Dividend investing is a great strategy to build long-term wealth. This strategy involves investing in profitable, well-established companies that pay regular dividends. This strategy is based on the idea that dividends can provide steady income to investors while also giving them the chance to profit from future stock price appreciation.
Investors who are looking for a similar strategy should be well-informed about dividends. This includes concepts like the ex-dividend and record dates. Many investors are confused about the differences between the ex-dividend date and the record date. Here's some help.
An exchange-traded company would experience changes in its ownership nearly every day. Because its shares are traded during each trading session, this is why it would see changes in ownership almost every day. It can be difficult for companies to accurately declare and pay dividends to shareholders because the ownership of equity shares changes frequently.
The company has set a date to pay dividends. This is done in order to make it easier. All equity shareholders on record as of that date will automatically be eligible for the company's dividends. Any equity shareholders who have entered the company's books after that date will be ineligible for any dividend payouts.
The record date is the date that the company sets for dividend payouts. Investors refer to the record date as the "date on record"
Let's look at an example to understand the concept record date.
ABC Limited, a company, planned to pay dividends to its equity shareholders. The company has set the record date for disbursement of dividends at November 03, 2020 to ensure that the process is fair and simple.
All equity shareholders who were listed on the company's shareholder's records on the record date are eligible for the dividends. After the close of trading on November 3, 2020, the company will pull up its shareholders' records and credit all declared dividends to shareholders that were present on that date.
The date that a buyer of stock of a company is no longer eligible for the dividend payment is called the ex-dividend day.
Before we get into the topic of the ex-dividend day, let's take a look at the current stock market settlement.
After T+2 days, the shares of companies that you purchase on the stock exchange are credited to your demat accounts. This means that shares bought on the stock market on Monday will be credited to your demat account on Wednesday. Your name will be added to the shareholders' list of the company once the shares have been credited to your account. This happens on Wednesday.
Let's now look at an example to show you how the stock market settlement works.
Let's say that ABC Limited has declared dividends. The record date set by the company is November 27, 2020. To be eligible for a claim on dividends, you must be listed on the shareholders' registry on or before the record date. This would mean that the November 25, 2020 date for purchasing shares of the company is the effective date.
In the above example, the ex-dividend day would be November 26, 2020. Any buyer who buys the stock after November 26, 2020 will automatically be ineligible to receive dividends. It takes T+2 days to credit the shares to the buyer's demat account. This would always occur after the company has set a record date.
These concepts have been explained. Let's now look at the differences between ex dividend date & date of record.
The primary difference between ex dividend date and record date is in the meaning of these dates. The record date, for example, is the date that you as an investor in a company's shares must be added to the shareholders' list to claim the dividends it has declared. The ex dividend date, on the other hand, is the date after which the dividend will be withdrawn by the company.
The ex dividend date differs from the record date in that it only considers the ownership of shares while the ex dividend date only considers the date of purchase. Due to the T+2 day nature of stock market settlement, the ex dividend date always precedes the record date.
You now have a good understanding of ex dividend date and record date. It is time to start investing in dividends. Here's one thing to keep in mind. The record date set by the company almost always occurs after the declaration of the dividend. This means that the share price will often witness an increase following the declaration. The share price will typically drop again after the dividend declaration.