If you invest in high yielding shares you might come across one or two adjustments that can be puzzling. Why, for example, do high-yielding shares always drop sharply on two Wednesdays each year? And what does that little 'xd' symbol by the side of the price in the newspaper share price listings mean?
The falls are harmless and the cause is mundane. It is because of the way the market takes account of dividend payments.
The reason is a simple one. It's because investors and professional dealers and market-makers need to have a dividing line that determines precisely when shareholders qualify for a dividend and when they do not, and to know exactly how and when that fact will be taken into account by the market.
All dividend announcements by companies give at least two key dates, and most give a third one as well. These dates are:
■ the 'record' date. This is the date after which new buyers of the shares will not qualify for the pending dividend payments. In other words if you sell a share just before or buy a share just after the record date, you won't be entitled to the dividend. This is not necessarily called the record date in a company announcement. The phrase generally used will be something like '…….will be paid on [payment date] to shareholders on the register at [record date].
■ the payment date. This is the date that dividend cheques are posted or dividends paid into shareholders' bank accounts. This may be some weeks or even months after the record date, so it is important to be aware precisely when the payment is likely to be made. It's particularly important for investors who (like me) rely on receiving a steady flow of dividends from their investments to be aware of the - generally two, but sometimes four - dividend payment dates before they buy a share. Company web sites and data services like Sharescope have these details, as do printed company announcements mailed to shareholders.
■ the 'ex-dividend' date. This is the third key date and the reason for that little 'xd' symbol beside the share price in the paper. The ex-dividend, or 'xd', date is normally the second business day prior to the record date. Since record dates are generally a Friday, this means that most ex-dividend dates are on a Wednesday. Ex-dividend dates are fixed this way because of settlement times. On the T+3 system operated in the UK (i.e. a trade settles three days after it is executed), investors need to buy a stock three days prior to the record date (that's to say, the day before the ex-dividend date) to be sure of qualifying for the dividend payment. This is because the new shareholder's name will only go on the register once the three settlement days have elapsed.
While that explains why these dates are when they are, the significance of the 'xd' really lies elsewhere. It is that the share price adjusts downwards by the amount of the pending per share dividend payment at the market opening on the ex-dividend date. For high yielding shares the adjustment can be a large one, and alarming if you are not expecting it. It happens in order to recognise the fact that buyers of the share on or after that day will not qualify for the imminent dividend.
For instance, a share that closes at 425p the day before going 'ex' a 15p dividend payment being paid on 3 December to shareholders on the register on Friday 2 November, will go 'ex' on Wednesday 31 October. On that day, other things being equal, the price would open at 410p 'xd'. The 15p dividend - the reason for the adjustment - would only be paid to those shareholders entitled to it some 33 days later.
On an ex-dividend date, any notional underlying change in the price compared to the previous day can be worked out by subtracting the dividend from the previous day's close and then comparing the resulting price with subsequent day's quotation.
And why the little 'xd' symbol on the prices pages and on broker contract notes? That's simply to emphasise that the shares are now being bought without entitlement to the pending dividend payment, although of course they will - if you continue to hold them - qualify for any subsequent ones.
But investors do need to be aware that there could be quite a gap between the share price adjusting on the xd date and them receiving the dividend payment that the adjustment represent. This can be several weeks, or sometimes even a few months. That's because the timing of the ex-dividend is dependent on the record date for the share register, and not the day the dividend will be paid, which are two entirely different and unrelated dates.
