INVESTING EXPLAINED: What you need to know about ex-dividend date – only those who hold shares prior to this cut-off will receive that dividend
In this series, we bust the jargon and explain a popular investing term or theme. Here it’s the ex-dividend date.
What does ex-dividend mean?
Companies distribute dividends to shareholders several times a year. Some make these payouts twice a year, but investment trusts and larger companies, such as Shell, Unilever and other members of the FTSE 100 tend to pay quarterly.
On the declaration date, when the company announces the dividend, it also sets two other key dates – the ex-dividend date and the record date.
Only those who have bought the shares before the ex-dividend date are entitled to receive that particular dividend – which will be paid to those who are shareholders on the record date, usually one business day later. Ex is Latin for ‘away’ or ‘from’. Cum-dividend, a phrase you will sometimes hear, means ‘with dividend’, Latin again.
Payout: Only those who have bought the shares before the ex-dividend date are entitled to receive that particular dividend
How does this work in practice?
Unilever’s third quarter dividend will be announced with its trading statement on October 27. The shares will go ex-dividend on November 17. The record date is November 18. The website dividenddata.co.uk lists the declaration, report and ex-dividend dates of FTSE 100 and other companies. If you are scanning the share price pages newspapers, you will see shares that are ex-dividend marked as ‘xd’.
Does the share price drop on the ex-dividend date?
The company has paid out cash so decreasing the value of its assets. On this basis, you would suppose that its market capitalisation and thus its share price would fall.
This is usually the case, but not invariably. Some positive news about the company, or the sector in which it operates could cause the shares to rise. Or the shares could be lifted by optimistic economic data.
Is there a way to make money when a share goes ex-dividend?
The ‘dividend capture’ strategy can be a means to benefit, and numerous investor websites argue that you do not need to be an expert share trader to turn a profit via this approach. There are some risks, however. Shares tend to appreciate, as their ex-dividend date draws closer. This presents the opportunity to buy shares before they move upwards, pocket the dividend and then sell. But if you get your timing wrong – by buying the shares too late, for example – your gains may be negligible, even taking into account the dividend.
Is there a scandal in Europe?
Oh, yes. The Cum-Ex scandal, the largest tax dodging scandal of recent German history, has even drawn in Chancellor Olaf Scholz. MM Warburg, a German financial institution, is alleged to have traded shares on, or just before, the record date, and claimed two capital gains refunds, although tax had only been paid once. The courts have ruled this to be criminal tax evasion.
How generous are divis now?
AJ Bell estimates that 2022 could turn out to be the second-best year ever for payouts, with FTSE companies distributing £85billion, only slightly less than in the record year of 2018. But there may be less largesse in 2023, according to Link’s, with recession set to limit the ability and willingness of companies to increase their dividends.
Yet if you own shares that have given you decent payouts this year, it’s worth noting that there is research indicating such shares tend to outperform in the long-term, especially at times of economic turbulence.