Investors who rely on dividend income need to understand four crucial dates to determine when they will get a distribution. Those four dates are the declaration date, the ex-dividend date, the record date and the payment date. While the declaration and payment dates are generally understood, the ex-dividend and record dates are easy to confuse. Here are the ways you can differentiate between an ex-dividend date and a record date. Consider working with a financial advisor as you hone your dividend investing strategy and tactics.
What Is an Ex-Dividend Date?
The ex-dividend date, otherwise called the ex-date, typically comes one business day ahead of the record date. It marks the day investors need to purchase a stock by if they want to receive a dividend payment. If you don’t buy the stock before the ex-dividend date, the dividend will go to the seller.
While the ex-dividend date sits before the record date, the company chooses the record date first. On the other hand, the corporation does not choose the ex-dividend date. Instead, the stock exchange’s rules determine its position.
Alternatively, investors may want to sell the stock they own but still receive a declared dividend. In that case, they must hold the stock until the ex-dividend date.
What Is a Record Date?
The record date acts as a cut-off for shareholders of a company. The company uses that day to identify all the investors who hold stocks in the company. If they are not on the corporation’s books by the record date, they do not receive a dividend. The board of directors selects which day serves this purpose. They also may use the record date to decide which investors receive pertinent financial information, such as stock reports.
Ex-Dividend Date vs. Record Date: Key Differences
The ex-dividend date and the record date are both important dates in the dividend distribution process. They also function similarly as cut-offs that both buyers and sellers need to know. However, they mark slightly different points in the timeline. The ex-dividend date marks the boundary when investors no longer receive the dividend with their stock purchase. In contrast, the record date is when a company identifies the stockholders eligible to receive the dividend. Both dates determine whether a stockholder earns the dividend but come at different points in the timeline.
Different sources determine the two dates. The ex-dividend date comes from a stock exchange’s rules, whereas the company itself chooses the record date. Therefore, the former depends on the latter. Additionally, the two dates are announced by the respective entities that decided them. So, the stock exchange announces the ex-date while the company’s board of directors announces the record date.
It’s important to note that the ex-date is considered more important for investors buying or selling stock. It affects them more directly than the record date. That is because stock prices shift downwards depending on the amount of dividend announced for stockholders.
Ex-Dividend Date vs Record Date: Example
There are four dates to the dividend distribution process:
the declaration date (when the company announces the dividend payment)
the ex-dividend date
the record date, and
the payment date (when eligible investors receive the dividend)
Let’s illustrate the difference between the ex-dividend date and record date with an example calendar. Imagine a company called XYZ Corp. It announces a dividend on July 2, 2021. The group then decides that the record date should be July 17, 2021.
That gives us the following timeline:
Declaration date – July 2, 2021.
Ex-dividend date – July 15, 2021.
Record date – July 17, 2021
Payment date – Aug. 17, 2021.
Planning a stock purchase is crucial because of this time sensitivity. Currently, it takes most stock trades two business days following the order execution to settle. For example, a stock bought on Tuesday would usually settle on Thursday. While this timeline varies for some products, it means you have to think ahead. To qualify for a dividend, you will need to purchase the share at least two days before the ex-dividend date.
Dividends may be a valuable source of income for you as an investor. Whether you want to learn to live off of them in your senior years or simply use them to boost your current income, they have the potential to help. So, it’s important to know what determines your eligibility to earn them. Purchasing and selling stocks strategically based on the dividend distribution process will help you maximize your income. Monitor the market for the most lucrative opportunities and keep your portfolio strategy in mind.
Tips on Investing
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