Why the share price drops on the ex-date

You will be able to explain the dividend timetable and why buying just before the ex-date gains you nothing.

Every few months a new investor asks the same question in a forum. They bought a stock the week before its dividend, collected the payout, and then noticed the share price had dropped by almost exactly the dividend amount on one particular morning. Did the market take their dividend back? In a sense, yes, and understanding why is the first step to thinking clearly about income investing.

Start with what a dividend is. A company earns profit, keeps some of it to run and grow the business, and may pay part of it to shareholders in cash. The board announces the payment on the declaration date. The announcement gives the amount per share and the timetable. The money then leaves the company's bank account and arrives in yours. A company that pays out S$100 million is worth S$100 million less afterwards, because that cash is no longer inside the business. The dividend does not come from nowhere. It is part of the company's value handed to you.

Now the timetable. The company sets a record date: the shareholders on its register at that date get the dividend. Because trades take a short time to settle, the exchange sets an ex-date shortly before the record date. Buy on or after the ex-date and the seller keeps the dividend. Buy before it and you receive it. The payment date comes later, sometimes weeks later, when the cash actually lands.

Put those two ideas together and the price drop makes sense. The evening before the ex-date, a share carries the right to the coming dividend. The next morning, it does not. A buyer on the ex-date is buying a share that is worth the same business minus the cash about to be paid out, so the price adjusts down by roughly the dividend. Other news moves the price too, so the drop is rarely exact, but the direction is reliable.

Use made-up figures. A stock trades at S$10.00 the day before its ex-date and will pay a dividend of S$0.30. On the ex-date, with no other news, it opens around S$9.70. If you bought at S$10.00 the day before, you now hold a S$9.70 share and are owed S$0.30 in cash. Your total is still S$10.00. Nothing was gained by buying just before the ex-date, and if you pay brokerage to get in and out, you are worse off.

This is the first and most useful lesson of income investing. What counts is your total return: the change in price plus the dividends you received. A dividend is not a bonus on top of your investment. It is your investment being paid back to you in cash, a slice at a time. A company that pays a large dividend while its business shrinks will see its price fall over time, and you can lose money while collecting every payout on schedule.

None of this makes dividends bad. A business that produces more cash than it can usefully reinvest should return it, and a steady dividend backed by steady profits is a sign of a healthy, disciplined business. In Singapore, IRAS treats dividends from Singapore-resident companies under the one-tier system, so they reach individual shareholders tax-free. For someone who wants regular cash from their savings, that is a real advantage. So the question to ask of any dividend is what backs it.

Where your dividend lands depends on how you hold the shares. If the shares are in your own CDP account, the cash goes to the bank account you linked to CDP for dividends. If they are held by a broker's custodian, the broker receives it and credits your trading account, and some brokers charge a handling fee. Check which one applies to you before your first payout, so you know where to look.

The rest of this course builds on total return. You will learn to read the numbers that tell you whether a dividend can last, to spot the trap of a yield that looks too good, and to apply the same thinking to S-REITs, whose structure makes them the biggest source of income for many Singapore investors.

Your task: pick one SGX-listed stock or REIT that pays a dividend. Find its most recent dividend announcement on SGXNet or the company's investor relations page, and write down the amount per share, the ex-date, the record date and the payment date. Then look up the closing price the day before the ex-date and on the ex-date, and compare the change with the dividend.

Find one recent SGX dividend on SGXNet, record its four dates, and compare the price change on the ex-date with the dividend amount.

Course

• Dividend stocks and S-REITs