In order to understand how buying stocks that pay dividends can benefit you as an investor, you need to know how companies report and pay dividends. Some important dates in the life of a dividend are as follows:
Date of declaration: This is the date when a company reports a quarterly dividend and the subsequent payment dates. On January 15, for example, a company may report that it “is pleased to announce a quarterly dividend of 50 cents per share to shareholders of record as of February 10.”
The date of declaration is really just the announcement date. Whether you buy the stock before, on, or after the date of declaration doesn’t matter in regard to receiving the stock’s quarterly dividend. The date that matters is the date of record (see that bullet later in this list).
Date of execution: This is the day you actually initiate the stock transaction (buying or selling). If you call up a broker (or contact her online) today to buy a particular stock, then today is the date of execution, or the date on which you execute the trade. You don’t own the stock on the date of execution; it’s just the day you put in the order.
Closing date (settlement date): This is the date on which the trade is finalized, which usually happens three business days after the date of execution. The closing date for stock is similar in concept to a real estate closing. On the closing date, you’re officially the proud new owner (or happy seller) of the stock.
Ex-dividend date: Ex-dividend means without dividend. Because it takes three days to process a stock purchase before you become an official owner of the stock, you have to qualify (that is, you have to own or buy the stock) before the three-day period. That three-day period is referred to as the “ex-dividend period.”
When you buy stock during this short time frame, you aren’t on the books of record, because the closing (or settlement) date falls after the date of record.
Date of record: This is used to identify which stockholders qualify to receive the declared dividend. Because stock is bought and sold every day, the company establishes a cut-off date by declaring a date of record.
All investors who are official stockholders as of the declared date of record receive the dividend on the payment date, even if they plan to sell the stock any time between the date of declaration and the date of record.
Payment date: The date on which a company issues and mails its dividend checks to shareholders. Finally!
For typical dividends, the events below happen four times per year.
|Date of declaration
|The date that the company declares the quarterly dividend
|Starts the three-day period during which, if you buy the stock, you don’t qualify for the dividend
|Date of record
|The date by which you must be on the books of record to qualify for the dividend
|The date that payment is made (a dividend check is issued and mailed to stockholders who were on the books of record as of February 10)
Three business days pass between the date of execution and the closing date. Three business days also pass between the ex-dividend date and the date of record. This information is important to know if you want to qualify to receive an upcoming dividend. Timing is important, and if you understand these dates, you know when to purchase stock and whether you qualify for a dividend.
Fortunately, for those people who buy the stock during this brief ex-dividend period, the stock actually trades at a slightly lower price to reflect the amount of the dividend. If you can’t get the dividend, you may as well save on the stock purchase. How’s that for a silver lining?