Updated on September 19th, 2023
By Bob Ciura, David Morris, & Ben Reynolds
The dividend payment process may seem simple. You invest in a dividend paying stock, and then the dividends end up in your brokerage account when payments are made (typically quarterly).
Income investors looking for quality dividend stocks should start with the Dividend Kings, a group of 50 stocks that have raised their dividends for at least 50 consecutive years.
You can download a free list of all 50 Dividend Kings by clicking on the link below:
There’s actually four steps to the dividend payment process that often go unnoticed by dividend investors:
Investors should become familiar with all four terms before buying a dividend stock, as being able to identify these dates will help avoid any potential confusion.
This article will discuss each term in detail, and use two examples to show how these dates can be easily found for specific companies.
Step #1: First, a company declares they are paying a dividend. This is the dividend declaration date.
Step #2: Then, a company decides which shareholders will receive a dividend. Shareholders who own shares before the ex-dividend date will receive the next dividend payment.
Important Note: The ex-dividend date is two days before the record date.
Step #3: The record date is the date when the corporation actually looks at its records to determine who will receive the dividend.
Step #4: Finally, the payment date is the payment date, when the dividend is actually paid to shareholders.
What really matters for shareholders is receiving the dividend in question. And three important dates determine who receives the dividend (and who doesn’t).
The first important date is your purchase (transaction) date. When shares trade hands, they actually do so on the actual purchase date, even though the formal settlement date is typically delayed by a few days time. For dividend purposes, the purchase date can make a difference. You must purchase one day in advance of the ex-dividend date to receive the dividend payment in question.
As discussed above, the ex-dividend date determines whether it is the buyer or the seller who receives the dividend. Investors who purchase shares on or after the ex-dividend date will not be paid that quarter’s dividend. Investors who purchase shares before the ex-dividend date will be paid that quarter’s dividend.
And finally, the payment date is the date the dividend payment is actually sent. Depending on the medium through which you own your shares, dividends may be mailed to you as a check, wired into your bank account, or deposited into your brokerage account as cash.
The declaration date is the date on which the company’s Board of Directors announces the next dividend payment to shareholders. It is simply an announcement – no dividends are paid on the declaration date.
Generally, dividends are paid quarterly, so declaration dates are quarterly as well.
While dividends are in no way guaranteed, it is generally a goal of company management to grow their dividend payments over time. This is a shareholder-friendly activity that is seen as a sign of underlying business strength, and is certainly discussed in great detail at Board of Directors meetings.
Companies will generally make it very clear when their dividends are announced via a press release on their Investor Relations website.
The record date and the ex-dividend date determine which shareholders are eligible to receive company dividends.
If shares trade hands in the time leading up to a dividend payment, these two dates determine whether it is the buyer or the seller who receives the dividend.
The record date is the date on which company management looks at their shareholder records to see who is eligible to receive the company’s future dividend payment. However, this date is of little importance to investors. Buying the company’s stock on the record date does not mean that you will receive the company’s next dividend.
Practically speaking, the most important date for dividend investors to be aware of is the ex-dividend date. This date, which is two days before the record date, has much greater implications for portfolio management.
Investors who purchase shares on or after the ex-dividend date will not be paid that quarter’s dividend (although they will be entitled to future dividends, assuming they still hold the shares). Investors who purchase shares before the ex-dividend date will be paid that quarter’s dividend.
The reason why the ex-dividend date is two days earlier than the record date is because it takes three days for a trade to ‘settle’ – for cash and shares to legally trade hands.
This seems counterintuitive. Anyone who has placed trades before knows that cash is deposited to your account on the day that you sell shares. Often, this is simply because your broker is willing to front you the money in advance while they wait to receive money from the counter-party. The actual process takes three days to complete.
This is why you must purchase three days in advance of the record date (or one day in advance of the ex-dividend date) to receive the dividend payment in question.
The payment date is the date on which corporate cash is actually paid to shareholder as a dividend. Depending on the medium through which you own your shares, dividends may be mailed to you as a check, wired into your bank account, or deposited into your brokerage account as cash.
Many companies also offer a Dividend ReInvestment Plan (or a DRIP, for short). These plans allow investors to use dividends to purchase more company shares.
You can view the 15 best DRIP stocks here (each of the stocks in that article charge no fees for their DRIPs).
Suppose an investor is looking to initiate a position in high-quality dividend growth stock AbbVie Inc. (ABBV), which is one of our top-ranked dividend stocks and a member of the Dividend Aristocrats.
You can download a full list of all 67 Dividend Aristocrats by clicking on the link below:
You can download an Excel spreadsheet with the full list of all 67 Dividend Aristocrats (with additional financial metrics such as price-to-earnings ratios and dividend yields) by clicking the link below: