A stock's ex-dividend date, or "ex-date," is the first trading day where an upcoming dividend payment is not included in a stock's price. In order to receive that dividend, investors must purchase shares before the ex-dividend date.
Image Source: Getty Images.
Three important dividend dates
In order to understand how the ex-dividend date works in the context of dividend investing, there are three key dates and definitions you need to know.
Ex-dividend date: The first day a stock trades without its dividend included in the share price. Investors who buy shares before the ex-dividend date are entitled to the upcoming dividend payment, while those who acquired shares on or after this date are not. From a seller's perspective, as long as you sell your shares on or after the ex-dividend date, you'll still receive the next dividend, whether or not you own shares when it is actually paid.
Date of record: Since it takes a few days -- three for stocks -- before a trade is settled or finalized, this is the date when the company creates a roster of its shareholders to determine who gets the dividend and who doesn't. For stocks, the date of record is always two trading days after the ex-dividend date.
Pay date: This is the date when the dividend is actually paid to shareholders, and is generally several days (or even weeks) after the date of record.
What the ex-dividend date means to you as an investor
As an example, consider the following sentence: "On April 26, 2016, Wells Fargo declared a dividend of $0.38 per share, payable on June 1, 2016 to shareholders of record as of May 6, 2016."
Since the ex-dividend date is always two trading days before the date of record, this means that shares will trade without the $0.38 dividend as of Wednesday, May 4. In order for a shareholder to be eligible to receive the dividend payment, he or she must own shares as of May 3 or earlier. On May 4, Wells Fargo's stock price can be expected to drop by approximately $0.38, in addition to any price drop or increase that occurs as a result of market activity.
A word of caution
One misguided strategy often used by newer investors is called "buying dividends." It involves buying stocks shortly before the ex-dividend date, only to sell them on or shortly after the date, in an attempt to pocket the dividend payment for a quick profit.
Unfortunately, this rarely works out in the investor's favor. As we've seen, the market tends to adjust the share price by the amount of the dividend on the ex-dividend date, so theoretically, the trade will break even. Plus, this maneuver involves paying a round-trip commission, which makes the majority of ex-dividend targeted trading unprofitable.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at knowledgecenter@fool.com. Thanks -- and Fool on!
the_motley_fool has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.