Understanding a Dividend Distribution
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 one business day 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 two business days after the trade date. This is abbreviated by T + 2. In order for the transaction to settle by the record date, the security has to be bought at least two business days before the record date.
The ex-date is one business day prior to the record date and, therefore, the date at which the buyer will not be the owner of record in time to receive the dividend. If the exam asks you to figure the ex-date, simply count one business day backward from the record date. When figuring the ex-date, remember to exclude any weekends and national holidays.
Example Question 1: Sharon is going to purchase 100 shares of AAPL. If the record date is on Tuesday, July 15, by when must she purchase the shares to receive the dividend?
Answer: Friday, July 11
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