and indeed commonly in practice, the stock will not open at exactly $9.50, because market forces may drive the price higher or lower, but in any case, the dividend-adjusted price of $9.50 will remain as the basis upon which the daily change is calculated. If, for example, the opening price is $9.00, the daily change at that point will be down $.50. Indeed the price is a full dollar less than the closing price of the previous day, but because of the adjustment for the dividend, in reality the value has changed only fifty cents.
In addition, at the open on the ex-dividend date, all open orders will be automatically adjusted down by the amount of the dividend unless they have been placed with a Do Not Reduce restriction.
So, buying a stock before the ex-dividend date simply to capitalize on the (false) idea that a dividend is free money is nothing more than a beginner's mistake.
Click Here For a More Detailed Explanation on
Why Dividends Are Not Free Money
Happens to the Stock Price on the Ex-Dividend Date
Click Here For An Explanation of Prorated Dividends.
Click Here For A Detailed Explanation of Special Dividends
For a quick review, there are three important things to remember:
The record date is not the same as the ex-dividend date.
The ex-dividend date is the first day a stock trades without the right to the dividend.
Any day the stock exchanges are closed is not a business day for purposes of calculating ex-dividend dates.
Click Here To Read Owner vs. Owner Of Record:
At What Point Do You Become The Owner Of A Stock?
Finally, to add to the confusion of record and ex-dividend dates, there are some rare cases involving unusually large cash dividends, rights offerings, stock spin-offs, etc., where the above rules are not followed. In such cases, the stock trades with due bills after the record date. While not a common occurrence, a stock trading with due bills is something to be aware of, and that is explained in the following section.
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Dividends of 25% or More of
a
Company's Stock Price
Cash dividends of 25% or more of a company's stock price represent a fraction of one percent of all dividends paid and are handled quite differently from normal dividends. There are some similarities, however. Like normal dividends, unusually large dividends have a declaration date, a record date, an ex-dividend date and a payment date. Also, like normal dividends, the ex-dividend date for a dividend of 25% or more of a company's stock price is set by the exchange, not the company. Here's the big (and confusing) difference: While the ex-dividend date is indeed set by the exchange, it occurs not before the record date, but after. In fact, the ex-dividend date is not even before the payment date! By rule, the ex-dividend date is one business day after the payment date. (In such cases the term deferred ex-date applies.)
Here's the exact
quote from the New York Stock Exchange Listed Company Manual: "When
the distribution is 25% or more, the Exchange will defer trading the
security
"ex" until one day after the mail date for the distribution."
The payment of a dividend via due bills is quite unlike a normal dividend payment. Shares that are purchased after the record date but before the deferred ex-date (the due bill period) are traded with a due bill attached. The chain of events that begins on the payment date works like this: The dividend is first paid to the shareholder of record, then, on the due bill settlement date, which is commonly two trading days after the ex-date, the dividend is withdrawn from the account of the shareholder of record who sold the shares during the due bill period and is then paid to the shareholder who bought the shares during the due bill period.
The dividend is paid to all shareholders of record first because that is the only information the company has on who is eligible for the dividend. The due bills are then executed by the stock brokerages of the buyers and sellers during the due bill period. The company does not participate in the due bill process.
On big percentage distributions one of the reasons the ex-date is after the payment date is to prevent the chaos that would be triggered if the the ex-date was before the payment date as is normally the case. For example, if the ex-date was before the payment date for a stock that was selling for $21 and they paid out a distribution of $7, such a dramatic drop in price could potentially, and unfairly, trigger margin calls in margin accounts holding the stock. To the stock brokerage it would appear that the total value of the stock had dropped precipitously when in reality the dividend that had not yet been paid would make up the difference. By making the dividend payment before the stock price is adjusted down on the ex-dividend date, no margin call would be issued because the value of the account would not be unfairly compromised.
Another reason for the use of due bills with stock dividends, spinoffs and extra large cash dividends is that it allows shareholders to receive the full value of their holdings if they choose to sell during the due bill period. Otherwise they would have to wait the days or weeks between a normal ex-dividend date and the payment date.
Note: The 25% rule is a general rule, not a strict one. It is not always applied with distributions of 25% or more of a stock's price. Foreign stocks traded on U.S. stock exchanges may or may not be subject to the rule, the decision being made on a case-by-case basis. The 25% rule is not always applied to U.S. companies either; there are occasional exceptions granted.
Unfortunately, the criteria used by FINRA to determine whether or not the rule applies in any specific case has not been shared with the public. While FINRA's rule provides for the case-by-case determination when foreign stocks are involved, it does not specify the occasions when the rule does not apply to U.S. companies.
As an example of when the 25% rule did not apply to a U.S. company, on November 29th, 2012, Enzon Pharmaceuticals (ENZN) declared a special dividend of $2, with a record date of December 10th. The stock's closing price on the day of declaration was $6.47. The declared dividend represented 31% of the stock's trading price, well above the 25% threshold. The 25% rule would dictate the ex-dividend date to be December 24th, the first business day after the December 21st payment date. Yet the ex-dividend date was December 6th, the same as it would have been under normal dividend rules. No explanation was given.
On rare occasions the exchanges make a mistake with the implementation of the 25% rule. On the same day that Enzon Pharmaceuticals declared their 31% dividend, November 29th, 2012, Tellabs, Inc. (TLAB) declared a dividend of $1, with a record date of December 14th. The stock's closing price on the day of declaration was $2.95. The declared dividend represented 34% of the stock's trading price, well above the 25% threshold. The 25% rule would dictate the ex-dividend date to be December 24th, the first business day after the December 21st payment date. Yet the ex-dividend date was determined to be December 12th, the same as it would have been under normal dividend rules, and published as December 12 on both the NASDAQ and Chicago Board Options Exchange websites on December the 6th. But unlike the ENZN example, on December 11th, only one day before the published ex-date of December 12th, the NASDAQ changed the ex-date to December 24th, the first business day after the payment date. They notified the options exchange of the change that same day and the CBOE issued a notice of the change. For five days the officially published ex-dividend date was December 12th, then abruptly changed on the 11th, to December 24th. Again, no explanation was given.
Here is the CBOE Research Circular #RS12-669, dated December 6th, 2012, informing options traders of the December 12th ex-dividend date.
And here is the CBOE Research Circular #RS12-682, dated December 11th, 2012, informing options traders of the ex-dividend date being changed to December 24th.
Note: Although this page is an explanation of how cash dividend dates work, deferred ex-dates are also used, under certain circumstances, with stock dividends, spinoffs and warrant issues. With those types of distributions the 25% threshold is not a factor, as often times the value of a spinoff or warrant is not known at the time of declaration. However, any time a deferred ex-date is applicable, no matter if the distribution is in cash or securities, the deferred ex-date rules explained here, including the due bill process, apply.
The Purpose of the Record Date
With all dividends, the record date establishes that only the shares outstanding as of that date are eligible for the dividend. With normal dividends that is a moot point because the ex-dividend date, being two business days before the record date, has already established which shares (and which shareholders) qualify for the dividend. But in the case of a dividend of 25% or more of the company's stock price, the ex-dividend date is after the record date, usually many days or weeks after, so the company may, if it chooses to do so, issue additional stock after the record date but before the ex-dividend date without affecting the gross amount of the declared dividend. While occasions of a secondary offering during such a period are rare, there are many more instances of shares being issued through dividend reinvestment plans and through exercise of stock options and convertible securities.
While initially confusing, there are valid, rational reasons why on big percentage distributions the ex-dividend date is after the record date and after the payment date. It doesn't happen often, but big percentage distributions don't happen often. That's why most investors aren't familiar with how they work.
Note: As of February 21, 2012, Canada has adopted the same due bill process.
Summary
All the above dividend date information can be broken down to into five simple statements:
2. The ex-dividend date determines which shareholders receive the dividend.
3. For normal dividends, the ex-dividend date is two
business days
before the record
date, unless the record date falls on an
exchange holiday or a Saturday, in which case the ex-date
shall be one day earlier than it otherwise would have been. If the
record date falls on a Sunday, the ex-date will be two days
earlier than it otherwise would have been.
payment date, but exceptions are sometimes made.
All of the confusion and misconceptions about dividend dates can be eliminated by sourcing the information directly from the exchanges themselves, not from well-meaning but misleading Websites. While all U.S. exchanges handle dividends the same way, there are slight differences in the wording. Here are the dividend rules from:
The
New
York Stock Exchange Listed
Company Manual.
Here is the Adjustment of Orders rule:
FINRA Rule 5330. Adjustment of Orders
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DEFINITIONS
Business Day
A day on which the stock exchanges and
the banks, agencies & depositories for securities in New York State
are open
for business. Any day on which the stock exchanges are open but the
banks are closed is not counted as a business day for the purpose of
calculating dividend ex-dates.
Conditional Dividend/Distribution A dividend or distribution conditional upon an event or circumstance that has not yet happened at the time of declaration.
Declaration Date The date a dividend is declared by the company. The amount of the dividend is also declared except in some cases of a conditional dividend.
Deferred Ex-Dividend Date
An ex-dividend date that occurs one business day after
the payment date.
Distribution
The payment of cash or securities that are not part of a company's
earnings.
Dividend
A payment of earnings to shareholders.
Due Bill
A statement of money owed.
Ex-Dividend/Distribution Date The first day on which a stock trades without the right to receive the dividend/distribution.
Normal
Dividend/Distribution
A dividend/distribution amounting to less than 25% of a
company's stock price.
Owner of record
The registered owner of a security on the Record Date.
Payment Date
The day the dividend payment is
made.
Record Date The day a buyer of a stock must be the registered owner (owner of record) to receive a dividend.
Special Dividend A dividend that is not regularly scheduled.
T+3 Settlement
Rule
The requirement that securities transactions be settled in three
business days. (Before June 7, 1995, securities transactions were settled in five business days.)