Stock Dividends

If you own a stock on the ex-dividend date, but sell it before the dividend is paid, do you still get the dividend?

IIRC, you get a bump in the stock price equal to the dividend. If the stock is $10 and the dividend is $1, the stock price goes up to $11 on the ex-dividend date.

Yes. That’s that definition of ex-dividend date. The price of the stock will fall by the amount of the dividend after this date.

Yes, I’ve done it many times.

Other direction. On ex date, the price is expected to drop by the dividend amount. Many quote services, such as yahoo, subtract the dividend from the previous night’s close when computing the change they show you on ex-date, so a stock can go down in actual price, but be shown as “up” on the day.

So, if I understand you correctly, people pay a price for a stock before the ex-dividend date with the expectation of the dividend, hence the higher price.

But what about when the dividend is actually paid? I would get that payment even though I no longer own the stock?

The owner of the stock on the day the dividend is fixed (record date) receives the dividend if they owned it on the ex-dividend date (some time, usually 2 days before the record date), not the owner of the stock on the day the dividend is actually disbursed.

There is a difference in the record date and the “ex-dividend” date because, I think, the stock transaction takes a little bit of time to get recorded.

Ex dividend as opposed to record date is determined by the exchange the stock is trading on. As you note, on the NYSE and NASDAQ, it is two BUSINESS days before the record date. If the record date is on a Monday, ex-div will be on Thursday of the preceding week, provided neither Thursday or Friday are holidays.

Possibly the best way to think about ex date is “the first day you can sell the shares and still get the dividend.”, encapsulating the answer to the OP’s question.

Thank you. So what is up with what the other posters are saying about the stock price increasing/decreasing on the ex-dividend date?

I believe I said so to. It isn’t guaranteed, but since the stock is selling without the dividend on the morning of the ex date, it is expected to be worth that much less. This is why the dividend is often subtracted from previous night’s close by the quote service in order to compute the change.

For example, if XYZ corp closes at $20.30 the night before ex-div, and it’s paying a $0.10 dividend, the shares are immediately worth that much less to a buyer who is not getting the dividend. Of course, the actual price it trades for is determined by what people are willing to pay, as always. The yahoo financial pages, and many others, would subtract that $0.10 from the previous night’s close, and show you a price of $20.22 as “up $0.02” rather than “down $0.08”.

For most stock issues, the difference will actually get lost in the normal price fluctuations. If a company pays a dividend which represents a 2% annual yield, and pays quarterly, the dividend is only a 0.5% change in stock price.

Exactly. The price of a stock is basically the total market value of a company’s equity divided by the number of shares. When a company pays out any cash, it’s market value drops by this amount. Thus, the owner of an $11 stock owns an $11 stake in the company. On the ex-dividend date, she now owns $10 of an equity stake and $1 in cash. Since she gets the dividend, she can now only sell her equity stake for $10.

An aside about dividends: They are not tax efficient. In essence, shareholders are forced to take a dividend (and pay resulting taxes) whether or not they want a dividend. Alternatively, if a company didn’t pay dividends, a shareholder could simply pay himself a dividend. For example, you own 10 shares of XYZ worth $10 each, for a total equity investment of $100. XYZ pays a $1 dividend per share. You now have 10 shares worth $9 each, plus $10 in cash. You have to pay taxes on the full $10 from the dividends.

If XYZ decided to stop paying dividends, you could replicate a dividend yourself: Simply sell 1 share. You now have 9 shares worth $10 each, plus the $10 from the share you sold. You paid yourself the dividend. And you only have to pay taxes on the gain, and not on the whole $10.

Dividends are used to reduce agency costs due to information asymmetry between shareholders and management. But in an efficient market, they really don’t serve a purpose. There are more efficient ways of managing capital structure (e.g. share repurchases, debt paydowns, etc.)

…just my 2-cent dividend.

Everyone here is using ex-dividend day incorrectly. The day you are referring to is the cum-dividend day. If you own the stock on the cum-dividend day, you get the dividend. The ex-dividend day is the day after the cum-dividend day and it it is the first day on which ownership does not entitle you to the dividend. Wikipedia is also wrong about this. “ex-” means without; “cum-” means with.

This is assuming regular purchase through an exchange like the NYSE. What really matters is the day of record. The company pays the dividend to those who are listed as owners on that day. But since it takes a few days to change the records, you must generally buy the stock by the cum day to be listed by the day of record.

It is possible to make expedited purchases after the cum day and still get listed by the day of record.