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According to Investopedia.com:

Similar to an individual company's stock, an ETF sets an ex-dividend date, a record date, and a payment date. These dates determine who receives the dividend and when the dividend gets paid.

Source: https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp

Investopedia does not go into great details for ETFs, but that page directly links to another Investopedia page regarding equity dividends, which states:

The ex-dividend date or "ex-date" is the day the stock starts trading without the value of its next dividend payment. Typically, the ex-dividend date for a stock is one business day before the record date, meaning that an investor who buys the stock on its ex-dividend date or later will not be eligible to receive the declared dividend. Rather, the dividend payment is made to whoever owned the stock the day before the ex-dividend date.

Source: https://www.investopedia.com/terms/e/ex-dividend.asp

And yet, when looking at the prospectus for the popular SPDR DIA ETF (which tracks the Dow Jones Industrial Average, DJIA), it seems to state just the opposite:

The regular monthly ex-dividend date for Units is the third (3rd) Friday in each calendar month, unless such day is not a Business Day, in which case the ex-dividend date is the immediately preceding Business Day (“Ex-Dividend Date”). Beneficial Owners reflected on the records of DTC and the DTC Participants on the first (1st) Business Day following the Ex-Dividend Date (“Record Date”) are entitled to receive an amount representing dividends accumulated on Portfolio Securities through the monthly dividend period which ends on the Business Day preceding such Ex-Dividend Date (including stocks with ex-dividend dates falling within such monthly dividend period), net of fees and expenses, accrued daily for such period. ... The payment of dividends is made on the Monday preceding the third (3rd) Friday of the next calendar month...

Source: SPDR DIA ETF Trust Prospectus (2020), page 61 (emphasis added)
https://www.ssga.com/library-content/products/fund-docs/etfs/us/ps/DIA_PROSPECTUS.pdf

It sounds like SPDR DIA ETF does not pay any dividends to fund owners who own the ETF on the day before the ex-dividend date, contrary to Investopedia. Furthermore, it sounds like they only pay dividends to fund owners who own the fund the day after the ex-dividend date, which seems completely backwards.

What's going on here? Does this ETF break typical conventions, or is this common? Perhaps there a fundamental principle missing from this analysis? How would one be aware of this without wading through the entire 80 page prospectus?

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  • Keep in mind that dividends have zero effect on total return. The price of the ETF will drop by the same amount as the dividend, so if you miss the ex-div date you get to buy at a cheaper price, and get more units for the same investment amount.
    – D Stanley
    Oct 20 '20 at 12:39
  • @DStanley Except if the asset is sold the day before the ex-div date, or according to what the SPDR DIA ETF prospectus seems to say, even if the asset is sold on the ex-div date. Oct 20 '20 at 17:16
  • No, you can't get the dividend and the cheaper price. If you trade at the pre-div price you get the dividend; if you trade at the post-div price you don't. Same if you sell. If you get the dividend you'll sell at a cheaper price, and vice-versa.
    – D Stanley
    Oct 20 '20 at 20:26
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It is really quite simple for this and other corporate actions - and not just for ETFs.

You need to be holding at the close of the day prior to the ex-date. You can buy at this time at or before this, but you must be holding as of the close.

If you buy it any time after that, you will not be entitled to the dividend. The "ex" part of ex-dividend means "excluding".

The "record date" is simply an accounting exercise reflecting transfer and settlement of the security into your name, and is entirely irrelevant to you (your broker handles all of this transparently).

Looking at a recent dividend for SPY: Ex-date Sep 18 2020 Amount $1.339224 Day prior to ex-date: Sep 17 2020 Payment date: 30 Sep 2020

So you must have bought on or before the close during regularly trading hours to receive this dividend. If you wish, You could certainly sell the stock on Sep 18 and you will still receive the dividend.

Note: The exact amount of the dividend is not known until after the close on 18th, prior to the next trading day open.

Cheers, Richard.

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    Why is the exact dividend amount not known before the close on ex-date? I thought that dividend amounts are stated in the dividend announcement.
    – Flux
    Oct 20 '20 at 7:55
  • ETFs are constantly rebalanced during the day in order to track the index. The exact holdings of the ETF aren't know until the close, so the exact dividend amount per ETF share isn't known until after that time. Oct 20 '20 at 13:11
  • Thank you for your answer, but doesn't the SPDR DIA prospectus say just the opposite (in the emphasized text)? Oct 20 '20 at 17:14
  • That is relating to the T+1 settlement process and the accounting required to determine who needs to get the dividend. It's certainly more complicated for the settlement house/broker to determine who gets the dividends but thankfully this is transparent to you. The "holding on the close on the day prior to ex-dividend" is the only thing you need to know. Oct 20 '20 at 23:37
  • Thank you for your response. Your level of knowledge likely greatly exceeds mine (and apparently a major website that reports on this sort of thing... screenshot hopefully coming soon), but I'm not seeing what you are saying in the prospectus. The prospectus seems to say, in layperson's terms, "you need to own the ETF the day after the ex-dividend date if you want the dividend". One of us is not understanding accurately, and it is most likely me, but can you explain how such seemingly clear statements in the prospectus can be explained differently? Oct 21 '20 at 3:06

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