It is a company's board of directors who actually declares a dividend. The declaration date is the first of four important dates in the process of a company paying a dividend.
How a Company Handles Paying a Dividend
Before a cash dividend is declared and subsequently paid to shareholders, a company's board of directors must decide to pay the dividend and in what amount. When the board of directors makes such a decision and declares a dividend for payment to stockholders, the retained earnings account on the company's balance sheet is reduced by the amount of the declared dividend. The retained earnings is an account of equity that shows the net balance of a company's earnings. Since the retained earnings account is an equity account, dividend payments must be deducted from the account, reflecting the reduction in total shareholder equity.
The debit to the retained earnings account is balanced by a credit to the dividends payable liability account. The same process applies to declarations of dividend payments for either preferred or common stock.
Key Dividend Dates
There are four key dates involved in the dividend process, of which the declaration date is the first. The declaration date, also referred to as the announcement date, since a company notifies not only shareholders but the market as a whole, is the date on which a company officially commits to the payment of a dividend.
Next comes the ex-dividend date, or ex-date, the date on which a stock begins trading without the dividend. To receive the declared dividend, shareholders must own the stock prior to the ex-dividend date.
The record date occurs three business days after the ex-dividend date and is the date on which a company officially determines the shareholders of record, those who owned the stock prior to the ex-dividend date, who are eligible to receive the dividend payment.
The final key dividend date is the payment date, the date the company sends out dividend payments to shareholders. The payment date typically occurs a week or two after the date of record.