ETF Dividend Dates Explained

DIY Investor's HandbookThis post is excerpted from The DIY Investor’s Handbook, coauthored by myself and Justin Bender, and available exclusively to clients of our DIY Investor Service.

Occasionally when you buy an ETF you won’t be eligible to receive the fund’s next dividend payment. At other times you’ll sell an ETF only to be paid a dividend a few days later. This is confusing for many investors, so let’s look at some important dates surrounding dividend payouts.

When a fund announces a dividend (or other distribution, such as an interest payment from a bond ETF), it will declare a record date and a payment date. For example, it might announce it will pay a distribution of $0.10/share to investors who own the ETF on January 15 (the record date), with the payment to be made on January 18 (payment date). In this case, if you sell your shares on January 16, you will still receive the dividend two days later, even though you no longer own the fund.

Two business days before the record date, the ETF will begin trading ex-dividend (“without dividend”). This means if you purchase the ETF on this date or later, you will not receive the upcoming dividend. For this reason the ETF’s net asset value—and therefore its price—will drop by the amount of the distribution on the ex-dividend date. However, if you sell the ETF on the ex-dividend date or later, you will still receive the distribution, because you will still be considered the shareholder of record until the trade settles three business days later.

Until the ex-dividend date, the ETF is said to be trading cum dividend (“with dividend”). The last cum dividend date is always three business days before the record date: the ETF purchase will therefore settle on the record date. However, if you sell the ETF on the cum dividend date, you will not receive the distribution, because you will no longer be considered the shareholder of record when the trade settles three business days later.

Using our example above, here’s how these dividend dates affect whether you’ll receive a distribution after buying or selling an ETF:

Dividend dates

A couple of important points to consider:

  • If you’re planning to buy an ETF in your taxable account near year-end, it may be wise to wait until it is trading ex-dividend. This way you’ll avoid the dividend and the taxes that come with it. You’re not losing out by doing this: remember, the ETF will fall in price on the ex-dividend date to compensate you for not receiving the distribution.
  • If you have a dividend reinvestment plan (DRIP) with an ETF and you’re planning to sell your entire holding, do so while it is trading cum dividend. If you don’t, you may get stuck with a few extra shares of an ETF you thought you were rid of, because you’ll receive the distribution in the form of new units rather than cash. That could mean another trade to clean up the account.

7 Responses to ETF Dividend Dates Explained

  1. Michael May 9, 2013 at 6:03 pm #

    I have been caught in the DRIP scenario mentioned in the post. I have sold stock which I was part of the DRIP and stuck with an 1 share on dividend payout even though my entire position was sold. Since it was a synthetic DRIP with the brokerage it would be nice if they implemented a policy to always reward the dividend in cash instead of shares if the customer no longer has an active position. I don’t really want to time my sale based on the dividend payout date.

  2. Mark Farey March 11, 2014 at 2:17 pm #

    Sorry, I’m still a little confused.

    How can the ETF price drop automatically by the value of the dividend on the ex-dividend date? Isn’t the ETF price determined by the value of the underlying shares, or are you saying that the value of the dividend always sits “on top of” the underlying share value?

    When I look at the return for a dividend ETF does it include share value growth or just the payout in dividends?

    Also, is the dividend returned as cash to the investor, or somehow re-invested in the fund? Or does that depend on the ETF? Specifically, I’m looking at BMO’s ZDV ETF.

  3. Canadian Couch Potato March 11, 2014 at 6:05 pm #

    @Mark: I guess you could say that dividend “sits on top of” the share’s value. When you think about it, this actually makes perfect sense. If the ETF today includes the promise of a $1 dividend, and tomorrow (the ex-dividend date) that promise no longer applies, the share must be worth $1 less. If this were not true it would be theoretically possible to buy the stock cum dividend and sell it ex-dividend and collect the dividend as a risk-free profit. More here:
    http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

    Unless you have signed up for a dividend reinvestment plan (DRIP), the dividends are paid in cash.

  4. Mark Farey March 12, 2014 at 10:03 am #

    So, “If this were not true it would be theoretically possible to buy the stock cum dividend and sell it ex-dividend.” Darn… there goes another get-rich-quick scheme! 🙂

    Thanks for the clarification.

  5. Max January 12, 2016 at 12:53 pm #

    Is there something that can delay the actual payment of dividends? According to Vanguard website, VCN payment date is on January 4, but we are 7 days later and I don’t see anything on my TD account history…

  6. Canadian Couch Potato January 12, 2016 at 1:34 pm #

    @Max: I would check with TD. Our clients with VCN received this dividend on the 4th as scheduled.

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