When you are buying and selling shares, it is important to know the ex-dividend date for the shares you are buying or selling.
If you don’t know the date when the shares go ex-dividend then you could be missing out on valuable dividend income.
Whilst this is important for all investors, it is particularly important if you are an income investor and/or looking to use shares to generate a passive income.
In this article you will learn when dividends are paid, how dividends are paid and everything you need to know about ex-dividend dates.
When Dividends Are Paid
The first thing to understand is the process of how and when dividends are paid, which usually goes something like this:
1. A proposed dividend is announced;
2. Shareholders agree or disagree to the payment of the proposed dividend;
3. Shares go ex-dividend;
4. The shareholders on the company’s shareholder register are recorded.
5. Dividends are paid to shareholders.
The timescale over which this process occurs is different for every company.
It can vary between a few weeks and a few months.
The time between the dividends being announced and going ex-dividend could be a week or so or it could be two months, say.
If you are buying shares of a company after a dividend has been announced then you might think that you will receive the dividend for your new shares if the dividend has not been paid yet?
If you are selling shares of a company after a dividend has been announced and before the dividend has been paid to you then you might think you would miss out on receiving that dividend?
In both cases you might be right or wrong!
Let me explain.
How Dividends Are Paid
Dividends are usually announced during the company results, be they annual results, interim results or quarterly results.
Even if the dividend policy of the company is not to pay a dividend, then it will announce that a dividend is not being paid at the time of its results.
For those companies that are intending to pay a dividend, the company will announce that a dividend is being proposed and it will announce how much of a dividend is intended to be paid.
However, the board of the company can not pay this proposed dividend without getting the agreement of the company’s shareholders first.
This is done formally by proposing and passing a motion at the Annual General Meeting (AGM) of the company where, amongst other things, the preliminary company accounts are finalized.
Having agreed that the proposed dividend will be paid, the company will need to work out who to pay the dividends to.
It does this by keeping a register of the names and contact details of all of its shareholders and how many shares they own.
Because shares are constantly being traded in the stock market, shares are moving between buyers and sellers all the time.
The owners and contact details of the shares being traded are thus constantly being updated on the company’s shareholder register.
So for the company to decide who gets the dividend and who doesn’t, it announces a cut-off date when the owners will be formally recorded.
This is known as the Record Date and it is announced at the same time as the company’s results along with the Proposed Dividend.
The record date is therefore the date when the company takes a snapshot of its shareholder register.
If your name is still on the register at the time of that snapshot, you will be paid the dividend.
If your name is no longer on the register at this time, you will not receive the dividend.
So you might think that you can buy shares on the day of the record date or the day before the record date and receive the latest dividends?
When you buy or sell shares, it takes time for the shares to transfer from the buyer to the seller and for the shareholder register to be updated.
This process is called settlement.
In the past, when all shares were held in the form of a paper certificate, this could take a while.
In modern times, as most shares are held electronically, this process can be much quicker than it used to be but there are still people who hold and trade with paper stock certificates.
The stock exchanges and controlling bodies such as the Securities and Exchanges Commission (SEC) in the USA and the London Stock Exchange (LSE) in the UK therefore set a date before the record date to allow time for the latest trades to settle and the register to be updated.
This earlier date is known as the Ex-Dividend Date and it is usually stipulated to be two business days prior to the record date.
Like the record date, the ex-dividend date is announced by the company at the time of its results along with the proposed dividend.
The ex-dividend date, as opposed to the record date or payment date is therefore the most important date that you need to know as a shareholder.
Not surprisingly, shares are said to go ex-dividend on the ex-dividend date.
So, if you buy shares in a company on the day before the ex-dividend date, you will receive the latest dividends.
If you buy shares on or after the ex-dividend date, you will own the shares but you will not receive the latest dividends.
That’s because the party selling the shares to you on the ex-dividend date will receive the shares instead.
If you sell your shares after the ex-dividend date but before the dividends are paid, then you will receive the dividends on the payment date.
As you might expect, the payment date is also announced with the company’s results, along with the proposed dividend, ex-dividend date and record date.
An example of dividend declaration in action is the final dividend announcement of Centrica plc made on 26th February 2012:
The Directors propose a final dividend of 11.11 pence per ordinary share (totalling £575 million) for the year ended 31 December 2011. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2012 and, subject to approval, will be paid on 13 June 2012 to those shareholders registered on 27 April 2012.
This provides all of the relevant information and dates for you.
Another example is the 4th Quarter dividend announcement of McDonalds Corporation made on 26th January 2012:
McDonald’s Board of Directors declared a quarterly cash dividend of $0.70 per share of common stock payable on March 15, 2012 to shareholders of record at the close of business on March 1, 2012
Notice that this declaration does not provide you with the ex-dividend date, so you need to calculate it yourself as 2 business days before the record date.
Forget to do this or calculate it wrong and you could miss out on your valuable dividends.
This is very easy to do as I have done it myself on several occasions.
So don’t forget to check the ex-dividend date before buying or selling shares.
I hope you’ve enjoyed this article – if you have, please leave me a comment below or share it with your friends and contacts.
Until next time…