Ex Dividend Date — What Is It and Why Is It So Important?The ex dividend date is the most important date in the dividend payment process. However, you don't usually see it in the press release that announces a company's dividend. Let's first understand what this date means exactly. Next, we'll discuss why it's so critical. Finally, we'll wrap up with an example.
When a company declares a dividend, there are some key dates involved. Read through our dividend calendar page for details on this. As an investor, besides knowing how much of a dividend is being paid out, you're really interested in knowing if you will get that dividend or not. Since the payment of a dividend doesn't happen the instant it's announced, how does the company determine whom to pay the dividend to? Enter the record date. Only those shareholders who own the stock on the record date will get the dividend. Now the ex dividend date in the U.S., is two business days before the record date. To be eligible for the dividend, an investor must purchase the stock before this date. Wondering why you need two different dates? To answer that, we need to first grasp the meaning of another date ... the settlement date. When you buy or sell stocks, from a practical viewpoint you acquire or rid yourself of the stock as soon as the trade gets executed. But from a legal viewpoint, this doesn't happen until the third business day after the trade is executed — the settlement date. Therefore, to be a legal shareholder on the record date, you need to purchase the stock no later than two business days before the record date. This cut-off date is the ex-dividend date.
Let's put some numbers to what we learned above to make sure we understand this vital date. Consider this extract taken from a press release for The Clorox Company..... "Clorox Declares Regular Quarterly Dividend OAKLAND, Calif., Feb. 9, 2010 - The Clorox Company (NYSE: CLX) today announced that its board of directors has declared a regular quarterly dividend of 50 cents per share on the company's common stock, payable May 14, 2010, to stockholders of record on April 28, 2010. The Clorox Company The record date is Wed. Apr 28, 2010. So if you need to be a Clorox stock holder on the record date, given the settlement period of 3 business days, you must execute a buy order for the stock by the close of business on Fri. Apr 23, 2010. The ex dividend date? By definition, this is the date before which you need to execute your buy order. Or, two business days before the record date. That takes us to Mon. Apr 26, 2010. To wrap up, we've covered the nuts and bolts of dividend dates, especially the ex dividend date. Our Clorox example should help make more sense of the calculations and highlight the importance of this date. Please subscribe to our Free Newsletter for great tips on how to get started and learn to invest by yourself. Return from Ex Dividend Date page to Dividend Investing page
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