Ex-Dividend Date vs. Date of Record: What's the Difference?

What Is the Difference Between Ex-Dividend Date and Date of Record?

Are you mystified by the workings of dividends and dividend distributions? Chances are it's not the concept of dividends that confuses you. The ex-dividend date and date of record are the tricky factors. Briefly, in order to be eligible for payment of stock dividends, you must buy the stock (or already own it) at least two days before the date of record and still own the shares at the close of trading one business day before the ex-date. That's one day before the ex-dividend date.

Some investment terms are tossed around more than a Frisbee on a hot summer day, so first let's fill in some of the basics of stock dividends.

There are actually four major dates in the process of a dividend distribution:

• The declaration date is the day on which the board of directors announces the dividend.
• The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record.
• The date of record is the day on which the company checks its records to identify shareholders of the company. An investor must be listed on that date to be eligible for a dividend payout.
• The date of payment is the day the company mails out the dividend to all holders of record. This may be a week or more after the date of record.

Why Issue a Dividend?

The decision to distribute a dividend is made by a company's board of directors. Essentially, it is a share of the profits that is awarded to the company's shareholders.

Many investors view a steady dividend history as an important indicator of a good investment, so companies are reluctant to reduce or stop regular dividend payments.

Dividends can be paid in various ways, but the big two are cash and stock.

Example of a Cash Dividend

For example, suppose you own 100 shares of Cory's Brewing Company. Cory has enjoyed record sales this year thanks to the high demand for its unique peach-flavored beer. The company decides to share some of the good fortune with stockholders and declares a dividend of $0.10 per share. You will receive a payment from Cory's Brewing Company of $10.00.

In practice, companies that pay dividends, issue them four times a year. A one-time dividend such as the one in this example is called an extra dividend.

Example of a Stock Dividend

The stock dividend, the second-most common dividend-paying method, pays in shares rather than cash. Cory might issue a dividend of $0.05 new shares for every existing one. You will receive five shares for every 100 shares that you own. If any fractional shares are left over, the dividend is paid as cash because stocks don't trade fractionally.

The Rare Property Dividend

Another rarer type of dividend is the property dividend, which is a tangible asset distributed to stockholders. For instance, if Cory's Brewing Company wanted to pay out dividends but didn't have enough stock or money to spare, the company could look for something physical to distribute. In this case, Cory's might distribute a couple of six-packs of its famous peach beer to all shareholders.

Ex-Dividend Date

As noted above, the ex-date or ex-dividend date marks the cutoff point for a pending stock dividend. Some trading platforms, market data, and news services might add an XD modifier to the ticker symbol to show it is trading ex-dividend.

If you buy a stock one day before the ex-dividend, you will get the dividend. If you buy on the ex-dividend date or any day after, you won't get the dividend.

Conversely, if you want to sell a stock and still get a dividend that has been declared, you need to hang onto it until the ex-dividend day.

The ex-date is one business day before the date of record.

Date of Record

The date of record is the date in which the company identifies all of its current stockholders, and therefore everyone who is eligible to receive the dividend. If you're not on the list, you don't get the dividend.

In today's market, settlement of stocks is a T+2 process, which means that a transaction is entered into the company's record books two business days after the trade.

To ensure that you are in the record books, you need to buy the stock at least two business days before the date of record, or one day before the ex-dividend date.

As you can see from the diagram above, if you buy on the ex-dividend date (Tuesday), only one day before the date of record, you will not get the dividend because your name will not appear in the company's record books until Thursday. If you want to buy the stock and receive the dividend, you need to buy it on Monday. When the stock is trading with the dividend, the term cum dividend is used.

If you want to sell the stock and still receive the dividend, you need to sell on or after Tuesday the 6th. Different rules apply if the dividend is 25%, or greater, of the value of the security. In this case, the Financial Industry Regulatory Authority (FINRA) indicates that the ex-date is the first business day following the payable date.

Special Considerations on Dividends

The only other date that is worth mentioning is the date of payment. That is the date the company delivers dividends to the shareholders of record. This can be a week or more after the date of record.

It may sound like easy money. Just buy a stock two days before the date of record and grab the dividend.

It's not that easy. Remember, the declaration date has passed and everybody else knows when the dividend is going to be paid too. On the ex-dividend date, the stock price will drop by roughly the amount of the dividend as traders acknowledge the reduction in the company's cash reserves.