What does "ex-dividend" mean? | Definitions for investing | Pearler (2024)

Imagine gearing up to attend a fabulous party, where you're promised a lovely gift simply for showing up! But there's a tiny catch - you have to RSVP by a certain date to snag that gift. In the world of stocks those 'gifts' come in the form of dividends. And that all-important RSVP date is what we call the "ex-dividend" date. Are you catching on?

Now, let's break it down together and give you more context, so you can journey into the world of investments with confidence. By the end of this article, you'll know what the term "ex-dividend" means and how it plays a role in the world of stocks.

An overview of dividends

Before we get into "ex-dividend", let's first drop the "ex". Understanding what dividends are can be a game-changer in shaping your investing strategy. Although they may seem complex at first, having a clear idea of how dividends work can help you make the most of investment opportunities.

So, what are dividends? When you invest in a company's stock, you could get a part of their earnings. This part of the earnings that you get is called a dividend. Think of it as a way the company thanks you for investing in them. Wondering whether the stocks you're invested in pay dividends? In Australia, there are various ways to determine whether an investment pays dividends.

But how can dividends fit into your investment strategy? For some investors, dividends serve as their regular income that keeps adding to their money pool. They can be a great way to build wealth over time without doing much.

There are several types and various reasons companies pay dividends. You can read more about that in our article " How are dividends paid? ". Generally, you can expect companies to pay dividends on a set schedule. You'll often hear about an upcoming dividend before the payment date, so you know exactly when to expect your payment.

What does “ex-dividend” mean?

Now, here's where the "ex-dividend" steps in. Ex-dividend is like a marker, a specific date that decides who gets a slice (dividend) of that pie (stock). If you buy stocks before this date, you're in the queue to receive the dividend. But if you jump in on or after the ex-dividend date, you'll miss out on that round of pie servings.

It's not just about grabbing those dividends. More experienced investors often have a bigger game plan. There is the option to reinvest those dividends through a dividend reinvestment plan . This plan allows you to turn that cash into more shares, and potentially make your slice of the company pie a bit larger over time. Without forking out any more money!

Ex-dividend timeline

Let's talk about the typical dividend payout timeline. Knowing this will come in handy and help you understand your stock investments. Here are a few important dates to keep in mind:

1. Declaration Date: This is the day the company announces, "Hey, we are going to give out dividends!" It's like getting a save-the-date card in the mail for an upcoming party. The company also mentions the amount of dividend you will receive per share. It's a heads-up to mark your calendar for the upcoming dividend.
2. Ex-Dividend Date : Often abbreviated as the ex-date. This is a key date you don't want to miss! To be eligible for the dividend, you need to buy the stock before this date. Think of it as the last day to RSVP for the party to make sure you get your bonus.
3. Record Date : This is when the company checks its records to see who owns their shares. If you're on that list, bingo! You'll get the dividend. It's like the day when the party host finalises the event guest list.
4. Payment Date : This is when the dividend distribution actually happens. If you're a shareholder before the ex-dividend date, you'll find a nice little payment coming your way. Before you celebrate, it's also essential to know the process of how dividends are paid.

Keeping tabs on these dates is a simple yet effective investing strategy. You can chat with a financial planner or even roll up your sleeves and dig into the dividend distribution process yourself. Either way, being in the know helps you make choices that might end up giving your investment portfolio a nice little boost.

An example of ex-dividend in practice

Meet Jamie: a 30-year-old who has always had a flair for personal finance. Jamie is a graphic designer, but her keen eye for detail doesn't end at her day job. She has kept her eye on a particular company stock with positive market sentiment for some time now. They've been doing great, with a steady dividend yield and Jamie believes it's a good place to invest. The company has just announced an upcoming dividend, and Jamie wants to jump in on the action.

Let's join Jamie as she takes her first exhilarating steps in receiving dividends.

Step 1: Ex-Dividend Date (Ex-Date)

The company has already announced the dividend (declaration date), so we'll jump to the ex-dividend date . Jamie marks the ex-dividend date, also known as the ex-date, which is coming up in a few days. Jamie learns that to receive a dividend payout, she needs to own shares before this date. So, Jamie looks at her budget to figure out how much to invest , then buys shares before the ex-date.

Step 2: Record Date

Once the ex-dividend date passes, on the record date the company looks through its records to see the shareholders eligible to receive dividends. Since Jamie is now a proud owner of shares in the company, her name is on the list and she's eligible for a dividend payout. Score!

Step 3: Payment Date

Fast forward a little, and Jamie wakes up to a pleasant notification on the payment date . The dividend distribution happened, and Jamie finds a neat little sum added to her account. Now Jamie has two options: receive the cash payment or opt for a dividend reinvestment plan to buy more shares. Her decision will depend on her investing strategy, which we'll cover soon. From her previous research, Jamie remembers the dividends are franked. She's curious to discover how much the franking credits are worth and decides to use Pearler's franking credits calculator to find out. The franked status of the dividends also encourages Jamie to hold on to the shares (more on that later).

Does a glimpse of Jamie's stock investing journey help make the ex-dividend process clearer? It's all about getting in at the right time and enjoying the perks as a shareholder.

How can ex-dividend impact your investment?

So, we touched on what an ex-dividend is and how it works. But how can it impact your stock investment?

Many investors underestimate the value of understanding ex-dividend dates in investing strategies. However, there are repercussions in neglecting the role of ex-dividend dates, especially in terms of share prices and investment timing.

Let's explore that now.

Impact on share prices

On the ex-dividend date, something interesting happens. The stock price might take a tiny dip. It's not about bad news; it's just how the stock trading world works when dividends are set to be paid out. This happens because the company is sharing a portion of its profits with the shareholders. It's a little change that reflects the company sharing its earnings, not its growth or success.

However, many times, stocks bounce back, especially when there's positive market sentiment in the air. Positive market sentiment is like a green light in the stock world. It means a lot of people are feeling good about a particular stock or the market. It can positively influence the stock trading atmosphere because more people might want to invest in high performing stock.

Timing of buying and selling shares

When it comes to buying and selling shares, timing makes a difference. It's all about striking while the iron is hot. Keep an eye on the calendar for the ex-dividend date and payment date - two crucial milestones in the dividend payout process as shared earlier. They help you strategise, plan, and make decisions that work for you.

Ex-dividend dates are like little signposts on your investing journey. They can help you make informed choices to achieve your investment goals.

But when keeping up with the ex-dividend gets too overwhelming, a financial planner can be your trusty guide in this process. They can help you navigate the sometimes confusing world of investments with ease and confidence.

How can knowledge of ex-dividend inform a long term investing strategy?

As mentioned, many investors forget to consider ex-dividend in their long term investing strategy. So how can knowing about ex-dividends help you build your investing strategy?

Holding through the ex-dividend date

Now, you're probably wondering, "How can this information help me in the long run?" Well, embracing the practice of holding through the ex-dividend date can be a clever move in crafting a long-term investing strategy. It's all about patience and reaping rewards over time.

Let me introduce you to the holding period rule . This rule encourages holding on to shares "at risk" for at least 45 days (90 days for preference shares), to fully reap the perks of the dividends. This is particularly relevant for franked credits as the Australian Taxation Office applies the rule for a shareholder to claim franking tax offsets.

So, how do you hold through the ex-dividend date? You simply buy shares before this date and then... just hold onto them. No selling, no trading, just hold. It's like planting a tree and then patiently waiting for it to grow and bear fruit.

Reinvesting to compound wealth

Reinvesting dividends to compound wealth can be a great help in growing your investment over time. Instead of spending that dividend on a splurge, how about we put it back to work? We're talking about a strategy where you use that dividend to buy more shares.

And guess what, doing this is a breeze! You just opt into the dividend reinvestment plan and let it run in the background. Around the payment date, instead of having the dividend paid into your bank account, you choose to buy more shares with it. This simple yet effective investing strategy is a favourite among long term investors building their wealth over time. It can set up and grow a stream of income, building a nice cushion for your future self.

Remember, in the world of investing, slow and steady often wins the race. Dividends can serve as a motivational tool as it fits into your long term investing strategy. So, embrace the journey and keep learning. You're on the path to becoming a well-informed investor, and the adventure is just beginning!

Understanding the ins and outs of ex-dividend can give you a leg up when investing in shares, helping you make informed decisions that align with your investment goals. Remember, in the grand scheme of things, every bit of knowledge enriches your investing adventure.

Happy investing!