Drazen_ / Getty Images Buying a dividend-paying stock, mutual fund, or exchange-traded fund (ETF) at the wrong time, however, can have some unintended tax consequences. Before you invest, you’ll need to know what the date of record and ex-dividend dates are, and how they impact the price of the stock and your taxes.
What Is the Date of Record?
When companies declare and announce a dividend, they specify which shareholders are eligible to receive payment, based on the date that they officially owned their shares. Here’s an example of a dividend announcement by Conagra: “CHICAGO, April 16, 2021 /PRNewswire/—Conagra Brands, Inc. (NYSE: CAG) today announced that its board of directors approved a quarterly dividend payment of $0.275 per share of CAG common stock to be paid on June 2, 2021, to stockholders of record as of the close of business on April 30, 2021.”
What Is the Ex-Dividend Date?
The ex-dividend date is the first day of trading that an investor buying the stock is ineligible to receive the current dividend. While company boards of directors determine the date of record, the ex-dividend date is determined by the exchange on which the stock is traded. The ex-dividend date on both the New York Stock Exchange (NYSE) and Nasdaq Stock Market is one day before the record date. This ex-dividend date exists to recognize the time it takes for shares to actually change hands between the buyer and the seller. When you buy a stock, your broker-dealer purchases it on your behalf. The broker-dealer is the shareholder of record on the issuing company’s books. But the broker-dealer maintains records that identify you as the stock’s owner, entitling you to any dividends or other benefits. This arrangement is called “holding in street name.” Broker-dealers are required by the Securities and Exchange Commission (SEC) to settle stock trades in two business days, which is known as T+2. If the stock is purchased on or after the ex-dividend date, the transaction will not be completed for two business days and the broker-dealer would identify the purchasing investor as a shareholder of record after the date of record. In that case, the seller would be entitled to the dividend.
Ex-Dividend Date vs. the Date of Record
Dividend Announcement Date
This is the date the board of directors announces the dividend per share, record date, and pay date. For example, XYZ, a stock of which you own 1,000 shares, announces on April 12 a quarterly dividend of 25 cents a share to be paid on June 1 to shareholders of record as of May 30. The current share price of XYZ is $20. The quarterly dividend represents a 5% annualized rate of return. In this case, the formula is: quarterly dividend X 4($1) / share price ($20) = .05
Dividend Record Date
This is the date shareholders must be on record as owning a stock to be eligible for a dividend payment. Because you bought XYZ shares on March 1, you are eligible for the June 1 dividend announced in April.
Ex-Dividend Date
XYZ has announced a record date of May 30, so in this case, the ex-dividend date is May 29. The XYZ dividend is a very generous 5%, so you are considering buying shares on May 28 and selling them on May 31 for a tidy profit. Unfortunately, this plan will not work out. The price of the stock will usually drop by the amount of the dividend paid—in this case, 25 cents per share. While you will receive the dividend as a new shareholder, you may also have to pay taxes on it, depending on whether the shares are held in a regular brokerage account, or a tax-deferred account, such as an IRA.
Dividend Payment Date
This is the date shareholders of record will receive a dividend payment. In the XYZ example, you would receive a credit to your brokerage account of 25 cents per share, or $250 for 1,000 shares, on June 1.
