If you own dividend paying stocks or are interested in buying some shares of a dividend stock, it is important to understand how the dividend dates work. Each time a company pays a dividend, there are several important dates, including the ex-dividend date and the dividend payment date.
Each time a company pays a dividend, the distribution must be declared by the board of directors. Dividends are not paid automatically. When the board declares a pending dividend, the announcement will include the amount of the dividend, the record date and the payment date. Once the next dividend has been declared, investors who meet the requirements to own shares on the correct day will receive the dividend.
The record date determines which shareholders will receive the dividend. An investor must be a "shareholder of record" on the record date to be entitled to the declared dividend. If an investor buys shares and does not become a shareholder of record by the record date, she will not receive the dividend. The stock purchase process takes three business days to make a stock trade official, so to be an owner on the dividend record date, the shares must have been purchased at least three business days before the record date.
Ex Dividend Date
Since an investor must buy shares three days before the record date to be a shareholder of record, a stock goes ex-dividend two business days before the record date. Investors who buy on the ex-dividend date or later will not receive the dividend. When the market opens on the ex-dividend date, the share price will open at the previous day closing price less the amount of the dividend. A trader who buys shares three days before the record date and sells the next day will collect the dividend but lose an equal amount of money due to the lower share price.
Dividend Payment Date
The dividend payment date is the day the dividend will be paid to the investors who owned shares on the record date. The payment date may be a couple of days after the record date or several weeks after. An investor does not need to continue to own the shares from the the record date to the payment date to receive the dividend. As long as an investor is the official owner on the record date, he will receive the dividend payment.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.