Right to Receive Dividends
A dividend is the payment of a portion of a company’s earnings to its shareholders. Payments usually are made in cash as a fixed amount of money per share, but they may also be distributed in additional shares of stock. Cash dividends are taxable events, while stock dividends are typically not taxable. Holders of a company’s common stock may or may not receive dividends, because a corporation is not obligated to issue them. But when it does, dividends are usually paid quarterly. Older, more-established companies tend to pay dividends, while newer growth companies may not.
When a company announces its decision to offer a dividend, it stipulates the date on which the dividend will be paid and the date by which an investor must own the stock to be eligible to receive the dividend. The date of the announcement is called the declaration date. The date of payment is called the payable date. The date by which an investor must own the stock (that is, the investor must be the owner of record) to receive the dividend is called the record date. The company sets the record date and may set it several days or weeks before the payable date.
Another critical date, the ex-date, or ex-dividend date, determines which investor—the buyer or the seller—receives the dividend. The ex-date occurs two business days prior to the record date. The seller receives the dividend on transactions that occur on the ex-date or after. The buyer receives the dividend on transactions that occur before the ex-date. The reason for this is that a buyer only becomes the owner of the security on the settlement date. Settlement refers to the process whereby a security is paid for and transferred to a new owner. The settlement date for most securities is three business days after the trade date. This is abbreviated by T + 3. In order for the transaction to settle by the record date, the security has to be bought at least three business days before the record date.