What Is a Due Bill?
A due bill is a financial instrument used to document and identify a stock seller's obligation to deliver a pending dividend to the stock's buyer. A due bill is also used when the stock's buyer is obligated to deliver a pending dividend to the stock's seller. Due bills can be used in a similar fashion when a company issues rights, warrants, or stock splits.
- A due bill ensures that pending dividend payments that are entitled to a certain party are paid even after the party disposes of its shares in the intervening period.
- These promissory notes ensure that shareholders are paid on the ex-dividend date—even if they sell their shares before the record date occurs.
- The due bill period is that time between the ex-dividend date and the date of record within which such dividend rights are a potential issue.
How Due Bills Work
Due bills function as promissory notes and ensure that the correct owner receives a stock's dividend when the stock is traded near its ex-dividend date.
For example, a buyer that purchases a stock ex-dividend, but before the dividend is actually paid, would provide a due bill to the seller stating that the dividend payment belongs to the seller. The timing of the ex-dividend date is set according to the rules of the stock exchange on which the stock is traded. This date is typically set for two business days prior to the record date. If a company issues a dividend in stock rather than cash, the ex-dividend date is set on the first business day after the stock dividend is paid out.
On the other hand, if a buyer purchases a stock on or before the ex-dividend date, they would be entitled to the dividend, but if they are not listed as the owner on the record date, the seller would receive the dividend on the payment date. Since the buyer is the rightful recipient of the dividend, the seller would issue a due bill to the buyer. This due bill entitles the rights of ownership to the buyer, even though the buyer has not yet been listed as the shareholder of record.
A due bill protects the stock's buyer, making sure the rights of ownership is established, regardless of whether the buyer has been listed yet as the shareholder of record.
What Is the Due Bill Period?
Suppose a stock is planning to issue a regular quarterly dividend. A list of stockholders of record who will receive the dividend is prepared on the record date. The ex-date is set (usually two days earlier) for when shares will trade on the open market without the right to the dividend. The period beginning on the record date and usually ending two days later (four days after the earlier ex-date) is when the identities of the holders of record are known and payment is due to them. This is known as the due bill period, during which remittances to investors are due after the stockholders of record are established.