Dividend payments are important to certain types of investors who invest for income. Therefore, they never buy stocks after the ex-dividend date. These investors use dividend payments as a yardstick for their investment. As a part of their dividend investing strategy, they purchase stocks of companies that have a history of paying regular dividends out of their earnings.
Stocks of these dividend paying companies are also referred to as income stocks or blue-chip stocks.
We have four dividend dates in the stock market which every investor investing in stock should know. Here are they;
- Declaration date
- Ex-dividend date
- Record date
- Payment date
Declaration date is the day on which the company has announced that they are going to distribute dividends to shareholders. Payment date is the day on which dividend will be credited to your bank account.
Now, comes two more important dates, which will decide whether or not dividend should be paid to you. It’s the most important date you should not forget if you are in the stock market.
If you are investing to get a regular dividend then ex-dividend date is the most important day you should remember.
When a common stock is bought, it takes 2-3 business days for the settlement to go through. After the settlement period, the buyer will be shown in the shareholder list maintained by the company.
Settlement period depends on the stock exchange of the country where stocks are listed. You need to check your settlement period with your county’s stock exchange.
Record date is the day on which a company takes the shareholders list from its record in order to determine which shareholders are entitled to receive the dividend. Only those shareholders who hold the shares of the company on the record date will be considered to receive the dividend.
If the settlement period is 3 business days, then the Ex-dividend date is 2 business days prior to the record date.
Similarly, if the settlement period is 2 business days, the ex-dividend date is 1 business day prior to the record date.
Ex-dividend date is considered as the day on which the stock of the company trades in the market without dividend. If you buy the stock on the ex-dividend date, then you will not get the declared dividend.
Example to understand ex-dividend date
If the record date of the company ABC limited is 03-05-2020, by considering two business days as the settlement period, the ex-dividend date is one day before 03-05-2020, which is 02-05-2020.
Investors who buy stocks on 01-05-2020, will receive the dividend because the transaction will be recorded in the shareholders list for that company in 2 working days, which is 03-05-2020.
If you buy the stock on the ex-dividend date i.e. 02-05-2020, then you will not be taken to the shareholders list as on 03-05-2020. Because, your settlement period will get over on 04-05-2020, which is not the record date for the declared dividend. Therefore, by buying the stock on 02-05-2020, you will not get the declared dividend.
In order to avoid this kind of difficulties in investing, investors adopt a dividend capture strategy and dividend investing style to get maximum benefits from the stock market.
To calculate ex-dividend date for indian stock market, you need to understand the clearing and settlement period that works in stock exchange of India. You can refer our article on clearing and settlement period for your further studies.