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What Is The Date of Record of Dividends?
The date of record of dividends is the cut-off date decided by the top management before which the investor's name should be present in the company's books to get the dividend payment of particular security.
In simple words, it is the date announced by the board of directors of any firm on or before which a stockholder or shareholder must own the firm's shares to be eligible to receive a dividend. The shares sold after this date are known as ex-dividend shares.
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- The date of record for dividends is the predetermined date by which an investor's name must be registered in a company's books to qualify for receiving the dividend payment for a specific security. It establishes ownership eligibility for dividend distribution.
- The date of record is closely related to the ex-dividend date, which is set two business days before it.
- The company uses the date of record to determine the list of shareholders entitled to receive dividends. No actual transaction occurs on this date; it serves as a reference point for dividend distribution.
Date of Record of Dividends Explained
The Date of Record for Dividends is the date before which the investors should register themselves for the dividends to be paid for a security. It should be determined strictly since it is essential to ascertain who the company’s shareholders are as of that date because shareholders of actively traded stock are changing continuously. The shareholders in the record as of the record date are entitled to receive dividends or distributions declared.
Record Date is usually set to ascertain the holders of a particular stock to understand who is entitled to receive the distribution and who is not. When a company prepares to distribute the dividend among the shareholders, this shareholder’s record is used to understand who owns the stocks. The record date varies among the types of securities. When any trade is executed, the investor becomes the owner of the record on the settlement.
Suppose a company decides to give its shareholders the dividends for which it has to go through various steps.
- The first and foremost step is to formally declare a dividend. The Board of Directors takes this decision.
- In the second step, the number of existing shareholders needs to be counted and kept in records. The record date comes with this second step in the dividend payment process.
- The third and final step is when the dividend is paid and the checks are written and issued. The number of shareholders is to be kept in the record as of the date of records because, for a small firm, it may be possible for the board of directors to know the number of shareholders. However, in the case of public firms, the number of shareholders can be significant.
It is important because of its relationship with another essential factor- the ex-dividend date. It must be kept in mind that on and after the ex-dividend date, the stockholder or shareholder will not receive any dividend as the seller is entitled to it.
The ex-dividend date is the date that is set precisely two business days before the record date. This system exists because of the T+3 system of settlement presently in use in North America, per which stock trades settle three business days after the transaction is carried out.
So if an investor decides to buy a stock two business days before its record date, his trade would only get settled the day after the record date. Then the investor will not be a shareholder of record for receiving dividends or distribution.
Date of Record for Dividends Video
Examples
Let us consider the following examples to understand the concept:
Example #1
Suppose a company XYZ Ltd has made a declaration of dividend on November 1 and identified November 16 as the Record Date. The company’s board makes the dividend declaration of directors in writing. This declaration implies that all the stockholders or shareholders on November 6 will receive a record date of a dividend. It is irrelevant that who owns the stock on November 1 because November 16 is the date that the company XYZ Ltd. will account for all of its shareholders.
Example #2
Let us take an example of company ABC Ltd., which has formally declared a $2 dividend per ABC share payable on August 1, 2017, to the shareholders of record as of August 20, 2017. The record date is August 20, 2017, and the ex-dividend date is to be set to two business days, which is August 18, 2017.
So if a shareholder wants to receive the dividend of $2 per ABC share, then he must buy the stock before its ex-dividend date.
So if an investor hears that a company has declared dividends, he must buy the stock on or before the ex-dividend date. No journal entry is made on the record date since no transaction has happened on that date. The company only keeps a list or record of its shareholders on this date.
Frequently Asked Questions (FAQs)
The date of record is crucial as it determines which shareholders are eligible to receive dividends. Only shareholders on the record will receive the dividend payment as of this date. It prevents buying shares just before the ex-dividend date solely to receive dividends, maintaining fairness in the dividend distribution.
No, the date of record and the ex-dividend date are different. The ex-dividend date is usually a few days before the date of record. If you buy shares on or after the ex-dividend date, you will not receive the upcoming dividend, but the date of record determines your eligibility as a shareholder.
There can be exceptions based on specific dividend reinvestment programs, preferred share terms, or other company-specific policies. Companies may have unique rules for dividend eligibility, so it's essential to refer to the company's dividend policy for details.
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