Definition and Meaning
When a stock is described as cum dividend (from the Latin cum meaning ‘with’), it indicates that the company has declared a dividend that is due to be paid but has not yet been distributed. Being a holder of cum dividend stocks means you are eligible for the upcoming dividend payment. The designation remains until the ex-dividend date, at which point any new purchasers of the stock will not receive this particular dividend.
How Cum Dividend Works
Importance of Dates
To be eligible for the dividend, investors must own the stock before it reaches the ex-dividend date, a crucial trading breakpoint. If you purchase the stock on or after this date, you miss out on the dividend and the stock is then considered to be ex-dividend.
Efficiency and Market Impact
Market prices adjust for dividend payouts due to the public availability of dividend information, reflecting the Efficient Market Hypothesis. This means the stock price might be higher when it is cum dividend compared to when it switches to ex-dividend, assuming other market conditions remain constant.
Special Considerations
Understanding Scrip Dividends
When companies find themselves low on cash, they might offer scrip dividends instead of cash payouts. This document acknowledges a debt that is payable as a dividend but settled at a later date or converted into shares.
Buying Strategies
Attempting to game the system by buying stocks just before the ex-dividend date and selling them shortly thereafter often fails due to market price adjustments. Knowing when to buy involves more than just chasing dividends and should align with broader investment strategies.
Example of Cum Dividend
Imagine PricedToSell, an e-commerce giant, declares a dividend of $0.50 per share, set to distribute on November 15. The ex-dividend date is November 1. If an investor purchases shares on or before October 31, they will receive the dividend. Those purchasing on November 1 or later will acquire the shares ex-dividend, hence not getting the $0.50 per share.
Related Terms
- Dividend: Portion of a company’s earnings distributed to shareholders.
- Ex-Dividend: Status of a stock when it no longer carries the right to the most recent dividend.
- Efficient Market Hypothesis: A theory that all known information is already reflected in stock prices.
- Scrip Dividend: A promise to pay a dividend at a later date, often in the form of additional shares.
Further Reading
- “The Intelligent Investor” by Benjamin Graham: A must-read book for understanding investment philosophy, including dividend strategies.
- “Dividends Still Don’t Lie” by Kelley Wright: An examination of how companies that provide consistent dividends can be the backbone of a successful investment portfolio.
Sailing through the stock market winds with a keen eye on cum dividends can steady your financial ship, if you know when to hold tight and when it’s safe to alight! Stay savvy, fellow investors!
