A stock is cum dividend, which means “with dividend,” when a company declares a forthcoming dividend but hasn’t paid it yet. A stock trades cum dividend until the ex-dividend date, at which point it starts trading without dividend rights. The buyer who secures the stock before the ex-dividend date is entitled to the next scheduled dividend payout.
Key Takeaways
- A stock trades cum dividend from its declaration date until the ex-dividend date when the company announces but hasn’t yet distributed a dividend.
- To purchase a share cum dividend, buyers must complete their purchase before the record date set within the dividend period.
- Dividend information is publicly accessible and incorporated into the share price per the efficient market hypothesis.
How Cum Dividend Works
Before companies announce their annual or quarterly results, they designate dates to close the register for dividend payments and scrips. These dates dictate eligibility for dividends and scrips (receipts acknowledging debt used by cash-short companies as an alternative to dividend payouts).
Cum dividend status indicates that a security is awaiting a dividend. Sellers of cum dividend stocks are, in fact, handing over the share and its accompanying forthcoming dividend to the buyer. Trading times primarily dictate cum dividend stocks rather than seller choices. Investment returns are more often influenced by stock price changes rather than dividends.
To distinguish a share cum dividend, buyers must finalize the purchase by a specified date within the dividend period, known as the record date. Certain corporations necessitate completing the sale two business days prior, while others may extend this deadline. Transactions finalized before this cut-off will ensure dividend receival. Missing the deadline means acquiring the share ex-dividend (without upcoming dividend rights). Declaration and recording dates chosen by the stock-issuing company establish these timelines.
Dividend schedules lack uniformity; payment dates differ per company. While quarterly dividends are standard, some firms payout annually, biannually, or even monthly on rare occasions.
Special Considerations
Declared Dividends
Cum dividend status encompasses forthcoming declared dividends, which the board of directors mandates through a formal motion. Declared dividends become corporate liabilities. Since dividends reflect company profits, this figure can vary.
Companies establish a recording date subsequent to the declaration date, which shares have to be purchased by to realize the dividend. Buyers must usually obtain shares two business days before this date, known as the ex-dividend date (ex-date). Purchases post-ex-date equate to an ex-dividend sale. Here, though the buyer gets the stock but misses out on the forthcoming distribution.
Dividend Rights and Purchase Price
The stock price varies based on its cum dividend or ex-dividend status. Dividend information available to the public is factored into the share price. Utilizing a strategy of last-minute buys to secure dividends before swiftly selling the stock is overly simplistic and often unsuccessful.
Illustration of Cum Dividend
Imagine an investor with 100 shares of PricedToSell, an ecommerce company, set to pay a quarterly dividend of $0.10 per share, with the ex-dividend date 10 days away. This investor considers a sale to fund another investment opportunity but must decide whether to sell during the cum dividend period and entitle the buyer to the $10 quarterly payout.
Should the investor choose to hold off, hoping alternative investments yield returns, but fails, the shares eventually sell ex-dividend. Consequently, the market price reflects a $10 drop (all things equal) post the dividend date. Thus, while the next buyer misses out on the current dividend, they gain rights to subsequent distributions, contingent upon continued shareholding.
. This fictional insight illustrates the sublegal finite balancing around cum and ex-dividend investing.
Related Terms: Ex-Dividend Date, Record Date, Declaration Date, Dividend Yield, Scrip Dividends.
