What Happens When You Sell Shares Before the Ex-Dividend Date

Fact checked by Katharine BeerReviewed by Charles PottersFact checked by Katharine BeerReviewed by Charles Potters

If you sell a stock that you own before the ex-dividend date you will not receive a dividend from the company. The ex-dividend date (also known as the ex-date) is the day at which the stock begins trading without the value of the subsequent dividend priced in since shareholders will no longer be entitled to the upcoming dividend payment.

Thus, the ex-dividend date is the date that the company has designated as the first day of trading in which the shares trade without the right to the dividend. If you sell your shares on or after this date, you will, however, still receive the dividend. If you sell your shares before the ex-date, however, you would not be entitled to receive those dividends.

Key Takeaways

• Shareholders who sell their stock before the ex-dividend date do not receive a dividend.
• The ex-dividend date is the first day of trading in which new shareholders don’t have rights to the next dividend disbursement.
• If shareholders continue to hold their stock, they may qualify for the next dividend.
• If shares are sold on or after the ex-dividend date, they still receive the dividend.
• When you purchase shares, your name does not automatically get added to the record book—this takes about three days from the transaction date.

Selling Shares Before the Ex-Dividend Date

If a shareholder is to receive a dividend, they need to be listed on the company’s records on the date of record. This date is used to determine the company’s holders of record and to authorize those to whom proxy statements, financial reports, and other pertinent information are sent.

When you purchase shares, your name does not automatically get added to the record book—this takes about two or three days from the transaction date. Therefore, if the date of the record is August 10, you must have purchased the shares on August 7 to receive a dividend. This would make August 8 the ex-dividend date, as it is the date directly following the last date on which you could get a dividend.

The ex-dividend date is set by either the National Association of Securities Dealers (NASD) or the stock exchange, once the date of record has been set. It is typically one day prior since stock trades settle one business day after they are initiated. This period is commonly referred to as T+1.

How Stock Prices Change on the Ex-Date

Remember that a company’s shares will trade for less than the dividend amount on the ex-dividend date than they did the day before.

When a dividend-paying company distributes a large dividend, the market generally accounts for that dividend in the days preceding the ex-date due to buyers stepping in and purchasing the stock. These buyers are willing to pay a premium to receive the dividend.

Important

Dividends that are reinvested are still taxed as dividend income.

Example of Selling Before the Ex-Date

Imagine Apple (AAPL) shares trade at $157.50 and the company announces a quarterly dividend of $0.22. Investors who hold the shares past the ex-dividend date will receive the $0.22. Investors who sell before the ex-date, on the other hand, will not. But all is not lost as shares in the company will typically fall by roughly the amount of the dividend, to $157.28, all else equal, or there will be an arbitrage opportunity in the market.

If shares didn’t fall as a result of dividend payments, everyone would simply buy the shares for $157.50, get the dividend, and then sell their shares after the ex-dividend date, essentially getting 22 cents per share free from the company.

Are Reinvested Dividends Taxable?

Yes. Even if you choose to reinvest dividends instead of taking them as cash, the Internal Revenue Service (IRS) still treats this as a taxable event.

If You Pay Taxes on Reinvested Dividends, Do You Have To Pay Again on Capital Gains?

Yes. Dividends are treated as income by the IRS. Therefore, if you take dividend income to reinvest in shares, you will have to pay taxes on the dividend income and then again on any capital gains earned when the shares are sold.

What Is the Difference Between the Dividend Record Date and Ex-Date?

When a dividend is declared by a company, they will also specify a date of record, where shareholders that are recorded on that record date will receive the dividend. Because shares settle T+1. the ex-dividend date falls one trading day before the record date. As a result, if you own the stock before the ex-dividend date, you will receive the dividend. However, if you buy it on or after the ex-date, you will not.

The Bottom Line

Dividend paying stocks are popular with investors because they provide them with a form of income that can be taken in cash or reinvested back into the company. Knowing what the ex-dividend date is and how it works before you decide to sell any shares is something every investor should understand.

Read the original article on Investopedia.