Dividends and Ex-Dividend Dates

Only holders on the record date get paid

When a company announces a dividend, it sets a record date: only shares still in your account at that day's close qualify. Anyone who buys later misses this payout.

The dividend is "cut" out of the share price

ex-dividend / ex-rights: a $0.50 dividend per share means the opening price on the ex-dividend date is cut from $20 to $19.50, while $0.50 of cash lands in your account. Shares plus cash add up to the same total as before: a dividend isn't free money.

Bonus shares: the cake cut into smaller slices

bonus shares increase the share count, and the price is cut in proportion. Reference price = (previous close − dividend per share) ÷ (1 + bonus shares per share). Total market value stays the same.

Filling or widening the gap

When the price climbs back to its pre-ex-date level, that's a gap fill; if it keeps falling, the gap widens. The company's outlook decides which way it goes, not the dividend itself. Cash dividends may also be subject to dividend tax.

Key takeaways

• You must still hold the stock at the close on the record date to receive the dividend or bonus shares.
• Ex-dividend reference price = (previous close − cash dividend per share) ÷ (1 + bonus shares per share).
• At the moment of the ex-date, your shares' market value + the dividend received = the market value before (minus dividend tax). A dividend doesn't create wealth by itself.
• If the price climbs back to its pre-ex-date level, that's a gap fill; if it keeps falling, the gap stays unfilled.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Click "Example: $20 · $0.50 dividend per share": what's the ex-dividend reference price? On the "Ex-dividend date" card on the right, what do stock value plus dividend cash add up to?
2. Click "$30 · 10-for-10 bonus": how many shares do you now hold, and what's the reference price? Are the two "Your total wealth" bars the same length?
3. Click "$20 · $1 dividend · 10% tax": how much less is your total wealth after the ex-date? Where did that money go?
4. Go back to "$30 · 10-for-10 bonus" and drag "Price after ex-date" to +50%, then to +100%: how far has the gap been filled each time? Finally drag it to −20% to see what failing to fill the gap looks like.

Quiz and explanations

1. The previous close is $20 and the cash dividend is $0.50 per share, with no bonus shares. What's the ex-dividend reference price?

Answer: $19.50.$20 − $0.50 = $19.50.

2. The previous close is $30 with a 1-for-1 bonus issue (one free share for every share) and no cash dividend. You had 100 shares. What do you have after the ex-date?

Answer: 200 shares, reference price $15.Your shares double to 200 and the reference price = $30 ÷ (1 + 1) = $15. Total market value is still $3,000.

3. You hold 1,000 shares, the previous close is $20, the dividend is $1 per share and dividend tax is 10%. If the price sits at the reference price on the ex-date, what are your shares plus cash received worth?

Answer: $19,900.The reference price is $19, so your shares are worth $19,000. The $1,000 dividend minus 10% tax leaves $900, for $19,900 in total. The $100 shortfall is exactly the tax.

Terms in this lesson

• bonus shares (Bonus Shares): Profits or reserves turned into new shares and given free to shareholders in proportion: more shares, a proportionally lower price and the same total value.
• dividend (Dividend): Part of a company's profit paid out to shareholders according to how many shares they hold.
• dividend tax (Dividend Tax): Tax owed on cash dividends, with rates that depend on the country, account type and how long you've held the stock.
• ex-dividend / ex-rights (Ex-Dividend / Ex-Rights): After a dividend or bonus share issue, the exchange lowers the share price by a set rule so shareholders' total wealth stays the same.
• gap fill (Gap Fill): When the share price climbs back to its pre-dividend level after going ex-dividend; falling further away is the opposite.
• record date (Record Date): Only people holding the stock at the close on this day are entitled to the dividend or bonus shares.