Once dividends are declared/approved by a company’s Board of
Directors, there are four important dates to remember regarding dividends:
Declaration date –
is the day the Board of Directors announces its intention to pay a dividend. On
this day, a liability is created and the company records that liability on its
books; it now owes the money to the stockholders. On the declaration date, the
Board will also announce a date of record and a payment date.
Ex-dividend date –
is the day after which all shares bought and sold no longer come attached with
the right to be paid the most recently declared dividend. Prior to this date,
the stock is said to be cum dividend (with dividend): existing holders of the
stock and anyone who buys it will receive the dividend, whereas any holders
selling the stock lose their right to the dividend. On and after this date, the
stock becomes ex-dividend: existing holders of the stock will receive the
dividend even if they now sell the stock, whereas anyone who now buys the stock
will not receive the dividend. It is expected that a stock’s price will fall on
the ex-dividend date by an amount approximately equal to the dividend paid.
This reflects the decrease in the company’s assets resulting from the
declaration of the dividend. The company does not take any explicit action to
adjust its stock price; in an efficient market, this will automatically occur.
Record date – shareholders
who have registered their ownership on or before the date of record will
receive the dividend. Registration in most countries is essentially automatic
for shares purchased before the ex-dividend date.
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