1.2 Dividends and Stock Splits

Cash Dividends

Cash dividends distribute earnings to shareholders. The board of directors declares them; they are never automatic. Mature, stable companies pay regular quarterly dividends, while growth firms typically retain earnings to reinvest.

The Four Dividend Dates

Ex-Dividend Date Under T+1 (Critical Update)

When the U.S. moved from T+2 to T+1 settlement on May 28, 2024, the ex-dividend rule changed. Under T+1, the ex-dividend date is the SAME business day as the record date — no longer one business day before it.

The logic: to be on the company's books by the record date, the trade must settle by the record date. With T+1 settlement, a purchase made on the record date settles the next business day — too late. A purchase made the day before the record date settles on the record date and counts.

• Buy before the ex-date → you settle in time and receive the dividend.
• Buy on or after the ex-date → the seller keeps the dividend.

Example: a record date of Wednesday, March 12 means the ex-date is also Wednesday, March 12. To collect the dividend you must buy on Tuesday, March 11 or earlier.

On the ex-date the stock opens lower by roughly the dividend. A $50 stock paying a $1 dividend opens around $49, because new buyers no longer get that $1.

Stock Dividends

A stock dividend pays additional shares rather than cash. A 10% stock dividend gives a 100-share holder 10 more shares. Total position value is unchanged — the holder simply owns more shares at a proportionally lower price.

$\text{Adjusted Price} = \frac{\text{Original Price}}{1 + \text{Stock Dividend \%}}$

For a 25% stock dividend on a $50 stock: $50 ÷ 1.25 = $40.

Stock Splits

A stock split changes the share count and price proportionally; the company's total market capitalization is unchanged.

Forward Splits

A forward split raises shares and lowers price. A 2-for-1 split doubles shares and halves the price, making them more affordable to retail investors and improving liquidity.

Reverse Splits

A reverse split cuts shares and raises price — often to meet a minimum listing price (e.g., the $1 minimum bid on Nasdaq/NYSE) or to court institutions that avoid low-priced stocks. A 1-for-10 reverse split turns 10 shares at $2 into 1 share at $20.

Split Formulas

$\text{New Shares} = \text{Old Shares} \times \frac{\text{Second Number}}{\text{First Number}}$

$\text{New Price} = \text{Old Price} \times \frac{\text{First Number}}{\text{Second Number}}$

For a 3-for-2 split on 100 shares at $60: new shares = 100 × (3 ÷ 2) = 150; new price = $60 × (2 ÷ 3) = $40.

Splits and Stock Dividends Compared

Students confuse these because both raise share counts and lower prices. The distinctions the exam tests:

A reverse split, by contrast, is frequently a warning sign — companies use it to stay above the $1 minimum bid required for continued listing on the NYSE or Nasdaq. A representative should not present a reverse split to a client as inherently good news.

Worked Dividend-Eligibility Scenario

Suppose XYZ declares a $0.50 dividend with a record date of Friday, June 19. Under T+1 the ex-date is also Friday, June 19. A client who buys Thursday, June 18 settles Friday and is on the record-date books, so the client collects the $0.50. A client who buys on Friday, June 19 (the ex-date) settles Monday — too late — and the seller keeps the dividend. This timing is a guaranteed exam item; always anchor your answer to settlement, not the calendar.

When Buyers Are 'Due Bill' Entitled

If a stock is bought before the ex-date but settles after the record date (rare edge cases around splits or special dividends), the buyer is still entitled to the distribution and receives it via a due bill — a written acknowledgment that the seller must forward the dividend or shares. The exam occasionally references due bills in the context of large special dividends.

Effect on Cost Basis

Splits and stock dividends change cost basis per share but never total cost basis. Buy 100 shares at $80 ($8,000 total); after a 2-for-1 split you hold 200 shares, total basis still $8,000, basis per share $8,000 ÷ 200 = $40. This matters for capital-gains math the exam loves to test.

Exam Focus

• The post-T+1 rule: ex-date equals the record date; correct any "one day before" answer.
• Determining who gets the dividend from the purchase date.
• Adjusted-price math for stock dividends and splits.
• Total value and total cost basis stay constant; only per-share figures move.