4 Dividend Distribution Dates Every Investor Must Know and Understand

After defining dividends and listing several types of dividend distributions, I will go over the four important dates in the dividend distribution cycle than every investor must know and understand.

Some dividend-paying companies pay irregular or sporadic special dividends, which also are sometimes called “extraordinary dividends”. Examples of this might be a special dividend due to the sale of a company asset, a one-time distribution of excess cash, a cash distribution as the result of a merger or consolidation of a company’s subsidiaries or other infrequent or one-time events.

Although special dividends are not part of the company’s core dividend policy, this is real cash and may be includable as income for tax purposes. However, special dividends should NOT be included in calculating a company’s current dividend yield, dividend growth rate or any other calculations involving the company’s dividends. The income investor should decide how to handle a special dividend. Some investors will simply accept the cash as a sort of bonus to household income. However, because this is usually excess cash, income investors should reinvest these special dividends in additional shares of the company rather than treating them as household income.

Publicly traded companies must adhere to a set of strict rules governing the payment of dividends to shareholders. The Securities and Exchange Commission (SEC), the government agency that regulates securities laws in the United States, and the exchange on which the company is listed, enforces those rules and have set requirements on how company will announce and distribute its dividends. All publicly traded companies that pay a dividend must go through a four-step process that has four standard dates. Here are those dates in chronological order..

1. Dividend Announcement Date

Also known as the declaration date, the announcement date is the day when the company formally announces to the public its decision to pay, or continue paying, a dividend. The announcement includes the amount of dividend that will be paid and the record and pay date. Some companies will make pre-declaration announcements of their intent to pay a future dividend. But this should not be confused with the formal announcement date. The timing of the announcement date will vary but is usually 30 days or so prior to the Record Date.

2. Ex-Dividend Date

The ex-dividend date is one day after the cutoff date for shareholders to receive the dividend payment for that period. All investors that purchase or own shares through the day before the ex-dividend date are eligible to receive the dividend payment for that period on the next upcoming pay date. Those shares are with dividend, also known as “cum dividend.” Conversely, shares purchased on the ex-dividend date or any days thereafter will not receive that dividend. The exchange on which the company is listed sets the ex-dividend date, but it is usually one market trading day prior to the Date of Record.

Dividends that exceed 25% of the value of the company must have time the ex-dividend date as one business day AFTER the dividend is paid. This also applies to dividends that are paid in company stock. However, these kinds of dividends are rare and are not what an income investor will encounter with a long term reliable dividend paying stock.

3. Date of Record

The date of record or record date is announced by the dividend paying company on the announcement date. It is the date when the company compiles the official list – the record – of all shareholders who are eligible to receive the dividend payout on the announced pay date. The date of record date happens one business day after the ex-dividend date for most equity transactions. In the past, when all transactions were recorded manually, it took time for the brokerage to compile a list for the company paying the dividend at the close of markets of all dividend eligible shareholders. Therefore, multiple days were allowed for this processing. However, as automation and technology supplanted manual transaction tracking, the interval shortened to just a few days. As of September 5, 2017, U.S. exchanges implemented the T+2 transaction settlement requirement. While most automated electronic transactions post almost instantaneously, we still have a one day wait until the investors entitled to the dividend are officially recognized as shareholders of record.

4. Pay Date

This is the date on which the company pays the dividend. Depending on the investment portfolio setup, investors can have their dividend payouts mailed as a check, wired into their bank account or deposited as cash into their brokerage account. While there is no rule when the pay date must happen in relationship to the other dates, most equities pay their dividends two to four weeks after the ex-dividend date.

I want to point out that most investors new to income investing are somewhat concerned about the seemingly arbitrary decision of whether C-Corporations’ or LLC’s Boards of Directors (BOD) pay a dividend and the distribution amount. As investors looking for reliable long-term dividends, we should have a relatively high degree of confidence that the securities in which we invest will indeed pay rising dividends over an extended period. So, how do we determine which companies will continue to pay great dividends and return above-average yields sufficient to provide us with retirement income we require? I will cover this in an upcoming article when I review different classes of core income securities, particularly C-Corporations.

Now that we understand exactly what a dividend is, some of its characteristics and how securities distribute dividends, I will explain some stock screening criteria in an upcoming article, so that we can select the right securities to provide us with a reliable retirement income.

Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.