A Dividend Primer

Posted by Dan Hung

December 13, 2007

I realized in my update on the Curious Investments Equity Income Strategy that I’ve never really done a tutorial on dividends here at The Curious Investor. Dividend terminology can sometimes be confusing, but it’s good to understand them as there are periods in time when dividends become a very important part of returns from equity investments. (More on this statement in a later post)

While we’ve discussed the dividend yields and payout ratios in the past, we’ve never looked at the actual process for paying dividends which can often get confusing as you try to time your purchases or sales of dividend paying stocks.

When it comes to dividends, there are four important dates.
Declaration Date: The day the Board of Directors declares that a dividend of a certain amount will be paid. This day, the dividend becomes an actual liability to the company and must be paid to stockholders. Furthermore, the Board of Directors will typically announce the record date, ex-date and pay date.

Ex Date: The ex-date is typically two days prior to the record date and determines the day after which shares of the company will trade ex-dividend, or without a dividend. After this date, the stock usually drops in price by the value of the dividend as those who buy it will no longer be entitled to the dividend payout.

Record Date: The record date is the date at which the company will check its books for all “holders of record.” People who own shares on this date will then be cut dividend checks.

Payment Date: The date the dividend is actually distributed to shareholders.

Now, you may be wondering why ex-date and the record date are different days. In fact, if trading and book keeping worked instantaneously, the ex-date and the record date ought to be the same. Stock trades in the US, however, have a three day settling period before they clear and, thus, if you buy a stock on the ex-date, you won’t technically own it until after the record date. So, for all intents and purposes, the ex-date is the true “record” date for shareholders interested in buying a dividend stock or thinking about selling a dividend stock.