I just do not understand ex-dates

Question G39MJ-V8QC7 says:

A publicly traded company announces the following in a press release:

“On Tuesday, July 7, 2021, Rile Logistics Company announced a quarterly cash dividend of $1.00 per share of common stock. The dividend will be payable Thursday, September 7, 2021 to shareholders of record as of Friday, August 20, 2021”

Then asks which statement is false. The answer I chose and got wrong is "The regular-way ex-date is Thursday, August 19.

How is this not a correct answer? The explanation states:

“With regular way settlement at T+2…, the last day an investor could buy the stock and settle by the record date would be Wednesday, August 18th.”

And according to investopedia:

“The third stage is the ex-dividend date, which is the date that determines which of these shareholders will be entitled to receive the dividend. Typically, the ex-dividend date is set two business days before the record date. Only those shareholders who owned their shares at least two full business days before the record date will be entitled to receive the dividend…To illustrate this process, consider a company that declares an upcoming dividend on Tuesday July 30th. If the record date is Thursday August 8th, then the ex-dividend date would be Tuesday August 6th. In this scenario, only shareholders who bought their shares on Monday August 5th (or earlier) would be entitled to receive a dividend.”

What am I missing here? These are the only questions I continue to get wrong.

Hi @Trent!

The ex-dividend date for a cash dividend is the business day before the record date, not two business days. It seems Investopedia is wrong in their post. This is probably because settlement timeframes for common stock used to be T+3. With a three day settlement timeframe, the ex-date used to be two business days prior to the record date. The ex-date is the “without the dividend” date, meaning it’s the first day an investor buying the stock would not settle in time to receive the dividend.

Obviously, you can rely on Achievable materials to confirm the ex-date is the business day prior to the record date, but here are some other outside resources you can use to confirm:

I checked several Investopedia resources, and they all are a little off in respect to ex-dividend dates. They’re usually a good resource, and I’m not sure why they are off on this topic.

Here’s the bottom line: the ex-dividend date for cash dividends is always one business day prior to the record date. To receive a dividend, the investor must be a settled owner by the record date. Using the question you quoted, let’s assume the record date for a cash dividend is Friday, August 20th. If an investor wanted to buy the stock and receive the dividend, they need to purchase it by Wednesday, August 18th to settle in time by Friday (T+2 settlement). Therefore, Thursday, August 17th is the ex-date. If an investor buys the stock on Thursday, August 17th (through regular-way settlement), they will not settle until Monday, August 23rd, which is one business day too late. That’s why Thursday is the ex-date.

I hope this explains why you got the question wrong. The question was looking for the false answer, and the regular-way ex-date is Thursday, August 19th (this is true).

I hope this helps! Please let me know if you have any other questions.

2 Likes

That’s helpful, thanks!