Shares of public corporations change hands very frequently; often several times a day. However, these companies only pay dividends once, twice or four times a year at the most. Therefore, there are strict rules to determine who, among the stock's various owners throughout the year, is entitled to receive a dividend. Understanding these rules will help you maximize your cash flow.
Corporations share their profits with stockholders by paying them a portion of their net income as dividends. In most instances, dividends are paid as cash. A small number of companies, however, distribute stock dividends. This results in an increase in the number of shares in the stockholder's portfolio but no increase in her net cash position. In case of cash dividends, a corporation will almost always distribute only a portion of its net profit in the form of cash. Some of the profits are then reinvested in the business to remain competitive. How much of the profits will be distributed to shareholders is solely at the discretion of the company's board of directors.
When the company's board decides how much of the firm's cash reserves to pay as dividends, it also announces a record date and a dividend payment date. Shareholders who hold the stock on the record date are entitled to receive a dividend on the payment date. As surprising as it may sound, it is enough to own the stock for only a single day to receive a dividend. Once your name is recorded as an owner of the stock as of the record date, you can sell the stock without giving up your dividend rights. The payment date is usually several weeks later than the record date.
One factor complicating the discussion of the dividend date is settlement. When you purchase a stock, it takes three business days for ownership to be transferred. This transfer of ownership is referred to as settlement. Therefore, you have to purchase the stock at least three business days before the record date to receive a dividend. Assume the record date is June 4. If you buy the stock on June 1, you will own it on June 4 and be entitled to receive a dividend. However, if you buy it on Tuesday or later, ownership transfer will occur after the record date and you will not be paid a dividend. June 2 is therefore referred to as the ex-dividend date; in other words, the first day on which buyers will no longer be entitled to a dividend.
Settlement After Ex-Dividend Date
It is possible for settlement to occur after the ex dividend date and for the investor to still receive a dividend. In our example, the investor can purchase the stock on June 1, in which case the settlement will occur on June 4, and still receive a dividend. Since the ex-dividend date is June 2, settlement is taking place after the ex-dividend date, yet the buyer is still receiving a dividend.
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