If you buy a stock before the ex-dividend date, you will receive the next dividend. If you buy on or after the ex-dividend date, you will not receive the next dividend.vaeenma/Getty Images/iStockphoto
I own Kimberley Clark (KMB-NYSE) and I have a question regarding the ex-dividend date. KMB closed on Dec. 1 at $121.13 (U.S.). The following day, Dec. 2, was the ex-dividend date, and when I checked KMB's price during the day it was quoted at $120.86, up 61 cents. These numbers don't add up. Can you explain what's going on here?
I don't blame you for being confused. If the shares had actually gained 61 cents from the previous day's close, they should have been trading at $121.74. But they were quoted at $120.86, which was actually down 27 cents from the previous day. So what gives?
I'll explain the discrepancy in a moment, but first let's quickly review how ex-dividend dates work. Basically, if you buy a stock before the ex-dividend date, you will receive the next dividend. If you buy on or after the ex-dividend date, you will not receive the next dividend.
In KMB's case, the quarterly dividend of 88 cents is payable Jan. 5 to shareholders of record on Dec. 4. Because trades take three business days to settle, an investor would have had to buy the stock on or before Dec. 1 to receive the next dividend. Those who bought on Dec. 2 or after would not get the dividend, which is why it's called the ex-dividend date.
Now, imagine if you bought the shares on Dec. 2. Would you want to pay the same price as someone who bought on Dec. 1? Of course not. After all, you're not entitled to the next dividend, so the price you pay would have to reflect that. All else being equal, on the ex-dividend date the price of the shares should fall by the amount of the dividend.
It rarely works out that way – the stock could fall by more or less than the dividend, or it could even rise – because lots of other factors influence the share price, including general market conditions and news affecting the company or its competitors. But when a stock goes ex-dividend, the value of the next dividend is effectively stripped out of the market price.
Now, back to the price quote for KMB. What happened is that the data provider basically added back the 88-cent dividend when calculating the price change. So, while the actual price change was negative 27 cents ($120.86 minus the previous day's closing price $121.13), the adjusted price change was positive 61 cents (negative 27 cents plus 88 cents).
Presumably, the purpose of adjusting the data in this way is to provide a picture of the stock's price movement that excludes the impact of the ex-dividend date. I don't particularly like this approach – I think the actual, unadjusted price change should be reported – but I can understand why some data providers do it. Incidentally, I checked a few U.S. and Canadian stock quotes on Globe Investor (and some other sites) in recent days and in all cases, the price changes were adjusted on the ex-dividend date.
One final thing to keep in mind: Some investors think it's important, if they're going to buy a stock, to put their order in before the ex-dividend date so that they get the next dividend. But because the stock market is an efficient pricing mechanism, there's really no advantage or disadvantage to buying before, on or after the ex-dividend date – except perhaps for that warm and fuzzy feeling you get watching the dividend land in your account.
For more on this topic, read my column "Four Dividend Dates Every Investor Needs to Know."
John Heinzl