Ex-Dividend Date

A customer whom I am tutoring recently asked the following question:

Can you provide a timeline which explains why the record date is several weeks after the dividend is declared. I have been assuming the date the dividend was declared was when it was paid as well, therefore am confusing the ex dividend date.

The concept of the declaration, ex-, record, and payable date is almost certain to appear in one or two questions on your Series 7 exam. While options can be difficult, this topic is the equivalent of a two-inch putt in golf. Yes, you could miss it, but no you aren't going to let yourself. I don't care how tricky the question appears, understand that you will never miss an easy question involving the ex- or the record date.
First, the dividend has to be declared/announced by the Board of Directors. That's the declaration date. In the announcement, we discover the payable date, which is the date the dividend checks will be cut and delivered to shareholders. Only if you're a shareholder of record on the record date will you receive the dividend.
That's really the concept right there. If Abbott Labs declares a dividend of $1.00 per share, they announce when it's payable, and they announce the deadline for being an owner of the stock--if you want that dividend.
This is where T + 3 settlement enters in. You don't really own a stock until your purchase has settled/cleared between your broker-dealer and the broker-dealer whose customer sold you the stock. That takes three business days. Once the transaction clears/settles, you are recognized as the owner, but not until. So, if you bought the stock three business days before the record date, you would be recognized as the owner on that date and would, therefore, get the dividend when they pull up the big list of shareholders. However, if you bought the stock just two business days before the record date, you would not be the official owner of the stock in time. So, the seller gets the dividend, not you.
This day, two business days before the record date, is called the ex-dividend date because buyers won't get the dividend. Therefore, they won't pay for it either. If the dividend is $1, the share price drops by $1. Cash is an asset, remember, so if the company is paying out cash, the stock is worth that much less. And that's why it's a violation to hustle a customer into buying just to get this dividend--that's called "selling dividends." It's fraudulent in that it implies something false--the investor could just skip the dividend, buy the stock for that much less, and avoid the taxation on the dividend.

So, actually, these are simple concepts--it's just that they are woven together into a fabric of many, many concepts. You have to know what settlement means, and remember that it's T + 3 for "regular-way settlement." You have to remember that the board of directors declares a dividend, and how the dividend would affect an investor. The Series 7 is some pretty sophisticated stuff. But on any given day 2/3 of all test takers pass it.
Knowing the concepts for real--rather than pretending you've studied--is the only way to be in the happy 2/3 rather than the deflated 1/3 who have to come back in 30 days for another grueling day at the exam center.

If you can find an audience who'll listen, see if you can explain what I just told you about the ex-date, record date, etc. to a friend or loved one. If you can do that, then you know for sure you have a handle on it. On the other hand, if you just want to keep taking the same practice questions over and over again--the easy ones that give you that warm, happy glow inside--on the ex-date or record date, good luck with that. The questions on the Series 7 will look much different the ones you've taken 15 times now.