Investing in a company that pays regular dividends is a great way to create wealth in the long-term. In addition to giving you the benefit of capital appreciation, the consistent payment of dividends by such companies can also double up as a source of regular income for you.
But before you go ahead and invest in a dividend paying company, you need to make sure that you’re aware of everything there is to know about dividends. This includes knowing everything about the ex dividend date and how to find the ex dividend date. That said, here’s an in depth guide that can help give you the answer to the question ‘what does the ex dividend date mean?’.
To be able to fully understand the ex dividend date, we first need to take a look at the concept of record date.
What is the record date?
When it comes to declaring dividends, companies don’t pay them out to its shareholders immediately. Instead, they first fix a date known as the record date. Only those shareholders who appear on the company’s shareholders’ register as on the record date become eligible for receiving the dividends. Any new shareholders who enter the company’s records after the set record date become automatically ineligible for receiving the declared dividend.
To better understand this concept, let’s take up an example. Assume that there’s a company, XYZ Limited. The company has decided to issue dividends to its equity shareholders. Since the stock of the company is traded quite frequently on the stock exchanges, the shareholders keep changing every single day. To make the process of issuing dividends easier, the company has notified a date – November 20, 2020. All of the shareholders appearing on the company’s shareholders’ register on that notified date (November 20, 2020) will automatically be eligible to receive dividends. This date, set by the company, is what is known as the record date.
Now that you’ve been made aware of the concept of record date, let’s move onto answering the question ‘what is the ex dividend date?’.
What is the ex dividend date?
Any new buyer of the shares of a company that declared a dividend will automatically become ineligible to receive the said dividends if the buyer purchases the shares on or after the ex dividend date.
Therefore, the ex dividend date is essentially a cut-off date that is used by companies to simplify their task of identifying the shareholders eligible for receiving the dividend.
Let’s take up an example to better understand this concept.
In the Indian stock market, the share settlement takes place in T+2 days. What this effectively means is that, when you buy the shares of a company, the said shares get credited to your demat account only after T+2 days. For instance, if you buy the shares of a company on Tuesday, they only get credited into your demat account on Thursday. And simultaneously, your name also gets entered into the company’s shareholders’ register.
Assume that there’s a company – ABC Limited. The company has decided to issue dividends to its equity shareholders. The date of declaration of the dividend is December 03, 2020, the ex dividend date is December 07, 2020, and the record date set by the company is December 08, 2020.
Now, you are an investor who has never owned the shares of the company. With this dividend declaration, you feel inclined to buy the shares of the company just for receiving the dividend. In such a situation, the last date for buying the shares in order to become eligible for receiving dividends would be December 06, 2020. Why is that? Here’s the logic behind this.
When you buy the shares of the company on December 06, 2020, the shares get credited to you after T+2 days, which in this case would be December 08, 2020. Since December 08, 2020 is the record date set by the company, you would be on the rolls of the company as a shareholder on that date, thereby enabling you to receive the dividends.
On the contrary, if you buy the shares of the company on December 07, 2020 (the ex dividend date), the shares would only get credited to you on December 09, 2020, which would be beyond the record date. Since you wouldn’t be on the rolls of the company as a shareholder on the record date, you would become ineligible to receive the dividends.
This is why it is essential to always purchase the shares a day before the ex dividend date to make sure that you receive the dividend. And this is how the ex dividend date acts as a cut-off date for determining the eligibility of shareholders for receiving dividend.
How to find the ex dividend date?
Now that the question ‘what does the ex dividend date mean?’ is answered, let’s take a look at how to find the ex dividend date.
Generally, a company that declares a dividend almost always also notifies the ex dividend date along with the record date. And so, finding the ex dividend date should not be very hard even for beginner investors.
That said, there’s also another way to find out the ex dividend date. Taking our stock exchange settlement process of T+2 days into consideration, in the Indian stock market scenario, the ex dividend date will always fall on a day before the record date. So, if the record date notified by a dividend paying company happens to be August 06, 2020, then the ex dividend date would be August 05, 2020.
When it comes to dividends, the ex dividend date is one of the two important dates that every existing and prospective investor should be aware of, with the other important date being the record date.
That said, as you’ve already seen above, if you’re an investor who is planning to purchase the shares of a company just for receiving its dividend, always ensure that you do so before the ex dividend date.