Since we are just about through the dividend season this post may be a little late in coming but, with a number of ITA subscribers indicating an interest in getting a better understand of the practical implications, I thought it might be useful to provide a brief description/explanation with a couple of examples from recent distributions.
The basics are really quite straightforward – when a Company or Fund makes a dividend payment it must make this payment from the (Cash) assets held by the company/fund. This means that the Net Asset Value (NAV) of the company or fund will decrease by the amount paid in dividends and this will be reflected in the price of shares (NAV/Number of shares Outstanding).
A company or fund will generally declare a dividend (Declaration Date) anywhere from a few days to a few months ahead of when an investor is eligible to receive the dividend (the Ex-Dividend date). In order to be eligible for the dividend the investor must already be holding shares on the ex-dividend date i.e. he/she must have purchased shares before the ex-dividend date.
The correction in share price will be reflected in the Opening price on the ex-dividend date.
As an example, let’s take a look at RWX (SPDR International Real Estate ETF) that went ex-dividend on December 23:
This is an extreme example since RWX paid an (unusual) whopping 6% (24% annualized) dividend – but the impact is easy to see in the above figure. RWX Closed on December 20 at $40.63 per share. At the Open on December 23 (the ex-dividend date and next trading day) RWX Opened at $38.14 – or $2.49 lower than the previous day’s Close. But investors holding shares at the Close on December 20 were eligible to receive the dividend – that was $2.484, or about the same as the drop in share price. So, it would not matter whether an investor sold at the Close on December 20 or on the Open on December 23 – the net profit/loss would be the same.
Although an investor is eligible to receive the dividend by holding shares on the ex-dividend date, the distributions are not paid on that date, so funds will not appear in the investor’s account. This occurs on the Payment Date – that is usually a few days (up to ~30 days – but generally ~5 trading days) after the ex-dividend date. However, shares do not have to be held through this interim period for the investor to receive the dividends – shares could be sold on the ex-dividend date and the investor would still receive the dividend on the payment date.
Technically there is another “official” date in this sequence – this is the “Record Date” or the date on which the investor is the “On-Record” holder of the shares. This is usually the next trading day following the ex-dividend date and is related to the time needed for the brokers/exchanges to clear records from the actual buy/sell transaction date. Although this is a technical requirement, from a practical perspective all an investor needs to know is that they must hold shares prior to the ex-dividend date and can sell anytime from the ex-dividend date onward to receive dividends.
As an observation, these price drops resulting from decreases in NAV often (but not always) tend to be (at least partially) recovered over a few days or weeks following the payment – although it is unlikely that RWX will bounce 6% in this time period. In my recent Rutherford Review post (https://itawealth.com/rutherford-portfolio-review-tranche-1-20-december-2019/) I showed a couple of examples of the magnitude of these bounces for RWX (with “normal” dividend distribution) and VEA.
VEA also went ex-dividend on December 23 with a declared dividend of $0.44. After closing at $44.24 on December 20 VEA opened at 43.80 on December 23 – or $0.44 lower – the same as the dividend.
VTI went ex-dividend on December 24 with a declared dividend of $0.886. After closing at $164.29 on December 23, VTI opened at $163.68 on December 24 – down $0.61 – not quite as big as the dividend, and influenced by other market factors (economy, news, sentiment etc), but I think you see the general trend. The magnitude of the bounce (if any) will also be influenced by these other factors.
When it comes to the Kipling workbook we can only use data that is available from the download source (Yahoo, Tiingo). On the ex-dividend date the available prices will be valid (current) prices – but prices on days prior to the ex-dividend date will also be “raw” prices i.e. unadjusted for dividends. Since we use “Adjusted Prices” to calculate “total returns” accurately, this means that momentum (slope) values for dividend paying assets, as calculated on the ex-dividend date, will not be accurate. Yahoo and Tiingo are generally pretty good in updating their databases to deliver “adjusted” prices and these are usually available on the day following the ex-dividend date for most common/popular assets. However, this may not be true for all assets – especially less liquid ones and for Mutual Funds – so it is always advisable to check the data in the “Adj_Close” sheet and to be careful if this is not adjusted (compare with “raw” data on your normal trading platform).
I hope this helps readers better understand some of the nuances of dividend payments – although it probably shouldn’t be a big deal in making adjustment decisions (other than making the investor a little more comfortable). Any tax implications are probably minor.