- Companies announce a dividend date or declaration date, besides setting the record date and the payment date for dividend payments.
- Furthermore, the stock exchange sets the ex-dividend date, generally one working day before the record date, which determines the investors’ dividend eligibility.
- The payment date is when the dividend is paid to shareholder through cheque or by crediting the brokerage account or electronically transferring the payment.
What is a dividend?
A dividend or dividend amount is the portion of the profit that a company shares with its shareholders. Furthermore, dividend payouts are made from the profit or earnings retained by the company. Dividends are generally paid in cash and sometimes in stocks. However, the dividend payment is not mandatory. However, it is decided by the board of directors after the approval of shareholders.
Typically, when a company declares results, it may also simultaneously announce dividend payments. Usually, three dates are announced that are important for investors: declaration date, record date, and payment date. In addition, there is another date used by the stock exchanges: the ex-dividend date.
Why are these dates important for investors?
These dates are important to plan the dividend allocation systematically to ensure the process is hassle-free and without harboring any grievances from investors.
Here’s how this mechanism works.
Source – pixabay
The declaration date is when the company announces a dividend, give details of the amount to be paid, and its record and payment dates. For example, a company may declare a dividend of US$0.64 per share on November 3 to be paid on November 30 (the payment date) to shareholders on record as of November 15 (record date).
So, November 3 is the declaration date.
The ex-dividend date is generally one working day before the record date. So, if the record date is Nov 15, the ex-dividend date will be November 14, which is a day before the record date.
Ex-dividend is not declared by the company but set by the stock exchange where the company is listed. The ex-dividend date is the day from when the stock trades without dividend. It means that the declared dividend will be paid only to shareholders on record a day before.
Only the stock changes hands while buying and selling stocks on this day, but the dividend does not. Therefore, the dividend is paid only to investors who made buy-transaction for stock before the ex-dividend date.
As the name suggests, this date is set to determine the shareholders on records to be considered for dividend payments. In this context, it is also important to note that the buy and sell transaction takes T+2 days (transaction+2 days) to settle. For instance: if the buy transaction takes place on Monday, the transaction will settle on Wednesday (T+2). So, dividend investors must be aware of this T+2-day scheme while buying stock to get a dividend as the record day is when the investor must have completed the transaction.
Based on the previous example, for the record date of Nov 15, an investor must buy the stock on November 13, which is T+2 or November 13 + 2 days, meaning Nov 15. Thus, the transaction would then settle on the record date, and the buyers will be eligible to get a dividend.
Due to this T+2 settlement system, the ex-dividend date becomes important. Any buy transaction made on or after the ex-dividend date will not make one eligible for dividend as the transaction will not be completed on the record date, which is one day after the ex-dividend.
The payment date or the payable date is when the dividend is paid to the shareholder through cheque or by depositing in the brokerage account or electronically transferring the payment.
Hence, based on the earlier example, the payment date will be on November 30.
These dates are significant for investors interested in dividend stocks. Moreover, stocks may also witness fluctuations on the day of ex-dividend and payment based on the trends. However, investors must apply due diligence before investing in the stock market.