As investor, you will find out that dividend is one of income stream on your investing portfolio. The higher the dividend, the happier is the investor. But for trader, especially short term trader and call-option writer,  there is more factor to be factored-in in order to maximize the profit or prevent lost. Why? That’s because of the typical behavior of the stock price during the “Ex-Dividend Date”.

Ex-Dividend Date & Record Date

If a company declare that they will give the shareholder dividend, beside the amount of dividend, the company will also announce a “Record Date“. This is the date that you need to be recorded already on their book in order for the company to pay you the dividend. (Otherwise the dividend will be given to the previous shareholder).

When you are purchasing a stock or share, there will be a few days before that purchase is settled.  Meaning if you purchase a stock via your broker today, there will be a few day before your name registered/recorded on company’s book.  So, depending on your stock exchange “Ex-Dividend Date” or simply “ex-date” is a few days before the record date (in Australia:4 days before Record Date). This is actually the first day that you are not eligible for that dividend. Or in other word, you need to buy the stock/share before the Ex-Dividend Date in order to be given dividend on that time.

Because of this, Ex-Dividend Date is the most important date for investor and trader when it comes to dividend.

Typical Price Action on Ex-Dividend Date

The typical behavior of stock price on ex-dividend date is quite unique:

1. The price will usually open at starting price go down by the amount of the dividend. It’s not 100% always, an it is also not 100% exactly the same as dividend value, but approximately close. The logic is: when company is giving say 50c as dividend per share, it is actually taking out that 50c from company value as cash and giving it to the shareholder. So the overall company value on the market will be less.For example: company XYZ have 20 million share with price at $10. So total company value (market capitalization) is $200 million. If the company gives 15 cents dividend to shareholder, then the value of the company is literally down by 15c x 20 million share = $3 million down. Hence the price per share is equal to $9.85.
2. If the dividend is significantly high (compare to the stock-price or relative to the industry standard) it’s not unusual for the stock to rally a day before ex-date to compensate for item (1) above

Let see some real graph from real market price about this typical guidelines:

WITH STRONG MARKET SENTIMENT

• Home Depot (HD): Ex-Date: 1-Sep-2009 for 22c dividend. It closes $27,29 on 31-Aug-2009 to open 26c lower on ex-date. It closed even lower. Dow Jones Industrial Index (DJIA) closed 181 points lower, S&P500 closed 21 points lower.
  

  HD-Home Depot ex date 1 Sep 2009

  Price gap was formed on Ex-Date but the market sentiment of bearish day have more prominent effect after opening (Dow Jones ended down 181 points). This follows the typical price behavior on ex-date. The price on ex-date also follows the market sentiment.

• United Parcel Service (UPS): Ex-Date: 20-Aug-2009 for 45c dividend. Price were opened only 10c lower on ex-date, went to low  $52.24 before rally 67cents to end up $52.91 on that day. DJIA was up 71 points, S&P500 closed 11 points higher.
  

  UPS ex date:20-Aug-2009

  The price just went down 10 cents on the opening of ex-dividend date having push upward by market bullish sentiment. This follows marginally the typical price behavior on ex-date. The price is also follow the market sentiment as it went up from low on the day fuel by strong bullish market sentiment.

• Coca Cola (KO): Ex-date 9-Sep-2009 for dividend of 41 cents (3.08% yield). With DJIA up 51 points and S&P500 closed 8 points higher, KO open $50.13 (down 45 cents from $50.58) before rally strongly to $51.74 for $1.16 up
  

  Coca Cola-KO ex date 11-Sep-2009

  This follows the typical price behavour on ex-date, and rally even stronger than the overall market.

• Microsoft (MSFT): Ex-Date:18-Aug-2009 for 13c dividend. It open 4c higher. DJIA closed 83 points higher, S&P500 closed 9points higher.
  

  Microsoft (MSFT) ex-date 18-Aug-2009

  With strong upward pressure from the market, the ex-date price ended up higher. The price on ex-date also follows the market sentiment.

• Boeing Co (BA): Ex-Date: 5-Aug-2009 for 42c dividend. The ex-date open 53c lower from closing $44.16 before going back up. DJIA closed 34 points lower that date, S&P500 closed 3 points lower.
  

  Boeing-BA ex-date 5-Aug-2009

  The price was down larger than dividend value. This follows the typical price behavour on ex-date. The price on ex-date also follows the market sentiment.

WITHOUT/MINIMAL MARKET SENTIMENT

Let’s see more example with more neutral market:

• Glaxo Smith Kline (GSK): ex-date 29-Jul-2009 for 46c dividend. It closed $38.69 the day before and open down 21 cents at $38.48 before close 30 cents lower. Dow Jones Industrial Index was only 22 points down, S&P500 closed 3 points lower.
  

  Glaxo Kline Smith - GSK ex date 29-Jul-2009

  The price is gaped down on ex-date and close  down on that day. This follows marginally the typical price behavior on ex-date. The price on ex-date also follows the market sentiment.

• McGraw Hill (MHP): Ex-date: 24-Aug-2009 for dividend of 22 cents (3.45% yield). Price close a day before at $29.67 but open 4cents lower $29.63 only to rally and close $1.04 higher. DJIA only went up 3 points higher, S&P500 closed 1 points lower.
  

  McGraw Hill-MHP ex date 24-Aug-2009

  The price opened at ex-date marginally lower but perform a strong rally despite neutral overall market sentiment.

• Qualcomm Inc (QCOM): Ex-Date:26-Aug-2009 for 17cents dividend. It closed on 25 Aug at $46.99 and open at exactly the same price the next day on ex-date. It rallied 54cents higher to close the day. DJIA only up 5 points, S&P500 closed 1 points higher.
  

  Qualcomm QCOM ex-date 26-Aug-2009

  The price did not go down on ex-date and even rally strongly even-though the Dow Jones index show some neutralit. The price on ex-date also follows the market sentiment.

• IBM: Ex-Date: 6 Aug-2009 for 55c dividend. It closes $118.47 a day earlier and finish the ex-date at $1.09 lower. DJIA closed 21 points lower, S&P500 closed 7 points lower.
  

  IBM ex date 6-Aug-2009

  With the strong market downward push, the price gap on ex-date was push further down. This follows the typical price behavior on ex-date. The price on ex-date also follows the market sentiment.

• BHP Billiton (BHP): Ex-Date:2-Sep-2009 for 82c dividend (2.49% yield). It open $60.45 from $61.43 previous close (down 98 cents) before close $60.87 on ex-date. DJIA was down 25 points, S&P500 closed 1 points lower.
  

  BHP Billiton ex-date 2-Sep-2009

  The price gapped down on ex-date and follow the sentiment of the market down, but manage to finish higher than the open. This follows the typical price behavior on ex-date. The price on ex-date also follows the market sentiment.

Conclusion

From examples above all the stock (except MSFT and QCOM) were following the typical behavior describe above: the price drop on opening compare to the previous days before continue moving with market sentiment. But the overall market sentiment (Dow Jones index or broader S&P500 index) as a whole is still the dominant force to the exact movement of the price.

Denis Kristanda