Corporate Finance - Dividend Payment Procedures
Dividend payouts follow a set procedure as follows:
1. Declaration Date
Declaration date is the announcement that the company's board of directors approved the payment of the dividend.
2. Ex-Dividend Date
The ex-dividend date is the date on which investors are cut off from receiving a dividend. If for example, an investor purchases a stock on the ex-dividend date, that investor will not receive the dividend. This date is two business days before the holder-of-record date.
The ex-dividend date is important as, from this date and forward, new stockholders will not receive the dividend. As a result, the stock price of the company will be reflective of this. For example, on and after the ex-dividend date, a stock most likely trades at lower price, as the stock price is adjusted for the dividend that the new holder will not receive.
3. Holder-of-Record Date
The holder-of-record (owner-of-record) date is the date on which the stockholders who are to receive the dividend are recognized.
Remember that stock transactions typically settle in three business days.
Understanding the dates of the dividend payout process can be tricky. We clear up the confusion in the following article:
4. Payment Date
Last is the payment date, the date on which the actual dividend is paid out to the stockholders of record.
Example of the process of dividend payment
Suppose Newco would like to pay a dividend to its shareholders. The company would proceed as follows:
1.On Jan 28, the company declares it will pay its regular dividend of $0.30 per share to holders of record on Feb 27, with payment on Mar 17.
2.The ex-dividend date for the dividend is Feb 23 (usually four days before of the holder-of-record date). On Feb 23 new buyers do not have a right to the dividend.
3.At the close of business on Feb 27, all holders of Newco's stock are recorded, and those holders will receive the dividend.
4.On Mar 17, the payment date, Newco mails the dividend checks to the holders of record.
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