For stock investors, dividends can be an important part of the investment return. Missing a dividend because of how the dividend dates work can be frustrating, and — more important — it can reduce the amount you make on that stock. The date of record is the day on which you must own the stock to receive the dividend. But the way the markets work let you both own and not own those shares on the date of record.
When a company declares a dividend, the announcement includes the record date, the payment date and the amount of dividend per share. The record date determines who are the “shareholders of record” who own shares on that date and are entitled to receive the dividend. The payment date might be a few days after the record date, or even a couple of weeks later. To receive the dividend you must be a listed shareholder on the record date. You do not need to still own the shares on the payment date.
Stock Settlement Rules
Stock market rules dictate that a stock trade takes three
business days to become official or “settle.” This means that if you place an order to buy shares today, you purchase at today’s share price, and the shares will show in your brokerage account — but you aren’t the official owner of the shares until three business days from today. So to be a share owner on the dividend record date, you must buy the shares at least three days before the record date.
Because an investor must purchase shares three days before the record date to receive a dividend, a stock goes “ex-dividend” two days before the record date. Buy shares on the ex-dividend date, and the trade won’t settle in time to make you a shareholder of record on the record date. This also means that if you own shares before the ex-dividend date, you can sell on the ex date, two days before the record date, and you’ll still be a shareholder of record and receive the dividend.
Even though you can sell on the ex-dividend date or later and receive the dividend, this move costs you the value of the dividend. When the stock market opens on the ex-dividend date, the share price will be lower than the previous day’s value by the amount of the dividend. So selling on the ex date, you earn the dividend, but you receive a share price that’s reduced by the amount of the dividend. The share price will eventually recover to the pre-ex-dividend value, so it usually pays to hang on to your shares rather than sell the moment you’re qualified to receive the dividend.