Dividend payment chronology
When a company pays a dividend, there are a number of dates that are important. In particular, the declaration date, the ex-dividend date, the holder-of-record date (record date), and payment date are relevant. On this page we discuss the dividend payment chronology and discuss what happens on each of the dates.
Declaration date definition
The first date that is important is the declaration date. This is the date when de company decides to pay a dividend. More formally, it is the date on which the board of directors approves payment of a dividend. On this date, the company specifies the dividend amount, the date the shareholders must own the stock (the record date, see below) and the date the dividend will actually be paid to the shareholders that are eligible (the payment date).
Ex-dividend date definition
The next important date is the ex-dividend date. The ex-dividend date is the first day on which a new purchaser of a stock will not be entitled to the dividend. Typically, the stock price drops by the amount of the dividend on the ex-dividend date. This ex-dividend date is one or two business days before the record date. This is because the settlement of equity securities typically takes one or two days.
Holder-of-record date definition
Third, there is the holder-of-record date or record date for short. This is the date on which all owners of the stocks will receive the dividend payment. Again, this is because settlement typically takes one or two days. So, it is only then that we can say with certainty who holds stocks in the company.
Finally, we have the payment date. This is when the payment is actually made to the shareholders. Nowadays this is done electronically by wire transfer. In the past, it sometimes done by mailing checks.
Dividend payment date example
Let’s consider an example of the impact that the ex-dividend date and the level of the dividend have on the stock price. On the ex-dividend date, the price will fall by the amount of the dividend, in the absence of any other news events. Thus, if the stock closed at $50 the previous day and the dividend is $5, then we can expect to see a price of $45 at the opening on the ex-dividend day.
We discussed the dividend payment chronology. While most people are familiar with the payment date and the ex-dividend date, the two other dates are also important. The declaration date, for example, typically also has a meaningful impact on the company’s stock.