Definition — cum dividend
Cum dividend (Latin for “with dividend”) describes a share that carries the right to a forthcoming distribution because the company has declared a dividend but not yet paid it. A share is cum dividend up until the ex-dividend date (ex-date); buyers who acquire the share while it is cum dividend will receive the next declared payout.
Key terms (short definitions)
– Declaration date: the day the board formally approves a dividend and announces its size and key dates.
– Record date: the cut-off date the company uses to determine which shareholders are eligible to receive the declared dividend.
– Ex-dividend date (ex-date): the date on which a share begins trading without the right to the next dividend. Purchases on or after the ex-date do not qualify for the upcoming payout.
– Scrip dividend: a non-cash alternative (a certificate acknowledging a payable entitlement) sometimes offered when a company lacks cash.
– Settlement cycle (e.g., T+2): the time between trade date and when ownership actually transfers; many markets use trade date plus two business days, and this influences the ex-date calculation.
– Efficient market hypothesis (EMH): the idea that public information (including declared dividends) is rapidly reflected in stock prices.
How it works — step-by-step
1. Board action: The company’s board declares a dividend and sets a record date and payment date.
2. Ex-date is determined: Exchanges or market conventions set the ex-date so that trades that settle before the record date qualify for the dividend. With a T+2 settlement cycle, the ex-date is typically two business days before the record date.
3. Trading before ex-date (cum dividend): If you buy the share and the trade settles in time for the record date, you are entitled to the upcoming dividend.
4. Trading on/after ex-date (ex-dividend): If you buy on or after the ex-date, the seller keeps the right to the declared dividend; the buyer gets future dividends only.
5. Price adjustment: On the ex-date, the market normally adjusts the share price downward by roughly the dividend amount, all else equal, because the entitlement to that cash has moved to the seller.
Important points and special considerations
– Timing and settlement matter: To receive a dividend when buying, make sure the trade will settle before the record date. In many markets that means buying at least two business days before the record date (T+2), but check local market rules.
– Once declared, a dividend becomes an obligation (liability) of the company until paid. However, future payouts can be changed for later periods.
– Price behavior: The anticipated dividend is usually priced in ahead of the ex-date. The simplistic buy-before-ex-sell-after-ex “capture” strategy is unlikely to produce reliable profits after accounting for expected price adjustment, transaction costs, taxes, and timing risk.
– Scrip dividends: Some firms offer scrip (paper or share alternatives) when they lack cash. Scrip changes the nature of the payout and may have different tax or settlement implications.
– Tax and broker rules: Dividend treatment for tax purposes differs by jurisdiction and by whether the dividend is qualified, ordinary, or scrip. Broker processing rules for entitlements and fractional shares also vary.
Checklist — when you want to capture (or avoid) a declared dividend
– Confirm the declaration date and dividend amount from the company announcement.
– Find the record date and the ex-dividend date listed by the exchange or issuer.
– Verify the market settlement cycle (e.g., T+2) and ensure your trade will settle in time.
– Check whether the firm is offering scrip instead of cash, and read the terms.
– Consider brokerage fees, bid/ask spreads, and likely tax treatment for dividends in your jurisdiction.
– Be aware that the market price typically adjusts on the ex-date by approximately the dividend amount.
– Confirm any special rules for ADRs, foreign stocks, or corporate actions that could affect entitlement.
Worked numeric example
Scenario setup:
– You own 100 shares of AcmeCo.
– Board declares a dividend of $0.10 per share.
– Record date is set; ex-date is two business days before the record date.
Case A — sell during the cum dividend period (before ex-date):
– You sell your 100 shares while the stock is
while the stock is still cum dividend (i.e., before the ex-date). Because most cash-market trades settle on a T+2 basis (trade date plus two business days), your sale will not show up on the issuer’s shareholder record by the record date. That means you (the seller) remain the shareholder of record and will receive the dividend payment when it is paid.
Worked numeric example — continued
– Assumptions: AcmeCo market price just before ex-date = $20.00; dividend = $0.10 per share; you own 100 shares; settlement = T+2; brokerage commission round-trip = $10; assumed dividend tax withholding = 0% for simplicity (taxes handled separately below).
Case A — sell during the cum-dividend period (before ex-date):
– You sell 100 shares at $20.00 = $2,000.00 proceeds.
– Because the trade settles after the record date, you remain the shareholder of record and later receive dividend = 100 × $0.10 = $10.00.
– Cash received (ignoring tax) = $2,000 + $10 = $2,010. Subtract brokerage $10 → net $2,000.
– Net economic outcome roughly equals keeping shares through ex-date then selling on ex-date minus any price movement unrelated to the dividend.
Case B — sell on or after the ex-date:
– On the ex-date the market typically adjusts down by approximately the dividend amount. So the stock might open around $19.90.
– You sell 100 shares at $19.90 = $1,990.00 proceeds.
– You are no longer the shareholder of record,