Dividend Dates Explained: All You Need to Know About Declaration, Ex-Dividend, and Pay Dates
Dividend Dates: When Do Dividend Investors Get Paid?
Here at Income Investors, we are constantly on the lookout for safe and rising dividend plays. But if you are just getting started with dividend investing, you might find it confusing as to when exactly you can get paid.
Different companies pay dividends at different times, and they often specify several dates in their dividend announcements.
Here’s an in-depth look at dividend dates so you’ll never miss a payment that you want to collect. Below I’ll use some examples to illustrate the logistics behind dividend payments.
But first, let’s go over some definitions.
Dividend Declaration Date
This is an obvious one. When a company’s board of directors declares a dividend, the day they do that is the dividend declaration date.
Dividend Payment Date
This is also an easy one. In a company’s dividend announcement, management will specify a dividend amount and a payment date.
On the dividend payment date, shareholders who are entitled to that payment will get the dividends deposited into their brokerage accounts.
Now, your next question might be, “How do I know if I’m entitled to that dividend payment?” Well, the answer involves two other important dividend dates.
What Is a Dividend Record Date?
The dividend record date is specified in a company’s dividend declaration. On this day, the company’s management will look at its books and determine who’s eligible for the upcoming dividend payment. The shareholders of record as of the dividend record date will get the dividend.
However, the dividend record date is more relevant to the company than to investors, since it will determine who the shareholders of record are on that day. For investors who want to collect the dividend, they will have to act a little bit earlier.
What Is an Ex-Dividend Date?
The ex-dividend date is hands down the most important date to take note of for dividend investors.
You see, because stock market transactions take time to settle, choosing a stock based on its dividend record date doesn’t get you on its list of shareholders of record.
To collect a company’s dividends, investors have to own the stock before the ex-dividend date. The ex-dividend date is usually set to be one business day before the dividend record date.
I know that all might sound a bit confusing, so let’s use an example to see how all these dates tie together. And most importantly, let’s see how an investor can use the information in a company’s dividend announcement to make sure they don’t miss the payment.
Let’s take The Coca-Cola Co (NYSE:KO), one of my favorite dividend stocks. The board declared a quarterly dividend on October 18, 2018.
The company declared a regular quarterly dividend of $0.39 per common share. That dividend is payable on December 14 to shareholders of record as of the close of business on November 30. (Source: “Board of Directors of The Coca-Cola Company Declares Quarterly Dividend,” The Coca-Cola Co, October 18, 2018.)
Since the announcement was made on October 18, that is the declaration date. Also, the press release made it clear that the payment date is December 14 and the record date is November 30. On the record date, Coca-Cola’s management will determine the shareholders of record.
For investors wondering what the difference is between the record date and the ex-dividend date, here’s the most important part.
The ex-dividend date, which is one business day before the record date, is November 29. This is the day on which the stock trades ex-dividend, meaning investors who buy Coca-Cola stock on November 29 won’t be entitled to the dividend. To be eligible for that dividend, you have to own KO stock before November 29.
|Declaration Date||Ex-Dividend Date||Record Date||Payment Date||Amount||Type|
|October 18, 2018||November 29, 2018||November 30, 2018||December 14, 2018||$0.39||Cash|
In other words, if you want to get paid by the beverage giant on December 14, the latest day to buy Coca-Cola stock is November 28.
Can You Sell on the Ex-Dividend Date and Get a Dividend?
Now, another common question is what happens to the stock on the ex-dividend date. And more specifically, if an investor sells on the ex-dividend date, will they still get paid the dividend?
Going back to the definition of ex-dividend date, we can confirm that the answer is “yes.”
If an investor already owns shares of a company and they decide to sell on the ex-dividend date, it does not change the fact that the investor owned the stock before the ex-dividend date. Therefore, the investor who sells on the ex-dividend date is still eligible for the dividend.
On the other side of the trade, we have an investor who buys on the ex-dividend date. If the investor did not own shares beforehand and just buys on the ex-dividend date, they would not get the dividend.
Sounds like a good deal for the seller, right? They get to sell their shares and collect dividends, while the buyer won’t be entitled to the payment even if they still own the stock on the dividend payment date.
Well, keep in mind that the stock market can be efficient. Because of the “seller gets the next dividend while the buyer does not” situation on the ex-dividend date, it’s not unusual to see the share price of a dividend-paying company drop on its ex-dividend date by roughly the amount of the dividend.
To sum up, if you buy a stock on its ex-dividend date or after, you will not receive the next dividend.
A Note on Stock Dividends
In the ex-dividend date example, Coca-Cola was declaring a cash dividend to investors. That is, on the dividend payment date, the company will transfer the cash payment to investors’ brokerage accounts.
Indeed, cash dividends are the most common type of dividends in today’s market, but they are not the only type. Companies can also pay stock dividends. As the name suggests, this happens when the dividend is paid in the form of additional shares rather than cash.
One interesting thing to note here is that, by paying a stock dividend, the company would increase its total number of shares outstanding. But because the act of paying a stock dividend does not change the value of the whole company (it merely issues a stock dividend for its existing shareholders), the increase in share count would cause its per-share value to drop.
For instance, suppose a company has one million shares outstanding at $50.00 per share. That gives it a market value of $50.0 million. Management then declares a five percent stock dividend, so shareholders would get one additional share for every 20 shares they own.
Now, because issuing this stock dividend does not change the value of the business, the company’s market value is still $50.0 million. The total number of shares outstanding, on the other hand, has increased by five percent to 1.05 million. Divide $50.0 million by 1.05 million shares and we see that each share would be worth $47.62 after the stock dividend.
Still, just like cash dividends, there are several important dates to pay attention to when companies pay stock dividends.
Here’s an example from People’s Bank of Commerce (OTCMKTS:PBCO) earlier this year.
On February 28, the company’s board of directors declared a five percent stock dividend, “payable to all shareholders of record April 27, 2018, payable on or about May 31, 2018.” (Source: “People’s Bank Declares 5% Stock Dividend,” People’s Bank of Commerce, February 28, 2018.)
In this case, the dividend declaration date was February 28, the payment date was May 31, and the date of record was April 27. To be eligible for that five percent stock dividend, investors needed to have owned shares before the ex-dividend date, which was April 26.
When to Buy a Stock to Get Dividends
For those just getting started in dividend investing, a common question is when the best time is to buy a stock for its dividends. I would like to answer that question from both a short-term and a long-term perspective.
From a short-term perspective, the answer is quite obvious, given the definitions and examples we have discussed. Since buying a stock on or after the ex-dividend date won’t get you the dividend, it’s best to buy before the ex-dividend date if you have your eyes set on collecting that payment.
However, in an efficient market, it does not make that much of a difference. This is because, on the ex-dividend date, the stock price of the company tends to drop by an amount close to that of the dividend payment.
So, if you buy the stock before the ex-dividend date, you get to collect the dividend but have to pay more for the stock. And if you buy the stock on or after the ex-dividend date, you won’t get the dividend, but you will pay less for the stock.
From a long-term perspective, timing an investment decision based on dividend dates, at least in my opinion, is even less important.
As income investors, we want to receive a stream of dividends not just for a quarter or two, but indefinitely into the future. Therefore, it’s more important to find the right dividend stock to buy than to determine when to buy it.
Again, KO stock serves as the perfect example. The company has paid consecutive quarterly dividends since 1920 and has raised its payout in each of the last 55 years. If you bought and held the stock long enough, you would have collected some hefty dividend payments regardless of whether you missed the first ex-dividend date.
The Coca-Cola Co Stock Chart
For those who think a few percentages of dividends don’t seem like much, keep in mind that companies that can raise their payout consistently tend to deliver oversized total returns.
If you need motivation to get started with dividend investing, here’s a chart showing how much profit KO stock investors have made over the years:
Chart courtesy of StockCharts.com
There you have it. With the right dividend stock and some patience, it’s possible for investors to earn astronomical returns from seemingly boring dividend-paying companies.
Understanding the concept of dividend dates could be your first step toward getting on that profit train.