Having a difficult time understanding questions regarding DERP

I can’t seem to nail the simple ex dividend math questions. I use both Kaplan and achievable and can’t seem to nail it. Can someone try to explain it like I’m 8

Hi @Alright_crimson_gall! Thanks for reaching out on our forum. Let’s use a real world example of a recent cash dividend paid by Target. In a press release on January 13th, 2022, Target’s Investor Relations Team said:

The board of directors of Target Corporation (NYSE:TGT) has declared a quarterly dividend of 90 cents per common share. The dividend is payable March 10, 2022 to shareholders of record at the close of business February 16, 2022.

With this press release, we can identify three dates:

  • Declaration date - January 13th, 2022
  • Record date - February 16th, 2022
  • Payable date - March 10th, 2022

I assume you’re struggling with the record date and its relation to the ex-date. Let’s be clear about the record date - this is the day an investor must be a settled owner of Target stock to receive the dividend. The transfer agent is the organization that keeps track of settled shareholders. Assume they make changes to the shareholder list once per business day. When investors buy Target stock, they are added to the transfer agent’s shareholder list on the settlement date. When investors sell Target stock, they are taken off the shareholder list on the settlement date. Think of it like a revolving door of shareholders.

Target’s record date is on Wednesday, February 16th. Common stock settles in T+2 business days. In order to receive the Target dividend, an investor must buy Target stock in time to settle by Wednesday, February 16th. If they buy the stock on Monday, February 14th, they will settle by Wednesday, February 16th (two business days after the trade). They get the dividend in this scenario!

However, what if they wait until Tuesday, February 15th to buy the stock? They won’t settle until Thursday, February 17th. In this scenario, the shareholder will not be on the shareholder list on Wednesday, February 16th, and therefore they will not receive the dividend. Because Tuesday, February 15th is the first day the stock would be purchased and the buyer would not receive the dividend, this is the ex-date. This is why the ex-date for cash dividends is the business day prior to the ex-date. There simply isn’t enough time to settle by the record date!

Let’s start there - I’m sure you may have questions, and we can explore this further. Let me know where you want to go from here.

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This is perfect. Thanks so much

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