The term cum dividend is utilized in reference to specific situations involving the payment of dividends on stock options. Typically, a cum dividend is provided when an investor purchases shares and is entitled to receive the next dividend payment attached to that investment. In most cases, that dividend has already been declared, but has not been issued to investors as of the date of the sale.
Entitlement to a cum dividend requires that the sale of the shares involved occurs within a specified time frame. The limitation of this time frame is often described as being up to and including what is known as the ex-dividend date. An ex-dividend is a term that is used to describe a stock that is sold without providing the right of the buyer to claim the next scheduled dividend. This means that if the buyer chooses to purchase the shares of stock on or after the ex-dividend date, he or she is not entitled to receive the pending dividend payment. Instead, that payment would still belong to the seller.
This window of time when the shares can be sold and the buyer entitled to a cum dividend usually falls within a specified date range after the dividend has been declared, but before the actual date that the dividend is issued to shareholders. In some countries, that date range is determined by utilizing governmental regulations designed to protect both investors and the corporations that sell shares of stock. In most situations, the end of this time period takes place at least several trading days before the dividend is slated for issue. This arrangement helps to prevent situations where investors seek to purchase shares a day or so before a dividend is issued, collect the dividend, and then sell off the shares immediately.
One of the benefits associated with a cum dividend is that it provides additional incentive for investors who want to acquire the shares of stock. Not only do they stand to benefit from the receipt of dividends that will be declared in the future, but also from the most recently declared dividend. Depending on the projected movement of the stock in the future, the investor may be willing to pay a little more for the shares, using a portion of the cum dividend to offset the difference. For the seller, the ability to sell the shares along with the pending dividend means that attracting potential buyers is easier, and more likely to result in a sale sooner rather than later. This can be extremely important if the funds from the sale are needed to cover some other type of financial crisis, such as a temporary cash flow problem.
