(Published Jan. 23 by The Financial Canadian)
Beginning dividend investors may easily become confused with the dividend payment timeline for companies.
Do dividend payments begin immediately after purchasing shares?
When do dividends stop being paid after shares are sold?
There are four dates involved in the dividend payment process, which are listed below in chronological order.
- Declaration Date
- Ex-Dividend Date
- Record Date
- Payment Date
We will discuss each term in detail and use two examples to show how these dates can be easily found for specific companies.
Dividend declaration date
The declaration date is the date on which the company’s board of directors announces the next dividend payment to shareholders. It is simply an announcement – no dividends are paid on the declaration date.
Dividends are generally paid quarterly, so declaration dates are quarterly as well.
While dividends are in no way guaranteed, it is generally a goal of company management to grow the dividend payment over time. This is a shareholder-friendly activity that is seen as a sign of underlying business strength, and is certainly discussed in great detail at board of directors meetings.
Growing dividends is also correlated with increased total returns. This can be seen in the Dividend Aristocrats – a group of companies with at least 25 years of consecutive dividend increases. They have meaningfully outperformed the S&P 500 over time.
You can see all 50 Dividend Aristocrats here.
Companies will generally make it very clear when their dividends are announced via a press release on their Investor Relations website.
Record date versus ex-dividend date
The record date and the ex-dividend date determine which shareholders are eligible to receive company dividends.
If shares trade hands in the time leading up to a dividend payment, these two dates determine whether it is the buyer or the seller who receives the dividend.
The record date is the date on which a company's management looks at the shareholder records to see who is eligible to receive the company’s future dividend payment. This date is of little importance to investors however. Buying the company’s stock on the record date does not mean you will receive the company’s next dividend.
Practically speaking, the most important date for dividend investors to be aware of is the ex-dividend date. This date, which is two days before the record date, has much greater implications for portfolio management.
Investors who purchase shares on or after the ex-dividend date will not be paid that quarter’s dividend (although they will be entitled to future dividends, assuming they still hold the shares). Investors who purchase shares before the ex-dividend date will be paid that quarter’s dividend.
The reason why the ex-dividend date is two days earlier than the record date is because it takes three days for a trade to "settle"– for cash and shares to legally trade hands.
This seems counterintuitive. Anyone who has placed trades before knows that cash is deposited to your account on the day that you sell shares. Often, this is simply because your broker is willing to front you the money in advance while they wait to receive money from the counterparty. The actual process takes three days to complete.
This is why you must purchase three days in advance of the record date (or one day in advance of the ex-dividend date) to receive the dividend payment in question.
The payment of dividends
The payment date is the date on which corporate cash is actually paid to shareholder as a dividend. Depending on the medium through which you own your shares, dividends may be mailed to you as a check, wired into your bank account or deposited into your brokerage account as cash.
Many companies also offer a Dividend Reinvestment Plan (or a DRIP for short). These plans allow investors to use dividends to purchase more company shares.
You can view the 15 best DRIP stocks here.
Two real-life examples of the dividend payment process
Suppose we are looking to initiate a position in Microsoft (MSFT, Financial) and we want to make sure we are eligible for the company’s next quarterly dividend payment. As such, we need to purchase before the company’s ex-dividend date.
The easiest way to find this date is by looking directly on the company’s Investor Relations page, which can be easily found via a Google search for "Microsoft Dividend Information."
The first search result contains the desired information.
Clicking on that result and scrolling down the page reveals the company’s next ex-dividend date is Feb. 14. In order to be eligible for Microsoft’s next dividend payment, the shares must be purchased on Feb. 13 or earlier.
Dividend payments will be made to Microsoft’s shareholders on March 9, 2017.
Applying the same methodology to Johnson & Johnson (JNJ, Financial) leads to identical results. First, search for "Johnson & Johnson Dividend Information" on Google. While the company’s Investor Relations page is not the first result, it is still on the first page of the search engine and thus very easy to find.
Clicking this link and scrolling down leads to a table that is similar to the one on Microsoft’s Investor Relations page.
According to the table, Johnson & Johnson’s ex-dividend date is Feb. 24, which means that investors who want to receive the next quarterly dividend must purchase their shares on Feb. 23 or earlier. Dividends will be paid to shareholders on March 14.
These two examples show precisely how easy it is to find information on record dates, ex-dividend dates and pay dates for corporate dividends.
Final thoughts: Why it doesn’t really matter
As investors, there are many other more important issues we should be concerned about over our eligibility to receive the company’s next dividend payment. Here is why.
On a company’s ex-dividend date, shares generally drop by an amount approximately equal to the company’s next dividend payment.
Investors who want to "lock in" the gain of that dividend but do not purchase before the ex-dividend date can still purchase shares on the ex-dividend date at a discount approximately equal to the dividend amount.
Because of this, there is no advantage to waiting to purchase shares.
Instead, focus on developing a long-term systematic investing plan that will be successful regardless of your timing of dividend payments. If you find a company that ranks favorably according to some proven system like The 8 Rules of Dividend Investing, buy some shares and focus your mental energy on identifying your next opportunity.
Disclosure: I am not long any of the stocks mentioned in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
