Your share becomes “Ex-dividend”. This is what it means
X marks the spot, as the saying goes.
But for investors who are considering buying a stock, this is the ex point, as when a stock is ex-dividend.
The Board of Directors declares a quarterly dividend of 25 cents per share which will be payable on November 15, in just over a month, to shareholders of record at the end of operations on November 1.
The ex-dividend date in this scenario would be October 29, the last business day before the record date.
Why is this important?
“A buyer of shares on or after the ex-date is not entitled to receive the next dividend payment,” explains Robert Willens, who heads a consulting firm specializing in tax and accounting matters.
An investment strategy that takes this into account is to buy a share in time to receive the dividend, or before the ex-date. But investors need to be wary of chasing dividends, and they need to understand the underlying fundamentals of a business.
In addition, investors should be aware of the possible tax consequences of buying a share just before the ex-date and then, after receiving the dividend payment, reselling it soon after. This is because the payment of dividends may not be considered qualifying dividend income, in which case it could be subject to higher taxation. Eligible dividend income is eligible for tax as a capital gain.
As Willens explains, “the shares on which the dividend is paid must be held for more than 60 days during the 121-day period which begins on the date which is 60 days before the date on which the shares become ex-. dividend with regard to the dividend. In other words, someone who buys just before the ex-date and sells soon after is unlikely to have a qualified dividend payment.
Dan Sotiroff, senior analyst at Morningstar, said the ex-dividend date is “only really important if you want to make sure you receive the next dividend payment.”
“If you are a long-term shareholder [and] plan to keep it for years and years and years, it probably doesn’t mean much to you, ”he adds.
Still, there are several things to consider around the ex-date.
In an email to BarronRhodri Preece, senior research manager for the professional investor group CFA Institute, points out that basic stock valuation involves valuing a discounted stream of future payments, in some cases dividends. The farther away these payments and the higher the discount rate, the more those cash flows, including dividends, are worth in today’s dollars.
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However, Preece points out, “immediately before a stock’s ex-dividend date, the period of time until the next dividend payment is very short” and this increases “the value of that dividend payment” and the stock.
But once the stock is ex-dividend, he adds, the next dividend payment might be three, six, or 12 months away. Consequently, this future dividend “is more strongly discounted than the old” dividend, and “the valuation of the share must temporarily drop when the share disappears” ex-dividend.
In that sense, the share price is depreciated on the start date, Willens says. For example, a stock priced at $ 50 would be reduced to $ 49.75 to reflect the imminent payment of a quarterly dividend of 25 cents per share. Of course, the shareholder gets these 25 cents on hand.
However, there are many other factors that influence a stock’s price at all times, including how the market perceives its fundamentals. But a stock’s ex-date is something dividend investors should at least be aware of.
Write to Lawrence C. Strauss at [email protected]