Definition of Date of Record of Dividends
The date of record of dividends also known as “record date” is the cut-off date decided by the company which establishes the list of eligible stockholders for the purposes of distribution of dividends. The record date determines the list of stockholders as on a particular date and only those stockholders whose name appears in the list become eligible for receiving dividends on their stocks.
Explanation
The stocks of public companies are available on stock exchanges for regular trading and thus the stocks keep getting transferred from one person to another. As a result of the high volume of transactions, the stockholders keep on changing now and then. Thus, a company needs to decide a cut-off date to determine shareholders as on which date are to be considered for distribution of dividends. This date which acts as a cut-off date for distribution of dividends is known as the date of record of dividends.
In addition to the record date, the ex-dividend date is also important for deciding the stockholders eligible for dividend receipts. Once the record date is finalized, the ex-dividend date is also finalized which is usually set for up to two business days before the record date. In order to be eligible for dividends, an investor needs to buy or own the stocks one day before the ex-dividend date. Anyone who purchases shares on or after the ex-dividend date doesn’t show up in the list of eligible shareholders for dividends as on the record date.
How Does It Work?
The record date is set the company and it is the date on which the record of stockholders is checked for determination of stockholders eligible for dividends. On the other hand, the ex-dividend date is fixed as per the rules set by the stock exchange. It is usually set for a period of up to two days before the record date. If the stocks are transferred by a seller on or after the record date then the seller only remains eligible for dividends and not the buyer. This is because the list of stockholders one day before the ex-dividend date is considered for dividend distribution.
The reason why ex-dividend dates and record dates are different is that settlement of stocks and updating of the records in the books of the companies take some time. Thus, on the record date, a company checks the list of shareholders eligible for dividends based on the ex-dividend date.
Examples of Date of Record of Dividends
Let us understand the concept of the record date with the help of an example.
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Suppose the company has decided that the stockholders appearing in company records on30th June shall be considered for the payment of dividends on 20th July. In this case, 30th June is the record date. Now consider that as per the stock exchange rules, the ex-dividend date is 28th June. Mr. Jackson sells his stocks on 29th June. Will he be eligible for dividends?
As we have discussed, to be eligible for dividends, a person needs to hold stocks before the ex-dividend date. Since Mr. Jackson has sold on 29th June i.e. after the ex-dividend date, he remains eligible for dividends and will show as an eligible stockholder in the records of the company on the record date.
Importance of Date of Record of Dividends
The date of record of dividends is very important for companies to determine the list of stockholders to whom the dividends shall be paid. This is because only those stockholders are paid dividends who appear in the records of the company on the record date. However, the names of those stockholders are taken on record in the list who were stockholders as one day before the ex-dividend day. Any stock transfers on and after the ex-dividend date are ignored for the purposes of record taking. Based on records appearing on date of record the dividend list is finalized and payments are done at the decided future date. The payment advice of the dividend payments is made based on the finalized list as on the record date.
Conclusion
One must not confuse the date of records of dividends with ex-dividend dates. Ex-dividend date falls before the record date and helps to decide which all names which appear in the record of the company as on record date for dividend payments. Further, both these dates are very important for deciding dividend distributions.
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