Share prices often drop by the amount the dividends are paid. Why does this happen? The answer is quite logical; when the company pays out the dividend, the value of the company is reduced by the amount of the total payout. In other words, the amount paid out in dividends no longer belongs to the company (instead in the shareholder’s pocket) and so the value of the company is diminished.
Some common terminology when referring to the release of dividends are:
Ex Dividend Date
To be entitled to a dividend payout, the shareholder must have purchased the shares before the ex dividend date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment and instead, the seller will receive the dividend.
The ex dividend date is one business day before the Record Date is set.
The Record Date is set by the company in order to close its share register. It occurs at 5pm on its chosen Record Date, so it can determine which shareholders are entitled to receive the dividend payout. All registration details must be finalised by this date.
Take the following example:
Big Business Ltd (BBL) has a current share price of $1.00. It announces that it will pay its dividends of $0.02 per share to shareholders of record as of 3 July. This means the Record Date is set for 3 July 2018, and therefore the ex dividend date is one business day before, so the 2 July. If you want to receive dividends for BBL, all trading must be done before the 2 July.
Ignoring share price fluctuations, investors can expect the share price of BBL to fall to $0.98 on the ex-dividend date to reflect the fact that $0.02 per share has been paid to shareholders.
After the dividend payment, the shareholder still has $1.00 in assets, it is just that $0.02 of it is now in the shareholder’s bank account and $0.98 is in the company share price.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.