In investing, the record date is the deadline set by a company to decide which shareholders qualify to receive upcoming dividend distributions.
Discover the significance of understanding a company's record date and why you might encounter surprises when anticipating dividend payments.
A company's board of directors selects a record date, which is the date you need to be listed as a shareholder in the company's records to receive a dividend. This date is also used to determine who gets investor-related information. When following a dividend investing strategy, investors look for stocks that provide a consistent income, and being aware of the record date is crucial to ensure they receive the dividend payment. If a stock is bought too close to the record date, the dividend might go to the seller instead of the buyer.
In addition to the record date, investors need to pay attention to the ex-dividend date, which determines eligibility for a dividend payout. The ex-dividend date is the first trading day when a stock buyer won't receive the current dividend, usually one business day before the record date. As an example, in October 2021, the Bank of America board of directors declared a dividend of 21 cents per share for Q4, payable on Dec. 31. The record date was set as Dec. 3, and the ex-dividend date was Dec. 2.
The reason investors need to buy stock two days before the record date to be eligible for a dividend is because of the settlement process. In the U.S., most stock trades take two business days to settle, known as "T+2" or trade date plus two. This means that if you want to qualify for a dividend, you need to complete the stock purchase a couple of days before the record date to ensure everything is settled in time.
The record date and ex-dividend date are crucial in dividend investing. When a company's board announces a dividend, it establishes a record date to identify eligible shareholders. This date is also used for distributing investor information.
In a dividend-focused strategy, investors target stocks for steady income. Being aware of the record date ensures receipt of dividend payments. If a stock is bought too close to this date, the dividend may go to the seller instead of the buyer.
Additionally, investors must note the ex-dividend date, the first day a buyer won't receive the current dividend. Usually, it's one business day before the record date.
For instance, if Bank of America declared a dividend for Q4 2021, with a record date of Dec. 3 and an ex-dividend date of Dec. 2, investors buying after Dec. 2 wouldn't get the upcoming dividend. The company typically pays dividends monthly, quarterly, or annually, often in cash or additional stock. Some investors reinvest cash dividends automatically.
If a dividend is 25% or more of a stock's value, special rules come into play. In such instances, the ex-dividend date is set one business day after the payable date.
Dividend-paying stocks are essential for many investors seeking income. It's crucial to note that dividends received in a taxable account are considered income and must be reported on a tax statement, even if they are reinvested in more shares of stock.
Additionally, it's worth mentioning that when dividends are paid out, the stock share price can sometimes decrease. Therefore, investors might make a more informed decision by waiting until after a dividend is paid before buying shares.
If a company reduces its dividend payment from one period to another or declares a pause in paying dividends, it could indicate a business weakness and might lead to a decline in the stock price.
Investors holding stocks that pay dividends may want to consider the record date for an upcoming dividend when deciding whether to sell or buy more shares.
