What exactly happens on the ex-dividend date, and how do the record date and payment date fit into the dividend timeline?

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AcadiFi · Accepted Answer

The ex-dividend date mechanics involve a specific sequence of dates that determines who receives the dividend. Understanding the settlement cycle is critical for getting this right. **The Four Key Dates** 1. **Declaration date:** The board announces the dividend amount, record date, and payment date. 2. **Ex-dividend date:** The first trading day on which the stock trades **without** the right to receive the declared dividend. Typically **one business day before** the record date (under T+1 settlement). 3. **Record date:** The company examines its shareholder register. Only shareholders **on record** as of this date receive the dividend. 4. **Payment date:** The dividend is actually distributed to eligible shareholders. **Why the Ex-Date Matters** Under T+1 settlement (standard in the US since May 2024), a trade executed on Tuesday settles on Wednesday. To be on the shareholder register by the record date (Wednesday), you must buy no later than **Tuesday** (which is the last cum-dividend day). The ex-dividend date is **Wednesday** — buying on or after this day means settlement occurs too late. **Worked Example — Stratton Electronics:** | Date | Event | What Happens | |---|---|---| | March 3 (Mon) | Declaration date | Board declares $1.50/share dividend | | March 19 (Wed) | **Ex-dividend date** | Stock opens ~$1.50 lower; buyers today will NOT receive dividend | | March 20 (Thu) | Record date | Stratton checks shareholder register | | April 4 (Fri) | Payment date | $1.50/share deposited to eligible accounts | **Price Behavior Around the Ex-Date:** | Day | Stock Price (Theoretical) | Explanation | |---|---|---| | March 18 (Tue) — last cum day | $75.00 | Price includes dividend right | | March 19 (Wed) — ex-date open | $73.50 | Price drops by approximately $1.50 | \`\`\`mermaid flowchart LR A["Declaration Date
Mar 3"] --> B["Last Cum-Dividend Day
Mar 18"] B --> C["Ex-Dividend Date
Mar 19
Price Drops ~$1.50"] C --> D["Record Date
Mar 20"] D --> E["Payment Date
Apr 4"] B --> F["Buy by This Day
to Get Dividend"] C --> G["Buy on This Day
or Later = No Dividend"] \`\`\` **Why the Price Doesn't Drop by Exactly the Dividend Amount:** In practice, the ex-date price drop is typically **85-95%** of the dividend amount because: 1. **Tax effect** — The marginal investor's tax rate on dividends vs. capital gains creates a wedge. 2. **Market noise** — Other information arrives overnight, obscuring the pure dividend effect. 3. **Bid-ask bounce** — The previous close may have been at the bid while the open is at the ask, or vice versa. **Common Exam Traps:** 1. The ex-date is **before** the record date, not after. Many students get this backward. 2. Settlement cycle changes affect the timing — under old T+2 settlement, the ex-date was two business days before the record date. 3. For options, exercise on the last cum-dividend day is important for American call holders (early exercise may be optimal to capture the dividend). 4. Limit orders outstanding are typically adjusted downward by the exchange on the ex-date to prevent erroneous fills. Review dividend date mechanics in our CFA Level II Equity module.

What exactly happens on the ex-dividend date, and how do the record date and payment date fit into the dividend timeline?

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