A Guide to Ex-Dividend vs. Date of Record (With Examples)
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A common feature of public companies is that they pay dividends periodically to their shareholders. Some concepts, such as the ex-dividend and record date, often determine how and when the company distributes its dividends. Understanding these terminologies can help you know how they affect stock purchases and dividend payments to help make more informed financial decisions.
In this article, we compare the ex-dividend vs. date of record, list the types of dividend payments, discuss payment and declaration dates, and outline examples.
Ex-dividend vs. date of record
When comparing ex-dividend vs. date of record, it's helpful to understand that they're finance terminologies related to the payment of dividends to shareholders. You can consider the following to understand both terms:
The date of record, or record date, is the date that a company identifies all its shareholders based on its records and the cut-off that the company sets for people to be eligible for dividend payments. This date is important for public companies as trades occur daily, and it may be difficult to track the current shareholder. While the record date often comes a day after the ex-dividend date, companies release the record date first.
The ex-dividend date, or ex-date, is the trading date on or after which a common stock buyer isn't eligible for the company's dividend payout. It's also the date after which an issuing company doesn't owe the buyer of new stock any dividend. The ex-dividend date is usually a business or trading date after the record date and signifies that you may have missed the deadline for dividend payment. Essentially, to be eligible for dividend payment, it's important that your name appears on the company's record before or on the record date.
The primary relationship between the date of record and the ex-dividend date is the gap between when you buy a stock and when it reflects in your account. As a trader, you may purchase shares on a particular date, but they may not reflect in your account until two days later. Even though you may pay to complete the transaction on a specific date and make payment, the ownership of the shares doesn't transfer until after the two days.
Similarly, the company doesn't recognize you as a shareholder until the shares reflect in your account. Due to this lag, you may not qualify as a shareholder eligible for dividend payment. To be eligible, Ensure you purchase a stock while considering the record date and the ex-dividend date.
The ex-dividend date and record date are essential because they determine whether a shareholder receives dividends. For instance, it's necessary to purchase a stock at least two days before the date of record and own it at least one business day before the ex-date to be eligible for dividend payment, making the ex-dividend date generally more important.
Relevance to buyers and sellers
If you're a seller and wish to receive a dividend payment, you may sell the stock anytime from the ex-dividend date or before the record date. While the ownership may transfer to the buyer after two days, your name reflects on the company's record, making you eligible for the payment. Conversely, as a buyer, if you wish to receive a company's dividend for a quarter, ensure you buy the stock at least two days before the date of record. The term for purchasing a stock before the ex-date is cum dividend, which means you're getting dividends.
Purchasing the stock after makes you ineligible for dividend payment, as your name only reflects as a shareholder after the record date. Alternatively, you may buy a stock at a lower price from the ex-dividend date. The value of the stock is reduced because anyone who purchases stock from the ex-date doesn't receive dividends. As a trader, you may evaluate the profit or losses based on these dates and the divided payment to determine which option is more profitable.
While the ex-dividend and record dates are important for dividend metrics that concern the issuing company and the stock exchange, different bodies release them. For most countries, the stock exchange releases the ex-dividend date two days before the record date. This date also depends on the relevant stock exchange where you find the company's shares. Then the issuing company may release the record date through its board of directors.
While the ex-dividend payment date ideally comes two days before the record date, there are some instances where the stock exchange may release it later. This exception occurs when the company declares a dividend of more than 25% of the stock's value. It may also apply where the company is issuing a stock dividend payment instead of cash. In such instances, they can set the ex-dividend date as a business or trading date after the payable date.
Types of dividend payment
There are three types of dividend payments that a company can issue. They include:
Cash dividend payment occurs when the company credits all its shareholders with a specific amount as dividend payment and is proportional to each shareholding. For instance, a company may pay $0.15 for each stock unit. You may receive $150 if you have 100 shares with the company at the record date. Companies that pay cash dividends usually issue these payments quarterly, and the recipients may change based on the shareholder for the period according to the record.
A company may issue shares as dividends as an alternative to cash payments. Like cash payment, the stock dividend is proportional to the shareholding. If the company decides to give two extra shares for every ten units, you may receive 20 additional shares if you already have 100 units. This dividend payment may work best for companies looking to increase outstanding shares or maintain healthy liquidity while remaining profitable.
Occasionally, a company may distribute some of its tangible assets as dividend payments. For instance, a company may distribute its physical assets like inventory instead of cash. This dividend payment is standard for companies that may not have shares or money to distribute.
Declaration date vs. payment date
The declaration and payment dates are also significant for a company's dividend payment. The declaration date is the day a company's board declares the company's dividend, which comes before payment. Most companies pay dividends quarterly, declaring them four times a year. The payment date is the day the company issues dividend payments to shareholders and can be a week after the record date. When issuing payment on the date, the company uses the names it compiles on the record date.
Although the payment date is significant, it doesn't determine who receives the dividend payment. It only determines when shareholders may receive the dividend payment for the period. While you may have completed the purchase of a company's stock on or before dividend repayment, you may not be eligible to receive it. In such a situation, the stock seller gets the payment since their name is reflected on the company's record.
Examples of ex-dividend and date of record
Here are some examples of the ex-dividend and record date:
Record date example
Constance Limited is a publicly listed company on the Canadian stock market. The company declared its dividends on the 16th of November and set the record date on the 15th of December. After trading ends on the 15th of December, the company records all its existing shareholders. Only shareholders that appear on the company's record on the 15th of December are eligible for a dividend payment of $0.12.
Ex-dividend date example
Constance Limited's ex-dividend date is the 16th of December. This means it's crucial for its investors to purchase the company's shares before this date to be eligible for dividend payout. Considering that it takes two days after the purchase for the shares to reflect on their account and for their name to enter the company's records, the latest purchase date is the 13th. Otherwise, they may be ineligible to receive a dividend if they make a purchase on or after this date.
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