Dividend Dates Defined and Explained

Unlike investors trading non-dividend securities who can focus their research solely on the company’s fundamentals and share price movement, income-seeking investors also must consider the specific dividend dates to find equities that best align with their portfolios’ investment strategies.

Because of the dividend distribution structure, trading shares of a dividend-paying security before or after specific dates could result in missed dividend distributions or a failure to meet the minimum holding period required to qualify certain types of dividend for preferential tax status and lower tax rates.

The four key dates income-investors must know and understand are: Declaration Date, Ex-dividend date, Record Date and Pay Date. While all these dates have roles in the dividend distribution timeline, the Ex-Dividend Date is the main focus. That date determines share ownership and which investors will receive the next round of dividend distributions.

For instance, missing the cutoff date for receiving the next round of dividend distributions by just one day could mean that the investor must wait an entire quarter – three months – for the next dividend installment. Knowing the cutoff date, the investor could have invested in other investment types and waited to purchase shares of the particular dividend-paying equity just before the next cutoff date. This is especially important for equities that are on a temporary downtrend, because waiting to take a position a few month later will allow investors to acquire shares at additional discounts.

In addition to staying aware of dividend dates to avoid missing out on payouts, investors have even devised an entire tactic based on trading shares of dividend-paying equities around specific dividend dates. The so-called dividend-capture strategy requires trades timed along the dividend dates schedule to maximize annual dividend income. With dividend income as the primary goal of this strategy, long-term asset appreciation is only a secondary consideration.

Declaration Date

The Declaration Date is just the date when a public company’s Board of Directors decides to pay the dividend for the upcoming distributions. In addition to announcing the dividend distribution, the company also provides the remaining dividend dates, as well as the dividend amount scheduled for the upcoming distribution and any additional information relevant to the dividend policy. Because the declaration date only provides information, it is the least important of the four dividend dates.

Depending on preference and dividend distribution frequency – monthly, quarterly, semi-annually, etc. – equities can choose to declare all dividends in advance for the entire year or issue separate declarations for each period. Securities with set dividend policies that specify distributing a particular amount can declare all their dividend distributions at one time. Alternatively, securities that have a policy to distribute a certain share of earnings as dividends must wait for quarterly or semiannual financial results to have the information about the specific dividend payout amount. These equities are most likely to declare their dividends along with their periodic financial results one period at the time.

Ex-Dividend Date

The most important among these key dates is the Ex-Dividend Date. On the ex-dividend date, the share or unit price of the security starts trading at a lower price in anticipation of the upcoming dividend payout. The price reduction is generally equivalent to the amount of the declared dividend distribution. The name of this date – ex-dividend – translated from Latin literally means “without dividend.”

At the onset of trading on the ex-dividend date, the share price should hypothetically fall by the exact amount of the announced dividend per share. However, investor trading patterns and speculations can induce market distortions. In anticipation of the known dividend distribution payout, traders will factor the upcoming dividends into the price, which causes the share prices to rise slightly leading up to the ex-dividend date.

The ex-dividend date has another very important function. It is the sole determinant of share ownership. The share or unit ownership determines eligibility to receive the subsequent dividend payouts. Investors must attain the shareholder of record status on or before the ex-dividend date to receive the next dividend distribution. Investors who purchase shares on the ex-dividend date do not gain the shareholder of record status until the following day. For all share transactions that occur on the ex-dividend day, the seller maintains share ownership for purposes of determining dividend eligibility.

The most important of the dividend dates, the ex-dividend date, is set in relation to the record date. The current requirements specifically state that the ex-dividend date occurs one business day prior to the record date.

Record Date

Record Date, or Date of Record, is the day that a publicly traded equity uses to determine dividend distributions eligibility and to compile a complete list of so-called “shareholders of record.” These are shareholders who are recognized as certified share or unit owners and, therefore, eligible to receive the next installment of dividend payouts. To be eligible for the next round of dividend distributions, an investor must purchase shares no later than two days before the Record Date.

The U.S. Securities and Exchange Commission’s (SEC) current regulations for settlement of all trading records operates under a T+2 settlement system. In the T + 2 formula, “T” is the trade date. This system assumes that no more than two full business days are needed for processing all trading transactions.

The settlement interval was anywhere between two weeks and one month in the 17^th and 18^th century when all transactions were handled manually. As means of communications and recordkeeping improved, the interval became shorter. The most recent change occurred in September 2017, when the SEC reduced the allowed settlement period from T+3 to the current T+2 interval. In alignment with the new settlement period change, NASDAQ announced its new requirement for ex-dividend timing, which is now “the first business day before the record date.”

The T+2 system – trade day plus two days – means that all trading transactions made before closing on Monday must be fully processed no later than the end of trading on Wednesday. Since Saturday and Sunday are not trading days, Thursday’s trades must be settled no later than closing on Monday. The table below shows the full information regarding trading and processing deadline requirements.

Pay Date

Pay Date or Date of Payment is merely the date when the security initiates the dividend payment distribution to all eligible shareholders. For cash dividend distributions, this generally means that the security initiates the direct fund transfers to the shareholders’ brokerage accounts or mails the dividend checks. While there are no specific SEC rules regarding the timing of pay dates, most pay dates generally follow approximately two to four weeks after the record date. This time frame is more than sufficient for an equity to set up electronic fund transfers and prepare dividend checks for distribution.

Traders and investors looking to maximize short-term returns must be especially aware of dividend dates, as missing few ex-dividend dates could derail the entire investment strategy. However, even long-term investors should be mindful of the dividend dates. A failure to receive dividend distributions because of a few missed ex-dividend dates might not appear to be very significant. However, missing a few decades of compounding on those missed payouts could mean a substantial difference in the total value of the investment portfolio.

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