Dividend dates explained

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Investors are sometimes puzzled by why high-yielding shares seem sometimes to drop sharply without any apparent reason on a Wednesday. The falls are harmless and the reason is mundane. It is bound up with the way the market takes account of dividend payments.

It's important for investors to have a dividing line that determines precisely when shareholders qualify for a dividend and when they do not, and to know precisely how and when that fact will be taken into account by the market.

All dividend announcements by companies give at least two key dates. These are:

The 'record' date. This is the date after which new buyers of the shares will not qualify for the pending dividend payments. In other words if you sell a share just before or buy a share just after the record date, you won't be entitled to the dividend. This is not necessarily called the record date in a company announcement. The phrase generally used will be something like "...will be paid on [payment date] to shareholders on the register at [record date]".

The payment date. This is the date that dividend cheques are posted or dividends paid by bank mandate are credited to shareholders bank accounts. This may be some weeks or even months after the record date, so it is important to be aware precisely when the payment is likely to be made. Company websites generally contain these details, as do printed company announcements mailed to shareholders.

The third key date, and the one that causes most confusion, is:

The 'ex-dividend' date. This is normally the second business day prior to the record date. Since record dates are generally a Friday, this means that most ex-dividend dates are on a Wednesday.

Ex-dividend dates are fixed this way because of settlement times. On the T+2 system operated in the UK (i.e. a trade settles three days after it is executed), investors need to buy a stock two days prior to the record date (that's to say, the day before the ex-dividend date) to be sure of qualifying for the dividend payment, since two days for settlement is needed before the shareholder's name goes on the register.

What happens on the ex-dividend date?

In order to recognise the fact that buyers of the share on or after that day will not qualify for the imminent dividend, the share price is adjusted downwards by an amount that reflects the size of the pending per share dividend payment. Hence the sometimes puzzling share price falls in dividend-paying shares.

If a share stands at 630p the day prior to 'going ex' a 25p dividend payment, this means that when the shares open the following day, they will have been adjusted downwards to 605p. Any movement from that level, or a higher or lower opening price, simply reflects the underlying tone of the market, or supply and demand for the share itself.

On an ex-dividend date, any underlying change in the price compared to the previous day can be worked out by notionally subtracting the dividend from the previous day's close and then comparing the resulting price with that day's quote.

Shares trading ex-dividend are noted in published price lists and broker contract notes with an 'xd' tag after the price, to emphasise that the shares are being bought without entitlement to the pending dividend payment.

*This content has been modified.