What is a cash dividend?

According to Wikipedia, a dividend is:

a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to …. pay a proportion of the profit as a dividend to shareholders.

Remember, the shareholders are owners of the company so that is why they are distributed a piece of the profit.
This is one type of corporate action, and probably the most common.

Cash dividends can be a regularly scheduled event, e.g., quarterly dividend, or a special one-time event, e.g., a special dividend.

What are ex-date, record date, and pay date?

There are several dates that are associated with a dividend. Some of these you should understand from a portfolio accounting and performance standpoint.

  • Ex-date: if you buy the stock on this date or after, you will not receive the dividend.
  • Record date: this is the date where the company determines which shareholders will receive the dividend.
  • Pay Date: this is when the company pays the dividend.

Let’s use an example.

Company ABC has the following dividend (“.10” means 10 cents a share):



Ex-date (August 7th):

Let’s also assume that the company has 1 billion shares and the stock price closed at 80 on August 6th.  That means the total market cap of the company stock is 80 * 1 billion shares = 80 billion.

If a 10 cent dividend is paid on the 1 billion shares, that means 100 million is being paid out (1 billion * .10 dividend).  This decreases the company’s market value by 100 million:


Record date (August 8th):

It may seem strange that a company would look to see who owned the stock on the day after the dividend is taken out of the market value.

The reason is that shares don’t settle immediately.  The company cannot look at the “shareholders of record” on the close of August 6th to see who owned it on August 6th.  Assuming a “t+2” settlement (trade date + 2 days), the company will be able to see the Aug 6th “shareholders of record” on August 8th.

Pay Date (August 21st):

The pay date is when the company pays the owed shareholders their cash, and it is typically weeks after the record date.  In this example, it is 13 days after.


How is a Dividend Reflected in a Portfolio Market Value via Accounting?

From a shareholder’s standpoint, there is no change in their total market value created from the dividend.  They just now have some of the money in the form of cash rather than their equity holding.

We will calculate the market value without the dividend and what we call the “Total Market Value” which includes dividend.

Let’s use the same example as above, and assume you hold 100 shares.

  • August 6th: The value of the securities would be 100 * $80 stock price = $8,000.
  • August 7th: When the dividend goes ex, the value of securities goes to 100* $79.9 = $7,990 and you what is called a dividend accrual or dividend receivable of $10.  (you are owned this $10 from the company)
  • In between ex and pay date, the dividend accrual will stay $10 and the securities will fluctuate with the price of the stock.  This can cause slight “cash drag” since the accrual is staying the same.
  • August 21st: The dividend accrual changes to cash and the investor can spend it.

This assumes the dividend is paid in the portfolio’s base currency, we will talk about foreign dividends later.

Now That We Know the Accounting, How Does it Affect the Investment Return?

Remember, the formula for a daily return is:

1) Impact to Market Values

Typically, when “Market Value” is used in this formula, it is referring to the Total Market Value including dividend accruals. Therefore, it can be re-written as this:

The accruals typically cancel out, except on ex date when there is a dividend accrual on the ending market value but not the beginning market value.

Sometimes you will see this formula as well:

This is typically used in a few situations:

a) When calculating performance using NAVs. Once dividends of funds are distributed, they are no longer reflected in the NAV and shares haven’t changed, so any income that’s been distributed needs to be added to get the total return

b) By benchmark providers or attribution systems. In these cases, the income is recognized on ex-date if they are not using accrual portfolio accounting as we have shown above.

2) Impact to Flows

An investor can chose to:

Reinvest dividends (in which case there are no cash flows)

Take the dividends as cash when they are paid (in which case, there will be cash outflows)

Your time weighted rate of return will be the same regardless of whether you invest the dividends into the portfolio on a pro-rata basis or  remove them.

I explain why in the following post about the myth of  the “dividends are reinvested” disclosure.

Reinvesting Differences

If you choose to reinvest the dividends, how they are reinvested will impact the returns.

  • If they are re-invested in across the portfolio on a pro-rata basis, they will earn the return of the portfolio.
  • If they are re-invested in the same security (sometimes you can elect for a DRIP – Dividend Reinvestment Program and get a discount and/or no transaction costs on the purchase of additional shares), that additional money will earn the return of the security it is being invested in, plus any relevant discounts if part of a DRIP.

What Are the Underlying Transactions I Will See On a Transaction Report?

In addition to accounting for market values discussed above, there will also transactions that show when the dividend paid and possibly also when it went ex.  For example:

  • Some systems will recognize the dividend transaction only on pay date
  • Other systems will gave two transactions, the date an accrual is created and the date the dividend is paid.

What About Foreign Securities?

If the dividend payment is made in a currency that is different from the investor’s “base” or home currency, then there is an additional accounting nuance you need to be aware of.

If we use the example above, and assume the investor’s currency is USD but the security is traded in EUR and pays dividends in EUR.  Then we need to add FX rate differences to the below:

Thanks for reading this article. Please send any feedback, corrections, or questions to info@learninvestmentperformance.com.

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