What "Ex-Dividend" Means and Why It Matters

One of the first questions a newbie investor asks is "When do I get paid my dividend?" The answer isn't as simple as you might think. Dividends aren't simply handed to registered shareholders on the day the dividend is paid.

Instead, companies declare a dividend to be paid on a certain day in the future to stockholders of record on an earlier date. This date iscalled the record date, or day of record. Once the company issues a record date, an ex-dividend date is usually set for two business days before the record date.

The ex-dividend date is simply the date on which the stock will trade without dividend rights. In other words:

If you buy the stock before the ex-dividend date, you will receive the next dividend payment.
If you buy the stock on the ex-dividend date, the next dividend goes to the seller, not you.
If you sell the stock on the ex-dividend date, you will still receive the next dividend payment.

At this point, you might wonder whether it makes sense to buy the stock just before the ex-dividend date and then sell it when it goes ex-dividend so you can enjoy the dividend for free. It sounds like a great idea, but the market isn't that gullible, and prices tend to adjust downward on the ex-dividend date to account for the upcoming dividend.

Here's a real-life example of how the process works using Intel Corporation . On Sept. 12, Intel announced the following:

The record datewas set for Nov. 7, which means the ex-dividend date would be on Nov. 5, two days before the record date. So let'slook at what happened before the record date. Incidentally, "cum dividend" simply means the stock is trading with its dividend rights.

Source: Yahoo! Finance.

When the stock started trading ex-dividend, there was a $0.49 drop in the stock price. Part of the drop owed to normal price fluctuations, and the other part was a reflection of the fact that the stock was trading without dividend rights. Intel investors who held the stock at least until the end of all trading on Nov. 4 were recorded as holders on Nov. 7 and received the $0.225 dividend on Dec 1.

Investors who bought on Nov. 5 or Nov. 6 did not receive the dividend. However, those who sold would have received the dividend on Dec. 1, because they would have been on the books on the record date.

In short, you should remember the simple rule that stocks trade without their dividendrightsin the two days before the record date. Fortunately, there are plenty of resources available to help investors. For example, you can usuallyfind the record date in the press releases on companies' investor relations websites.

In addition, newspapers usually publish the stock price listing with an "X" next to it when the stock is ex-dividend, and financial websites like Yahoo! Finance usually publish the ex-dividend date on their home page for the stock.

The article What "Ex-Dividend" Means and Why It Matters originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.