Ex-dividend date: the key every investor must understand before trading stocks

If you are new to the world of equity investing, you have probably heard about dividends, but there is one aspect that often causes confusion: the ex-dividend date. It is a fundamental concept that can determine whether you receive the announced dividend from a company, regardless of whether you are a shareholder. In this guide, we will uncover all the secrets around dividends, from their basic nature to advanced strategies to maximize profitability.

What are dividends really in the stock market?

Before delving into the ex-dividend date, we need to understand what dividends are. Essentially, they represent the compensation received by shareholders for holding a stake in a company. When a corporation generates profits and decides to distribute them, it allocates a portion to its shareholders instead of reinvesting all capital into expansion.

This mechanism serves a dual purpose: on one hand, it attracts investors interested in generating passive income; on the other hand, it allows established companies to demonstrate financial solidity. Not all companies operate under the same policy. While growth-phase (typically tech) companies tend to reinvest their earnings to expand, traditional sector corporations like utilities and oil tend to allocate significant amounts to dividend payments.

The ex-dividend date explained: the critical cutoff point

This is where many investors make costly mistakes. The ex-dividend date is the cutoff day that determines who is entitled to receive the announced dividend. Although it may seem like an administrative detail, this date has immediate practical implications for our operations.

The mechanism is simple but requires attention: if you hold shares until the ex-dividend date, you will be entitled to the dividend payment, even if you sell the shares the next day. Conversely, if you buy shares on or after the ex-dividend date, you will not receive that dividend, even if you are a shareholder at the time of payment.

This process is complemented by two other important dates: the record date (when the company verifies who meets the entitlement condition) and the payment date (when the money is transferred to our accounts).

Practical example of the ex-dividend date

Imagine Banco Dinero announces a dividend of €0.8 per share payable on May 15, with the ex-dividend date set for May 10. If we own 200 shares and sell them on May 10 exactly (or before), we will receive the full dividend. However, if we acquire them on May 10 or after, we will not receive anything in this distribution, even if we are the legal owners of the shares when the payment is made.

In international markets, you will see different terminology: ex date for the ex-dividend date, last trading date for the last day of trading with rights, and payment date for the final payout.

Essential terminology every investor must master

Navigating the world of dividends requires familiarity with certain terms that appear constantly:

Dividend Yield (Dividend Return): Expresses the percentage return you will receive in the form of dividends based on the current stock price. It is calculated by dividing the annual dividend by the stock price.

Earnings Per Share (EPS): Indicates the portion of net profit attributable to each share. It is obtained by dividing total profit by all outstanding shares.

Pay Out: Represents the percentage of profits that the company decides to distribute as dividends. Startups often operate with pay outs close to zero, while mature companies can reach 80-90%.

Price Earnings Ratio (PER): A metric relating the stock price to its EPS, indicating how many times the profit the stock price represents. It is essential for identifying whether a stock is overvalued or undervalued.

Types of dividends: not all are distributed equally

Companies have flexibility in structuring their dividend programs. Knowing the different modalities will allow you to anticipate changes in your cash flow:

Ordinary dividend: Calculated based on profit forecasts during the fiscal year, before the accounting period ends.

Complementary dividend: Adjusts to actual known profits, paid after the fiscal year closes.

Extraordinary dividend: Not derived from ordinary operational performance, but from special events such as asset sales or restructuring.

Flexible or script dividend: Gives shareholders options: receive cash, new shares, or a combination of both.

Fixed dividend: The classic modality, where the company approves a specific amount in cash per share at a meeting.

Growth vs. Value: the role of dividends in classification

Dividend policy is a key differentiator between two categories of stocks. Growth stocks (growth) prioritize expansion and innovation, typically without significant dividends. Value stocks (value) operate with established cash flows and allocate substantial resources to distributions, mainly found in sectors like energy, telecommunications, and financial services.

Dividends in CFD: an often-overlooked aspect

Most trading platforms operate via Contracts for Difference (CFD) instead of direct stock purchases. These derivative instruments replicate the behavior of the underlying asset. A crucial point: CFDs also distribute dividends following the policy of the company they represent.

The advantage is access to leverage and short-term trading without the restrictions of physically owning the shares. The disadvantage is that we lose voting rights at shareholder meetings, although statistically this affects retail investors who do not hold large volumes.

The Dividend Aristocrats: the elite of payers

There is an exclusive selection of corporations known as Dividend Aristocrats: companies in the S&P 500 that have increased their dividends consecutively for 25 years or more. Currently, there are 65 members in this club, including names like Coca-Cola and Procter & Gamble. Belonging to this category indicates corporate stability and confidence in future earnings.

How to calculate dividends: practical formulas

Dividend calculation is straightforward with two fundamental formulas:

Dividend Per Share (DPA): DPA = (Profits × Pay Out) / Total Number of Shares

Dividend Yield (DY): DY = (Annual Dividend Per Share / Current Stock Price) × 100

Practical application of the calculation

Suppose Company XYZ reports profits of €50 million with a 70% pay out, allocating €35 million to shareholders. If it has 100 million shares outstanding, the DPA would be: 35,000,000 / 100,000,000 = €0.35.

If the stock is currently trading at €7, the yield would be: (0.35 / 7) × 100 = 5%. This 5% represents the return you would get solely from dividends, excluding price appreciation.

Dividends versus coupons: fundamental differences

Although both represent periodic income, dividends and coupons operate in different universes. Dividends belong to the realm of equities (stocks), where recipients are shareholders and payments lack a predefined maturity date. Coupons belong to fixed income (bonds), where recipients are bondholders and there is both a payment schedule and a return of invested capital date.

The yield of a coupon is known in advance through the bond prospectus, while dividends are determined by board decisions. Coupons are often annual, though periodicities vary. Dividends are often distributed semiannually in many corporations.

Investment strategy with dividends: building sustainable wealth

Developing a dividend-oriented portfolio requires discipline and methodology. This approach does not seek quick speculative gains but the construction of a consistent cash flow:

Focus on track records: Select companies with a proven history of constant and increasing distributions year after year.

Sector concentration: Utilities, basic consumption, and energy have historically offered more predictable dividend profiles.

Comparative PER analysis: Look for companies with low ratios relative to their sector, avoiding overpaying.

Dividend reinvestment: Although optional, reinvesting significantly amplifies returns through compound interest.

Debt assessment: Companies with moderate debt have less risk of cutting dividends amid interest rate changes.

Continuous monitoring: Even with a buy-and-hold approach, regularly review published financial statements to detect deteriorations before cuts materialize.

Impact of the ex-dividend date on stock price

The market reacts notably around the ex-dividend date. It is common to see price drops proportional to the announced dividend on the payment day, a completely normal phenomenon reflecting that money has left the company. Some sophisticated investors exploit these fluctuations through specific arbitrage strategies, although for long-term retail investors, these daily movements are of little substantive relevance.

Summary: why dividends matter in any serious strategy

Regardless of your investment horizon, understanding dividends and especially the ex-dividend date is unavoidable. Dividends generate passive income, directly influence valuations, and events like the ex-dividend date produce predictable volatility in prices. Whether you choose to build a specific dividend portfolio or simply hold buy-and-hold positions, these concepts will determine operational decisions and final profitability.