Dividend Policy: What Are Dividends?

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This video explains #dividend #policy and what are dividends. The three major dividend dates are described below.

Declaration Date

First, let’s define the dividend declaration date: A dividend declaration date is simply the date on which a company announces an upcoming dividend payment as well as the ex-dividend and dividend payment dates, usually by issuing a press release a few weeks before the dividend is actually paid.

Let’s look at an example … Assume you own 100 shares of Company XYZ. A few weeks after the conclusion of the first quarter (i.e., March 31), Company XYZ issues a press release announcing a $1.00 dividend per share for the quarter. The press release was published on April 30th and the dividend is payable on May 15 to shareholders of record as of May 1. In this case, the declaration date is April 30 – the date the press release was published.

The dividend declaration is important because it (1) assures investors of the size of the dividend check that they will be receiving; (2) informs them of when they must own the stock in order to get paid as well as when they will get paid; and (3) it can possibly have a significant impact on the stock price, in particular if the company cuts and/or suspends its dividend (often signaling operational and/or financial trouble at the company) or sustains/grows it in excess of market expectations.

Ex-Dividend Date

Next, let’s discuss the ex-dividend date. The ex-dividend date is perhaps the most confusing of the three terms discussed in this video and is based on a fourth, but closely-related term: the “record date.” When companies determine whether you should get a dividend, they use two important dates: the "record date" or "date of record" and the "ex-dividend date" or "ex-date."

On the dividend declaration date, a company sets a record date when investors must be on the company's record books as a shareholder to receive the dividend. Companies also use this date to determine who to send proxy statements, financial reports, and other information to. After the company sets the record date, the ex-dividend date is established based on stock exchange rules. The ex-dividend date is typically one business day before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, the dividend is paid to you.

Let’s look back at our earlier example to explore this further … Company XYZ’s first quarter dividend declaration stated that the $1.00 dividend would be payable to shareholders of record as of May 1. That means that May 1 is the record date and since the ex-dividend date is typically one business day before then, the ex-dividend date would be Tuesday, April 30. This means that if you purchased shares in Company XYZ on April 30, you would not receive the dividend, but if you purchased them on Monday, April 29, you would.

Remember, however, that it is the previous business day, not calendar day. Therefore, if the record date fell on a Monday, the previous Friday (assuming it was not a stock market holiday) would be the ex-dividend date. Another important thing to remember is that since on the ex-dividend date that dividend is no longer payable to new buyers of the stock, the stock price almost always falls by the same amount (or very close to it) that the dividend payment was declared for at the opening on the ex-dividend date. Therefore, if you purchase a high-yielding stock right before its ex-dividend date, do not be shocked if your stock’s trading price drops by a considerable on the ex-dividend date.

Dividend Payment Date

The final term that we will discuss in this video is the dividend payment date. It is the easiest to understand and is simply the date on which a company pays a dividend to its shareholders of record.

Since this is a pretty simple concept, let’s dive right back into our example … the 100 shares that we purchased in Company XYZ prior to its ex-dividend date of April 30, were declared to pay $1.00 per share to shareholders of record on May 15. As a result, on May 15, the dividends would either be mailed to us by check, deposited directly into our checking account, or deposited directly into our brokerage account, depending on the agreement we have with our brokerage firm.

This date is important to keep in mind because it is pay day! You can expect to have funds available on this day to purchase additional shares of the same stock (perhaps even through the company’s direct reinvestment program) or different stocks, or perhaps use for some other purpose such as living expenses or to pay off debt.