What does ‘going ex-dividend’ mean?
Companies distribute a proportion of their earnings back to shareholders by paying them dividends; they may pay several dividends in a year. Before each dividend payment date, the company will tell the markets how much they are going to pay and will set a record date. This is the date on which a shareholder must be recorded to be eligible to receive the next dividend payment.
Once the record date is set, the ex-dividend date is set. It is typically a couple of days before the record date, but the exact timing depends on the rules of the stock market. It becomes a marker date for investors. When buying stock, it normally takes about three days for the purchase to be settled and recorded, and therefore investors know they must buy stock before the ex-dividend date if they are to get the next dividend payment by that company.
How does the ex-dividend date impact a stock price?
When an individual stock goes ex-dividend, its share price normally drops. To understand this, imagine a company is worth £100 million, and it pays out a dividend worth £1 million. In theory, the company is now only worth £99 million, and its share price should drop by 1% on the market open of the day it goes ex-dividend.
How does this impact the stock index?
A price-weighted index, such as the FTSE 100, Dow Jones Industrial Average (Wall Street) or the ASX 200 (Australia 200), is made up of a large number of stocks. On any given day, large numbers of stocks from a single index could go ex-dividend at the same time. When a large number of stocks go ex-dividend at the same time, or when larger stocks in an index go ex-dividend, the cumulative effect can have a large impact on the index level.
Luckily, companies tell the market what their dividends are going to be well ahead of the ex-dividend date, and so we know what the impact is likely to be on both the individual stock prices, as well as the cumulative effect on the index.
How does it impact my IG account and how do I find out more?
At IG, we post expected ex-dividend adjustments in IG Community and also include them in our Week Ahead email.
In IG Community, you can also watch a short video on how IG deals with dividend adjustments, and if you have any questions please make a post.
IG will make the adjustment to the index on the previous day’s cash close, which means 6:30pm (London time) each Wednesday for the FTSE 100. Other markets are affected by dividend adjustments on a more ad-hoc basis, so make sure you check out the above link each week for the most up-to-date forecast.
It’s also important to note that only DFB or cash index positions will be affected, while futures will not be adjusted because they already take these adjustments into account. Finally, the DAX (Germany 30) is a performance-weighted index so isn’t included on the list.
Companies going ex-div on the FTSE 100 this week
This week (commencing 19 February 2018) the FTSE 100 will see a relatively large dividend adjustment as five large companies will all be going ex-dividend on the same day. The companies going ex-dividend, and therefore affecting the IG FTSE cash index on Wednesday 21 February at 6:30pm (London time), are:
What happens to your position?
The most important thing to remember, irrespective of whether you are long or short, is that holding an index DFB or cash position through a dividend adjustment is a cash neutral event. You will not gain or lose from the dividend adjustment. However, if you haven’t experienced this event before it may require an explanation.
If you are long, your open position will fall by the dividend amount, but IG credits your account with the point adjustment, multiplied by your position size. You do not make or lose money on this adjustment.
If you are short, your open position will show an increased profit by the dividend amount, and therefore we debit your account with the point adjustment, multiplied by your position size. Again, you do not make or lose money on this adjustment.
Don’t forget, there is a short video on IG Community here, which is worth watching and provides further clarity on how this will be displayed on your account. If you have any questions please feel free to leave a Community comment.