Investing In Dividends For Dummies
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Dividends aren't paid like clockwork. Unlike other forms of income-generating investments, companies have no legal obligation to pay dividends. This fact means the company's board of directors must actively declare, every single quarter, whether it will pay a dividend.

Because dividend stocks, like all other stocks, can be traded on the open market, companies need some way to determine who (the buyer or the seller) gets the next dividend payment when shares are exchanged. You may assume that the person who owned the shares the longest during the quarter would get the dividend payment. After all, if you own the shares for 10 of the 12 weeks that comprise the quarter, you should have more right to the dividend payment than the investor who owned the shares for just the other 2 weeks, right? Well, not exactly.

When you buy and sell dividend stocks, dates determine who gets the dividend and who doesn't. To determine the rightful recipient of dividend payments, companies keep track of several dates in the life of a dividend share, including the date of declaration, trade date, settlement date, date of record, ex-dividend date, and the actual payment date. Because each dividend is a unique event, the company must specify the important dates for this payment.

Date of declaration

The date of declaration is the date on which the company's board of directors announces its next quarterly dividend payment. The declaration typically begins with something like this:

Chicago, IL — January 29, 2011 Carrel Industries, a provider of consumer products, today announced that its Board of Directors has declared a quarterly cash dividend on its common stock of 44.5 cents per share. The dividend is payable on February 27, 2011, to stockholders of record on February 13, 2011. Carrel Industries initiated quarterly cash dividend payments in the third quarter of fiscal year 2005 and has increased the dividend by 5 percent from the dividend level one year ago.

In this example, the date of declaration is January 29, 2011. The declaration also contains two more key dates: the payment date (February 27, 2011, in the example) and the date of record (February 13, 2011, in the example).

Trade date

Stock trading is a lot like buying or selling a house. You buy the house one day but you don't actually become the official owner until after the closing. With all stocks, the day you buy your shares is the trade date, but you don't actually take ownership of the shares until several days later on the settlement date, described in the following section.

Settlement date

The settlement date (also called the closing date) is the date on which the transaction becomes finalized — the buyer pays for the securities and becomes the official shareholder of record while the seller relinquishes her ownership status and collects the money. For equities, the settlement date is the trade date plus three business days (known as T + 3). The seller has three business days after the trade date to deliver the shares to the buyer.

Rarely do investors receive actual stock certificates to prove ownership, as they did in the good old days. Instead, companies keep electronic records of transactions to facilitate the process of trading shares. The person holding possession of the shares according to these company records is called the shareholder of record.

Date of record

The date of record is the cut-off date for dividend payment eligibility. In other words, to receive the next scheduled divided payment, your name needs to be on the company's books as the shareholder of record on or before the date of record. If you buy and close on shares before the date of record, you receive the dividends. If you buy before the date of record but settle after it, the seller receives the dividends because she's listed as the official owner on the date of record.

Ex-dividend date

Ex-dividend means "without dividend," so the ex-dividend date determines the payment of dividends on the purchase and sale of shares.

  • Purchase: Buy shares before the ex-dividend date, and you qualify for the declared dividend. Buy shares on or after this date, and you're ineligible for the most recently declared dividend.

  • Sale: Sell shares on or after the ex-dividend date, and you collect the declared dividend. Sell shares before this date, and you miss out on the payment.

The ex-dividend date is arguably the most important date to the dividend investor, but the press release rarely mentions it.

So where does this all-important ex-dividend date come from? After a company chooses the date of record, the stock exchanges or the National Association of Securities Dealers, Inc., sets the ex-dividend date two days prior to the date of record. This system creates a three-day period before the date of record during which anyone buying shares is ineligible to receive the declared dividend payment. Why three days? Because a trade on or after the ex-dividend date settles after the date of record.

Because the dividend returns value to the shareholder, ex-dividend also means that the dividend is value removed from the stock's price, meaning the dividend stock typically trades lower on the ex-dividend date. So, if a company's shares close at $10 the day before the ex-dividend, and the dividend is 25 cents a share, on the morning of ex-dividend the stock opens up at $9.75.

Don't base your decision to buy or sell solely on whether you'll be eligible for the declared dividends. Consider both the share price and the yield to determine what's in your best interest.

Payment date

The payment date (also referred to as the distribution date) is many shareholders' favorite day. On this date, the company distributes dividends to shareholders. Most companies pay dividends after the end of each three-month fiscal quarter. When a company's fiscal year aligns with the calendar year, the fiscal quarters end on the following dates:

  • First quarter: March 31

  • Second quarter: June 30

  • Third quarter: September 30

  • Fourth quarter: December 31

A company's fiscal year may not align with the calendar year. For example, the calendar year runs from January 1 to December 31, but a company's fiscal year may run from August 1 to July 31 or October 1 to September 30.

About This Article

This article is from the book:

About the book author:

Lawrence Carrel is a contributing writer for The Journal of Indexes /, where he writes a weekly column on the exchange-traded fund and indexing industries.

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