- The declaration, or announcement, date;
- The record date;
- The ex-dividend date; and
- The payable, or payment, date.
Dividend Declaration Date
The dividend cycle begins with declaration date. It is the day that the board of directors officially announces that the company will pay a dividend. The announcement indicates the amount of the cash dividend, the day the dividend will be paid and the shareholder of record date. For example, on February 8, 2018, Union Pacific Corp. (UNP) issued a news release titled “Union Pacific Corporation Announces a 10 Percent Dividend Increase for First Quarter 2018” that stated:
OMAHA, Neb., Feb. 8, 2018 — Union Pacific Corporation (NYSE: UNP) announced that its Board of Directors today voted to increase the quarterly dividend on the Company’s common shares by 10 percent to 73 cents per share. The increased dividend is payable March 30, 2018, to shareholders of record as of February 28, 2018.
Many companies declare their quarterly dividend along with the quarterly earnings results, although some make the announcement just before or after the quarterly performance announcement. Union Pacific declared this dividend three weeks after its fourth-quarter 2017 earnings announcement. This was also the second consecutive quarterly dividend increase by Union Pacific.
When the dividend is announced, the company sets a record date as of which shareholders must be in the company’s books in order to be eligible to receive the dividend. Companies will also use this date to determine who will be sent proxy statements, financial reports and other materials.
Once the record date is set, the stock exchanges determine the ex-dividend date. When you purchase a stock, you have two trading days to settle or pay for the stock. Therefore, you must purchase a stock at least two trading days before the record date to make it on the books of the company as a shareholder of record and qualify for the dividend payment. If you purchase a stock on or after its ex-dividend date, you will not receive the dividend. Instead, the seller of the stock will get the dividend. If you purchase the stock before the ex-dividend date, you will receive the dividend.
When Union Pacific declared its February 8, 2018, dividend, it set a record date of February 28, which happens to be a Wednesday. To qualify for this $0.73 dividend per share, you must own or purchase the stock by Monday, February 26. When calculating the ex-dividend date, you must pass over weekend days and trading holidays during which the stock exchanges are closed. On Tuesday, February 27, the stock trades ex-dividend; any shareholder buying the stock on this day or later will not be entitled to the March 30 dividend. When Union Pacific opens for trading on Tuesday, February 27 (the ex-dividend date), its opening price will be adjusted downward by the amount of the dividend as well as any market-related activity.
Union Pacific is currently trading with a share price around $132.50, so its downward price adjustment of $0.73, or roughly 0.6%, may be lost in the noise of the normal market movements. The higher the dividend yield, the greater the impact.
The cash dividend transfers assets from the company to the shareholders and its market value (share price times number of outstanding shares) adjusts on the ex-dividend date to reflect the decrease in assets.
The exchanges and brokerage firms track and make adjustments for the ex-dividend date. Outstanding limit orders and trailing stop orders will also be adjusted for dividend distributions unless you instruct your broker not to make the adjustment. A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a limit order that is good until canceled, you can specify that the limit price should not be reduced (DNR: do not reduce). The default is to reduce the limit price so that buy trades are not automatically executed because a stock price declined due to a dividend distribution.
The Payment Date
The dividend cycle ends on the payment date when the company actually makes the dividend payment. The payment or payable date is usually between two to four weeks after the record date to give the company registrar time to account for the shareholders and prepare the payments.
Cash dividends are distributions of a company’s net income or profit. When a company has a profit, the profit increases the retained earnings account on the balance sheet. Dividend payments reduce the retained earnings tracked on the company’s balance sheet by the total amount of the dividend payment. When the board of directors declares a dividend, retained earnings is reduced and a liability account called “dividend payable” is created. When the dividend is paid, the cash account on the asset side of the balance sheet and the dividend payable account on the liability side of the balance sheet are then both reduced by the amount of the dividend payout.
The cash dividend is an important distribution of profits to its shareholders. Your claim to this distribution depends primarily on the date you purchase or sell your stock relative to the record date. The concepts of dividend cycle may seem confusing at first. Keep in mind that if the settlement day of a trade is any day up to and including the record date, the buyer gets the dividend. If the settlement day falls after the record date, the dividend belongs to the seller. On the ex-dividend date, the transaction will settle after the record date. There is no way to game the dividend payment cycle. You can, however, determine whether you want to receive a company’s dividend if you plan to buy or sell a stock near the ex-dividend date. If you purchase a stock before the ex-dividend date in a taxable account, you will receive the cash dividend but incur a tax liability for that year.
This post was inspired by an article that originally appeared in the October 2017 monthly issue of AAII’s Dividend Investing newsletter.