Education: Growth & Income Investing

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Understanding Dividend Dates

The Board of Directors at a company that you recently invested in just declared a quarterly dividend. While this is great news, you may begin to wonder if you will be one of the lucky few to find a dividend check in your mailbox. A number of different dates are commonly mentioned which can leave one scratching his or her head. Let’s clarify them.

Important Dates to Know

There are four important dates you should familiarize yourself with when it comes to a company distributing dividends.

Declaration Date

When the Board of Directors at a particular company announces their intention to pay a dividend, this date is referred to as the declaration date. Furthermore, it is on this date that the company officially owes this money to its shareholders, thus, a new liability has been created on its books. The Board will also release the date of record and the payment date at this time.

Date of Record

When a company declares a dividend, it sets a record date when an investor must be a shareholder on its books to receive the dividend. If one is verified as a holder of record, he or she is entitled to payment—cha ching! Registration is basically automatic for those who purchase shares before the ex-dividend date (discussed below).

Date of Payment

The date on which a company distributes its dividends to shareholders of record is referred to as the date of payment, or the payable date. This date usually comes after the date of record in order to give the company enough time to carry out the distribution process.

Ex-Dividend Date

This is the date that can cause the most confusion for investors. Once a company sets the date of record, the stock exchanges or the National Association of Securities Dealers, Inc. (NASD) establish the ex-dividend date. The ex-dividend date is typically set several business days (usually two) before the date of record. For those who have purchased before the ex-dividend date, the dividend is yours. For those who have bought shares on or after the ex-dividend date, you are out of luck. Consider the following example:

After posting stellar results for the full year of 2006, the Board of Directors at Sunshine Carpet Cleaners (fictitious company) announced on Mar 1, 2007 that it will pay a quarterly dividend to its shareholders. The dividend will be distributed on Mar 24, 2007 to shareholders of record that appear in Sunshine Carpet Cleaners’ books on Mar 10, 2007.

As far as the ex-dividend date of Mar 8, 2007, it was set two business days before the date of record. Investors who purchased shares of Sunshine Carpet Cleaners before this date will receive the dividend.

Ticket to Quick Profits, Right?

So if you are like most investors, you are probably thinking to yourself, “Why don’t I simply purchase stocks before their ex-dividend date, pocket the eventual dividend and make a quick and easy profit?” Sounds simple, right? Wrong.

When the ex-dividend date arrives, the price of the company’s stock will actually fall to compensate for the upcoming dividend. It will decline in price by an amount similar to the dividend payout in order to fend off arbitragers—investors looking for riskless profits. So…nice try, but better luck next time.

Conclusion

Hopefully we have succeeded in helping you decipher the various dates associated with dividend-paying companies. But remember, just because a company pays a dividend doesn’t necessarily make it a worthy purchase. Always make sure to dig into a company’s fundamentals as well.