Ex-dividend dates pertain to investments, such as stocks and some exchange-traded funds, that pay dividends or other cash distributions to their investors.
Some common stocks, most preferred stocks, and some exchange-traded funds (ETFs) pay dividends or distributions. These payouts can be at regular intervals, such as monthly, quarterly, or annually. Sometimes, an investment will pay an unscheduled special dividend in addition to its regular dividend payments. And, sometimes, an investment which does not pay regular dividends will announce and pay a special dividend.
In any or all of those circumstances, there are 3 important dates regarding distribution payments: The ex-dividend date, the record date, and the payment date. The ex-dividend date, which is commonly referred to as the “ex-date”, usually, but not always, occurs first in the sequence.
For example, the Zweig Total Return Fund, a closed-end ETF which trades on the New York Stock Exchange (NYSE) under the symbol ZTR, gives its investors a regular monthly distribution equal to one-twelfth of 10 percent of the Fund’s net asset value as of the close of business on the final trading day of the previous month, which, in this case, was April 29th, 2011. ZTR’s regular monthly distribution is normally a combination of dividends, capital gains, and return of capital.
On May 2, 2011, the first business day of the next month, the Fund declared a distribution of $0.033 per share, with a payment date of May 19, 2011, payable to shareholders of record on May 12, 2011, with an ex-date of May 10, 2011.
The significance of the ex-date is that shares purchased that day are not eligible to receive the payout on May 19th. Stock trades take 3 days to settle, so shares purchased on the 10th would not be shares of record in the investor’s account by close of business on the 12th, which is the record date.
Typically, on an ex-date, the trading price of the investment is reduced by the amount of the distribution. So, if ZTR closed at $3.40 on May 9th, it would open even (no gain or loss) at $3.37 on May 10th.
For some investors, the ex-date price reduction presents a buying opportunity. Long-term holders of an investment that pays regular distributions can use the ex-date to add to their accumulation of shares at a reduced price, but then must wait for the next distribution to begin receiving a payout on those newly purchased shares.