Dividends and relevant dates

Hi there,

We covered dividends in our last article Dividends vs bonus. The purpose of this article is to make you aware of the process of dividend payment and its effect on stock prices.
There are five major dates in the process of a company paying dividends. These are:
1. Dividend declaration date,
2. Last Cum-dividend date
3. Ex-date,
4. Date of record or record date and
5. Date of Dividend payment.

EXPLANATION

The first one, declaration date is the day on which the company announces to shareholders and to the market that the company will pay a dividend. The company communicates this decision to shareholders through notices to the stock exchanges and to the public and market participants through newspaper advertisements.

Stock are bought and sold on daily basis. So who is eligible to get dividends?

That question brings us to the second ,third and fourth dates.

The date up-to which the shares can be bought in the stock market and be eligible to receive dividend is called the Last cum-dividend date. This date is fixed by the exchange.

To determine which shareholders will be entitled to dividend payment a record date is set. The record date is the day on which the company looks at its records to see who its shareholders are. A person must be listed as a holder of shares in its records to have the right to receive a dividend from the company.

If you do not own shares of, say, Infosys, but would like to buy the stock and be entitled to the dividend amount, you need to know when the last cum-dividend date and ex-date is. The ex-date usually precedes the record date by about two days. On or after this date, the shares of Infosys will trade without its dividend.

That means, if you buy Infosys even one day before the ex-dividend date, you will still get the dividend. But if you buy on the ex-dividend date, you won’t get the dividend.
For example check the dividend declared link of moneycontrol.com at http://www.moneycontrol.com/stocks/marketinfo/dividends_declared/index.php .You can see the record date and ex-dividend date of various companies that have declared dividends. That’s also a huge archive to study the dividend history of companies.

What happens if you actually buy on the ex-date?

Whenever a company announces a book closure or a record date, the exchange sets up a ‘No Delivery’ period for that security.During this period, trading is permitted in the security, but these trades are settled only after the no-delivery period is over.Therefore, although you may have bought shares before the record date, you will not be a shareholder on the records, as the shares would have still not been delivered to your account.Therefore, the buyer of the shares on or after the ex-date will not be eligible for the benefits. However, if you sell shares on the ex-date, you will still be eligible for dividends.The last one, the date of payment is the date the company sends out the dividend to the entitled shareholders.

CALCULATING DIVIDENDS.

Always remember that dividends are paid on the ‘face value’ of the share and NOT on the market price of the shares. That’s one common mistake people make.

What’s the difference between face value and market price of a share?

This topic was also discussed in the last article.Face Value of a share is the value which is decided by the company issuing it, at the time of initial offering. Face value has nothing to do with market value of a share. Market value of shares changes depending on several conditions. Face value changes only when splitting takes place.

EFFECTS OF DIVIDENDS ON STOCK PRICES

From the dividend announcement date till the record date, the share prices keep moving up since investors buy into such shares to get dividends. But, Share prices fall on the ex-date. Why? Let’s discuss with an example.

  • Let’s assume that Infosys is currently trading in the market for Rs 2500 per share. And let’s further assume that the company decides to declare a dividend of 60 per cent with a record date of Monday, September 17.
  • The face value of the stock of Infosys is Rs 5. This means the dividend works out to Rs 3 per share. Investors buy into the share to be entitled to the dividend. This could explain the spike in share price when a stock is cum-dividend (trading with dividend before the ex-date).
  • However, the stock market sees the actual payout of dividends as the company giving up a part of its profits, thereby reducing its cash reserves.
  • Also, since buyers on or after the ex-date are not entitled to the dividend, share prices drop by the amount equivalent to the dividend per share as a way of compensation.This is why Infosys’s s hare price will probably fall by Rs 3 when the stock goes ex-dividend (without dividend).

DIVIDEND INVESTING.

Falling markets give little room for capital appreciation. However, this doesn’t imply that investors cannot benefit during such a period. They can look at investing in companies that hold promise of rewarding them through dividends. In such a case, choosing the right company, with a good track record of growth, sound financials and history of dividend payment, becomes critical.

The beginning of the new fiscal will usher in the annual dividend season. Beginning from the middle of April, companies will start announcing the annual dividends to the shareholders. So the period of March -April is the right time to look for some dividend stocks. It makes sense to focus on dividends which are also incidentally tax-free in the hands of the investor. In fact, a dividend yield of 6.5% is equivalent to 10% interest earned over a period of one year, which is a taxable income.

Dividends are also more stable than corporate profitability. Most companies raise their dividend payout ratios during times of low profitability instead of cutting the dividends in tune with a decline in profitability.

if we look back in history, a number of companies had a consistent dividend-paying record over the past 10-15 years regardless of the ups and downs in the business cycle. We also need to appreciate the fact that even the promoters of these companies depend on dividends as a source of their income.A company that has never missed a dividend pay-out in the past 10 years, have healthy operating cash-flows, comfortable debt-to-equity ratio and haven’t performed too badly in the first 9 months of the year is a good candidate for dividend investing.

However, readers should note that the payment of dividend is at discretion of the company management and shareholders should not treat it as their right.

Hope you are clear about dividends dates and it’s relevance. The two ratios that deal with dividends are dividend pay out ratio and dividend yield ratios. All these have already been explained in previous lessons.

Have a nice day !

You may like these posts:

  1. Dividends vs Bonus
  2. Bonus shares – A positive sign.
  3. Understanding Dividend pay out & retention

13 Responses to “Dividends and relevant dates”

rupali

March 11, 2011 at 6:25 pm

great work sir i was trying hard to learn about share market and all terms used in it but it was no where unless i found your site iam and many others will be greatful to you to make us understand in simple words thank you very much sir

share market

April 29, 2011 at 2:50 pm

Thank you for sharing. Your article was very poignant
and understandable. It helped me to understand very clearly. Thank you for your help.

Fantine

September 20, 2011 at 12:10 pm

What a neat article

Stock Tips

November 2, 2011 at 3:51 pm

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No name

February 22, 2012 at 5:26 pm

Thanks for the article. easily understable to newbies as well.

John

March 28, 2012 at 12:56 pm

Excellent web site. Plenty of helpful information here. I’m sending it to a few friends. And obviously, thanks to your effort!

Krishna Kishore Appala

April 20, 2012 at 12:34 pm

Hi

I bought 25 infosys shares yesterday , and there is is stated that EX-DIVIDEND on 24-May-2012(Final 640.00%).

According to this , am i eligible to get the dividend announced ?

Thanks

Faisal

January 15, 2013 at 8:43 am

Really Excellent Effort.

rishu raj

June 30, 2013 at 12:10 pm

good

Dilip

February 10, 2014 at 3:47 pm

Excellent explanation . I had many doubts and all got cleared with your article. Thanks a lot for making the concept so simple to understand !

abi

June 7, 2014 at 7:46 pm

thanks toooooo

abi

June 7, 2014 at 8:49 pm

thanks toooooo great help.

kushal

June 7, 2015 at 10:20 pm

Finally my query is solved

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