Wednesday, June 13, 2007

Ex-Dividend and Limit Orders

A friend of mine was a bit baffled when his brokerage adjusted the price of his limit order for Altria Group (MO) today from 69.50 to 68.81. Anyway, he asked me about it. He's new to the world of investing, and I imagine quite a few others that are also inexperienced might find this little bit of knowledge useful. So, I'll write up a quick explanation.

When a stock pays a dividend, there are two dates that are important. One is the ex-dividend date and the other is the actual dividend pay date. The dividend pay date tells you when you will actually receive your dividend. The ex-dividend date tells you on what day the stock begins trading 'ex-' (without) dividend rights. This means that if you purchase shares on the ex-dividend date or later, then you are not entitled to receive any dividends on the dividend pay date.

When a stock goes ex-dividend, its price is adjusted down by the dividend amount. We see that yesterday, MO closed at 70.14. Today is its ex-dividend date, and it closed at 70.26. This quarter's dividend is 0.69 per share. What this means is that MO went up 0.81 today, and not just 0.12.

Naturally, your limit order price will be adjusted to account for this. And, that is exactly what happened with my friend's order. That said, you can specifically add a 'do not reduce' condition to your limit order, which basically tells your broker not to make any adjustment to your limit price due to dividends.

No comments: