5.11.7.1. Determining a Dividend Distribution
When the issuing company announces its decision to offer a dividend, it stipulates the date in the coming days or weeks for its distribution. 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, be the owner of record) before receiving 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 receives the dividend: the buyer or the seller. 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. Remember that 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 is, 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.
ex-date = record date – one business day
settlement date = trade date + two business days
Ex-dates can also apply to warrants, rights, and ADRs—any type of security that carries additional earnings (e.g., stocks that carry dividends, bonds that carry interest r