P&L Reporting with Dividends
For those who know more about the operational side of things: given that stocks trade ex-dividend several days before the dividend is actually paid out, how does that get reported in P&L? Say you only hold one name that doesn't move at all except for the dividend effect, would your assets show a dip when the stock trades ex-div and then a jump back to where the portfolio assets were when the dividend actually gets paid out?
Ah, diving into the nitty-gritty of dividends and P&L reporting, are we? Let's peel this banana layer by layer, based on the most helpful WSO content.
When a stock goes ex-dividend, it means the stock is trading without the value of the next dividend payment. This typically results in the stock price dropping by an amount roughly equal to the dividend being paid, as the market adjusts for the fact that new buyers will not receive this dividend.
Now, in the scenario you've described, where you're holding a stock that doesn't move except for the dividend effect, here's what happens:
Ex-Dividend Date Effect: On the ex-dividend date, the stock price will indeed show a dip approximately equal to the dividend amount. This is because the stock is now trading without the right to receive the next dividend. In your P&L, if you're marking to market (valuing your assets at the current market price), you'll see a decrease in the value of your assets equivalent to the dividend amount times the number of shares you hold.
Dividend Payment Date: When the dividend is actually paid out, the cash balance in your portfolio will increase by the dividend amount times the number of shares you held before the ex-dividend date. However, the stock price itself doesn't automatically jump back up; the market has already adjusted for the dividend payment. The increase in your cash balance is where you see the "jump" back, not in the stock price but in the overall value of your portfolio.
So, in essence, your assets show a dip on the ex-dividend date due to the decrease in stock price, and then your portfolio's overall value increases back when the dividend is paid out, reflected in your cash balance rather than the stock price itself. This cycle reflects the operational side of handling dividends in P&L reporting, ensuring that the total value of your portfolio accurately reflects both the market value of your holdings and any income received from them, like dividends.
Sources: January 2016 Data Update 7: Dividends, Potential Dividends and Cash Balances, Market making group exercise, (Physical trading) What is considered an 'acceptable' story for why trading?
We book the dividend on ex-date internally. The custodian PNL is reported monthly and reflects small differences from internal views pertaining to financing costs, exchange rebates, etc.
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