The Dividend Payment Time Line

Dividends in publicly traded firms are usually set by the board of directors and paid out to stockholders a few weeks later. There are several key dates between the time the board declares the dividend until the dividend is actually paid.

• The first date of note is the dividend declaration date, the date on which the board of directors declares the dollar dividend that will be paid for that quarter (or period). This date is important because by announcing its intent to increase, decrease, or maintain dividend, the firm conveys information to financial markets. Thus, if the firm changes its dividends, this is the date on which the market reaction to the change is most likely to occur.

• The next date of note is the ex-dividend date, at which time investors have to have bought the stock in order to receive the dividend. Since the dividend is not received by investors buying stock after the ex-dividend date, the stock price will generally fall on that day to reflect that loss.

• At the close of the business a few days after the ex-dividend date, the company closes its stock transfer books and makes up a list of the shareholders to date on the holder-of-record date. These shareholders will receive the dividends. There should be generally be no price effect on this date.

• The final step involves mailing out the dividend checks on the dividend payment date. In most cases, the payment date is two to three weeks after the holder-of-record date. While stockholders may view this as an important day, there should be no price impact on this day either. Figure 10.1 presents these key dates on a time line.

Figure 10.1: The Dividend Time Line

Announcement Date Ex-Dividend day Holder-of-record day Payment day

2 to 3 weeks 2-3 days 2-3 weeks

Board of Directors announces quarterly dividend per share

Stock has to be bought by this date for investor to receive dividends

Company closes books and records owners of stock

Dividend is paid to stockholders

Types of Dividends

There are several ways to classify dividends. First, dividends can be paid in cash or as additional stock. Stock dividends increase the number of shares outstanding and generally reduce the price per share. Second, the dividend can be a regular dividend, which is paid at regular intervals (quarterly, semi-annually, or annually), or a special dividend, which is paid in addition to the regular dividend. Most U.S. firms pay regular dividends every quarter; special dividends are paid at irregular intervals. Finally, firms sometimes pay dividends that are in excess of the retained earnings they show on their books. These are called liquidating dividends and are viewed by the Internal Revenue Service as return on capital rather than ordinary income. Consequently, they can have different tax consequences for investors.

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