The Date on Which A Cash Dividend Becomes A Binding Legal Obligation

Dividends

It is a common occurrence for corporations to declare dividends. Sometimes, this is because they have some extra cash on hand that they don’t have any immediate use for. Other times, this is because they have reached a point in their life-cycle that they no longer have a lot of convenient growth opportunities, meaning that it makes more sense for them to hand out their earnings rather than reinvest their earnings into their routine operations. Whatever the case, while dividends can be paid out using a wide range of assets, cash is by far the most common choice. For those who are unfamiliar, when a corporation declares a dividend, that results in a debit to retained earnings as well as a corresponding credit to a new liability called dividends payable. This is because dividends are paid out of the corporation’s retained earnings from its routine operations rather than some other part of their equity. Eventually, when the dividends are paid out, that will result in a debit to the dividends payable as well as a corresponding credit to cash and cash equivalents. Dividends that are paid out using other kinds of assets are accounted for in other ways. However, the general course of events is much the same, which makes sense because dividends are dividends.

What Are the Important Dates to Remember for a Cash Dividend?

Moving on, there are a number of important dates that interested individuals should remember for dividends that are paid out in cash.

Announcement Date

Generally speaking, corporations aren’t obligated to pay dividends on their common shares. It is common to see corporations paying regular dividends on preferred shares whether they are doing well or not. However, preferred shares are very different from common shares, so much so that they are sometimes seen as a hybrid of equity and liability. Similarly, there are corporations that have paid out regular dividends on their common shares for decades and decades, but they are not actually obligated to do so. Instead, they are locked in by the expectation that they will continue paying out regular dividends on their common shares, with the result that their shareholders are pretty much guaranteed to panic should they ever fail to do so. Something that can have negative consequences for corporations to say the least.

In any case, that state of affairs changes on the announcement date. Like the name says, the announcement date is when the corporate management declares a dividend, which needs to be approved by the shareholders before being paid out. This is the date on which the dividend becomes a binding legal obligation, thus making it something that interested individuals should definitely keep in mind.

Ex-Dividend Date

The ex-dividend date is very important because it is the date on which dividend eligibility comes to a conclusion. For instance, suppose that a stock comes with an ex-dividend date of August 12. If someone owned the stock on a business day before August 12, they are eligible to receive the dividend that will be paid out on the stock. In contrast, if someone doesn’t buy the stock until either on August 12 or after August 12, they are out of luck when it comes to collecting the dividend. Perhaps unsurprisingly, this means the ex-dividend date can produce some notable changes in the stock’s share price because the value of the upcoming dividend is one of the factors that determine said figure.

Record Date

Speaking of which, the record date is the cut-off date for determining which shareholders can and can’t get the dividend, which is important because it is very common for shares to exchange hands from shareholder to shareholder. As such, the record date has a very close relationship with the ex-dividend date, so much so that it is set one business day after the ex-dividend date. In more practical terms for would-be shareholders, this means that they need to own the stock one business day before the ex-dividend date and two business days before the record date if they want to collect.

Payment Date

As for the payment date, this is exactly what it sounds like, which is to say, the date on which shareholders actually get the cash for the dividend sent to their accounts. Something that a lot of people anticipate to say the least.

How Do People Use This Information to Invest in Dividend Stocks?

These dates are very important for people who want to invest in dividend-paying stocks for excellent reason. However, they are even more important for some dividend investors than others. For instance, a lot of dividend investors practice a buy and hold investment strategy. Basically, this means that they search for reliable and reputable stocks that pay out dividends on a regular basis. After which, they buy shares in these stocks so that they can earn some income while still benefiting from the stocks’ growth potential. On the whole, this isn’t the highest-risk, highest-reward investment strategy. However, it can be very well-suited for those who are looking for stability in more than one sense of the word.

However, there are also people who practice what is called the dividend capture, which is a much more active kind of investment strategy. Here, interested individuals are buying and holding dividend-paying stocks for very short periods of time, so much so that it isn’t uncommon to see them holding on to these stocks for just a single day’s time. Basically, the idea is that they hold the dividend-paying stock for just long enough to collect the dividend before selling it to eliminate their exposure to it. Theoretically, dividend capture shouldn’t work. In practice, well, suffice to say that the market isn’t quite as perfect as what theory says it should be, meaning that there is a fair number of people out there who earn a decent return by practicing it.

Naturally, this means that interested individuals can’t make any mistakes about the ex-dividend date of dividend-paying stocks. Otherwise, that could mean that they will be eating a loss in the process. Generally speaking, that shouldn’t be a huge problem because dividend capture is very much focused on volume for higher returns, meaning that each individual transaction becomes less important in the grand scheme of things. However, such mistakes have a very unfortunate tendency of adding up very fast, meaning that they are definitely to be avoided as much as possible.

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