Shareholders are entitled to more than just capital gains on their stock possessions, and that surplus comes in the form of dividends. Shareholders are part owners of the organisations of which they are holding shares.
They are, thus, eligible for a portion of those companies’ profits distributed periodically via dividends. This distribution is governed by particular dates, of which the record date is one.
Record date, also known as the cut-off date, is the specific day on which a company finalises the list of shareholders eligible to its forthcoming dividend distribution. An organisation whose stocks are actively traded in the stock market expects to see a constant flux in the list of shareholders. Consequently, a record date plays a critical role in determining the aforesaid eligibility for the dividend.
Persons whose names are mentioned in a company’s shareholder record as on the record day are entitled to earn dividends or distribution as announced by the concerned organisation. Therefore, investors who purchase shares post that date or whose names appear in a company’s shareholder record after the record date has lapsed are not eligible for that specific dividend distribution.
Nevertheless, a cut-off draws most of its significance from other related dates in the ambit of dividend distribution. And therefore, it is crucial to develop an understanding of those dates as well.
Dividend distribution is associated with four primary dates – announcement date, ex-dividend date, record date, and payment date.
The announcement date, as the name suggests, is the day on which a company announces its decision to distribute dividends. The date on which it shall pay out the dividend is called payment date. In between, two dates are quintessential to this process – ex-dividend date and record date.
Of these four dates, the ex-dividend date is not formally announced by an organisation but rather determined by the concerned stock exchanges in relation to the record date. Typically, the ex-dividend date is set two business days prior to the record date for dividends in India.
That is because according to the protocol followed in stock exchanges, it takes T+2 days for a shareholder’s name to appear in the books of a company, from which it determines the eligible list of stakeholders. Therefore, investors who intend to purchase stocks of a company to earn its immediately forthcoming dividends must do so before the ex-dividend date lapses.
Example – Company QRS has announced on 8th May to payout a 5% dividend on its stocks worth Rs.100 per share on 1st June. It subsequently announced the record date on 21st May.
Let’s take a look at this table of dates associated with dividend distribution as put forth by Company QRS.
|Announcement date||8th May 2020|
|Record date||21st May 2020|
|Ex-dividend date||19th May 2020|
|Payment date||1st June 2020|
Therefore, investors who will be willing to purchase QRS stocks to earn dividends on it on 1st June shall do so by the end of 19th May to appear in its shareholders’ record as of 21st May. If an investor purchases its stocks on 20th May his name will appear in QRS’s record on 22nd May and thus, will not be considered for dividend payout on 1st June.
Ex-dividend date, alongside dividend record date, exerts a significant impact on a stock’s value in the market. When a company announces its decision to distribute dividends, it prompts investors to partake in the dividend payout by purchasing its stocks.
Therefore, in the days building up to the ex-dividend date, a stock’s value surges prompted by an increase in demand. The surge begins from the announcement date and reaches its peak on the ex-dividend date. And since an ex-dividend date is in relation to the declared dividend record date, the latter plays a significant role in driving up share prices.
Conversely, when stocks go ex-dividend, i.e. post the dividend date, its value or price begins to decline. That is because its dividend incentive, the sole factor driving the share price up, ceases to exist after the ex-dividend date. According to prevalent trends, after the ex-dividend date, share prices fall almost in the same proportion in which it rose before that date.
Opportunist investors utilise the timeframe between the announcement date and ex-dividend date to sell such stocks in their possession at a high price to realise substantial capital gains. Subsequently, when share prices fall after the stocks go ex-dividend, they repurchase those shares at a lower price.
Regardless, investors willing to jump on the bandwagon of earning dividends should keep a note of the record date and time their stock purchases such that their names appear on record as of that date.
It refers to the cut-off date set by companies that determine whether a shareholder is eligible to partake in dividend or any distribution.
As per protocols followed by stock exchanges, it takes T+2 days for a shareholder’s name to appear in a company’s book.
When a company announces the distribution of dividends, investors get into a frenzy to purchase its stocks, to partake in its dividend. This leads to a surge in the value of the company’s stocks, prior to its ex-dividend date.