It is possible to build wealth over the long-term by investing in companies that pay regular dividends. These companies will not only give you capital appreciation but also provide regular income.
Before you invest in dividend-paying companies, it is important to be informed about all aspects of dividends. This includes how to calculate the ex dividend date. Here's a detailed guide to help you answer the question "What does the ex dividend date refer to?"
We must first understand what record date is to be able fully to understand ex dividend date.
Companies don't pay dividends to shareholders right away when declaring dividends. Instead, companies set a record date. Only shareholders who are listed on the company's shareholders list on the record date are eligible to receive the dividends. All new shareholders who join the company's books after the record date are set become ineligible to receive the declared dividend.
Let's look at an example to better understand the concept. Let's say there is a company called XYZ Limited. The company decides to pay dividends to its equity shareholders. The stock of the company trades on stock exchanges quite often, so shareholders change every day. The company has set a date for the issuance of dividends to make it easier. It is November 20, 2020. All shareholders who are listed on the company's shareholders register by the notified date (November 20th 2020) will be eligible for dividends. This is the record date.
Now that you are aware of the concept record date, let us answer the question "What is the ex-dividend date?"
If a new buyer buys shares in a company that has declared a dividend, he or she will be automatically ineligible for the dividends.
Companies use the ex dividend date to help them identify shareholders who are eligible to receive the dividend.
Let's look at an example to help us better understand the concept.
The Indian stock market's share settlement process takes T+2 days. This means that when you purchase shares in a company, they are credited to your demat account after T+2 business days. If you buy shares of a company's stock on Tuesday, the shares will only be credited to your demat account on Wednesday. Your name is also entered into the shareholder's register.
Let's say there is a company called ABC Limited. The company decided to pay dividends to its equity shareholders. The dividend will be declared on December 03, 2020. Ex dividend dates are December 07, 2020 and December 08, 2020.
You are now an investor, but you have never owned shares of the company. This dividend declaration will make you want to purchase shares of the company in order to receive the dividend. If this is the case, December 6, 2020 would be the last day to buy shares to qualify for dividends. What is the logic behind this? This is the logic.
The shares you receive when you purchase shares of the company after December 06, 2020 are credited to your account. In this instance, it would be December 08 2020. You would become a shareholder of the company on December 08, 2020, which is the record date. This will allow you to receive dividends.
Contrarily, if the shares are purchased on December 7, 2020 (the ex dividend day), then the shares will only be credited to your account on December 9, 2020. This would be after the record date. You would be ineligible for the dividends because you wouldn't have been on the company's shareholder rolls on the record date.
To ensure that you receive your dividend, it is important to purchase shares at least one day before the ex-dividend date. This is why the ex dividend date serves as a cut-off point for determining whether shareholders are eligible to receive dividends.
Let's answer the question, "What does the ex-dividend date mean?". Now let's look at how we can find it.
A company that declares dividends almost always notifies the ex-dividend date with the record date. Finding the ex dividend date shouldn't be difficult for even novice investors.
There is another way to determine the ex dividend date. Taken into account the stock exchange settlement process of T+2 day, in the Indian stock markets scenario, ex dividend date will always be on the day before the record date. If the record date notified by a dividend-paying company is August 6, 2020, the ex dividend date will be August 05. 2020.
Dividends are one of two crucial dates that investors, both current and potential, should know about. The record date is the other.
As you can see, it is important to ensure that you purchase shares of companies before the ex-dividend date if you are an investor.