Dividend Dates – When do Dividends get Paid?
By: Ned Piplovic,
Investors seeking asset appreciation have a greater level of flexibility for buying and selling equities than dividend-seeking investors, who must account for specific dividend dates to maximize their investment returns.
Because investors trading non-dividend securities do not have the additional constraint of dividend dates, they can afford to focus on analyzing equity fundamentals, announcements of business initiatives and share price movement to time their trades for optimum financial gain. Alternatively, maximizing gains from dividend-paying equities involves the additional restriction of buying and selling equities around specific dates to ensure eligibility for receiving the dividend payout for a specific payout period.
The basic theory for investing in non-dividend securities is fairly simple: “Buy low, sell high.” Unfortunately, determining and timing correctly share-price lows and highs is not quite that simple. However, while that is a completely separate topic for another occasion, plenty of useful information is available from the investment experts on StockInvestor.com.
Because of the dividend distribution schedule, investors trying to maximize their dividend income must pay close attention to four key dividend dates: Declaration Date, Ex-Dividend Date, Record Date and Pay Date. Each of these dates has a specific role in the dividend distribution process. To answer the question when dividends get paid, this article first will provide some general information about all the dividend dates and their significance to income-seeking investors.
While each of these dates plays a role in the dividend distribution timeline, the Ex-Dividend Date determines share ownership. This date determines which investors have a claim to the next round of dividend payouts. Buying or selling equity shares on the “wrong” date could mean that the investor misses the next dividend distribution and must wait for the subsequent round. While that might mean only an additional month in some cases, in other instances that could represent a wait of up to six month or even a full year. Furthermore, when trading equities that pay qualified dividends, the timing of the trades also carries tax implications. To qualify for the preferential tax status and reduced tax rates, investors must specifically adhere to defined minimum holding periods.
Skipping a few dividend payouts because of missed ex-dividend dates or foregoing the reduced tax rate occasionally because of selling an equity before the expiration of the minimum holding period might not seem like much. However, missing the compounding effect on even a small investment amount over a very long term can add to a significant difference.
Knowing when dividends are paid and timing equity purchases is important. Some investors have developed a whole investing strategy – called the dividend-capture strategy – around timing equity purchases. This strategy aims to maximize the total annual dividend income, even at the expense of capital gains.
The Declaration Date is the first of the four dividend dates, which provides information about the upcoming dividend distributions. After a public company’s Board of Directors approves the proposed dividend distribution amount and schedule, the equity files an 8-K form with the United States Securities and Exchange Commission (SEC) about the dividend declaration and makes an announcement to the public. In addition to providing the payout amount, the equity also provides the remaining dividend dates and any other relevant information.
Depending on their specific dividend policy and payout frequency, some equities determine and declare a dividend for each payout period. However, equities whose dividend policy includes specific rules for dividend distributions can elect to declare all their dividend payouts for the entire year at one time.
Since it determines stock ownership and eligibility for receiving dividend payouts, the Ex-Dividend Date is the most important of the four dates. The name – ex-dividend – is a literal translation of the Latin phrase “without dividend.” That is because the share or unit price of the security hypothetically should begin trading at a price that is lower than the previous day’s closing price by the declared dividend amount. However, investors generally distort the market price by buying shares and driving the price higher in anticipation of the ex-dividend date.
The ex-dividend date also determines stock ownership and an investor’s eligibility to receive succeeding dividend distributions. Because of the current SEC settlement period rules – which will be discussed in the next section below – investors must have share ownership at least one day before the ex-dividend date to receive the next round of dividend payouts. The seller retains share ownership and dividend payout eligibility for any transactions occurring on the ex-dividend date. The buyer does not gain ownership until the following day.
On the Record Date, or Date of Record, publicly traded equities compile the list of all “shareholders of record.” This list identifies all investors that are certified as share or unit owners. These are the shareholders that will receive the dividend distribution for that period. Since investors must own the stock prior to the ex-dividend date and the ex-dividend date is set one day before the Record Date, investors must own the stock at least two days before the Record Date to be eligible for the next dividend payout.
The current SEC rules require that all trading transactions must comply with the T+2 settlement system. Under the requirement of this system, all financial market transaction must clear no later than two full business days after the trade day – which is the “T” in the T + 2 formula.
This settlement interval used to be much longer when all transaction records were manual. During the 17th and 18th century, the interval generally ranged from two weeks to a whole month. Just before the most recent reduction, the interval shrank to just three days as recordkeeping became more automated and means of communications advanced. 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. At the same time, NASDAQ adjusted its own requirements and defined the ex-dividend date as “the first business day before the record date.”
In more practical terms, the T+2 system requires that all trading transactions before closing on Monday clear and settle before the end of trading on Wednesday. Then Tuesday’s trades must settle by the end of trading on Thursday and so forth. However, since Saturday and Sunday are not trading days, the settlement deadlines for Thursday’s and Friday’s trades are the end of trading on Monday and Tuesday, respectively, of the following week. The table below depicts the detailed settlement requirements.
The actual dividend payments are made on the Pay Date or Date of Payment. This is the date when the security mails out the dividend checks of initiates the direct fund transfers to the shareholders’ brokerage account. The SEC has no specific rules regarding pay date timing.
Most pay dates occur within two to four weeks after the record date. However, the pay date can occur just a few days after the record date. Depending on the dividend distribution frequency, pay dates can occur at different intervals. The most common distribution frequencies are monthly and quarterly. However, the pay dates also can occur semiannually – favored by many European companies because this timetable aligns with their schedule of reporting financial results twice per year.
By paying attention to all the early dividend dates and executing their trading strategy around the ex-dividend dates, income seeking investors can sit back in anticipation of the upcoming pay dates when they will be collecting the fruits of their earlier labor.
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Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.