A lot more confusion has surrounded this subject than what it deserves. I have witnessed all sorts of discussion forums on who will get the dividend, when will they get the dividend and at times, a discussion on why the investor did not receive the dividend on their shares. Let’s end all confusion around this.
“Dividends are paid to the holders of shares as of the Record Date”
This statement is true, but buying a share on the Record Date will not entitle you to the dividend. Let me explain and also address these related concepts:
1) What happens when the company declares a dividend?
2) Record date vs. Ex-dividend date.
3) When is the dividend paid?
What happens when the company declares a dividend?
As and when the board of directors feel that they should distribute a part of the profits to the shareholders they can declare a dividend. Typically (and not mandatorily) this is done by the board of directors at the time of approving the quarterly or annual financial statements. After the board of directors declare a dividend, two things have to happen:
First, the management must specify the ‘Record Date’ which is the date on which the company ascertains the shareholders who are entitled to receive the dividend. Your name must appear as a shareholder in the records of the company (i.e. shareholder register) on this date for you to be entitled to receive the dividend.
Second, the company must actually pay the dividend amount (for de-materialised shares payment of dividend amount is done by ECS directly into your bank account, unless you have not provided your bank account details to the depository. In case you are holding physical share certificates you should make sure that you have received your dividend cheque from the company).
Record Date vs. Ex- dividend date
This is where a majority of the confusion stems from. Remember that share purchases in India are settled on a T+2 business day basis where T is the transaction date i.e. the date on which the share purchase transaction occurs. This means that ownership of a share purchased on 10 June 2013 will transfer from the seller to the buyer only on the 13th of June. So if a Company declares 13th of June to be the Record date, you will be entitled to receive the dividend only if you purchased the share before the 11th of June (i.e. on 10th of June or before) and hold on to it at least until the end of day on the 10th of June. The idea is to have your name on the register of shareholders on the 13th of June which is the Record date. For that to happen, you must buy the share before the 11th of June, which will be the Ex-dividend date.
(Click to enlarge)
On 11th of June the share will become Ex-dividend. Shares bought on and after the Ex-dividend date are not entitled to receive the dividend which is the reason why share prices usually adjust downward on the Ex-dividend date.
Why these dates differ and 2 points to keep in mind:
► In case the stock market is closed on any of the days between the Ex-dividend and the Record date (owing to it being a Saturday or Sunday or any other exchange holiday) then the Ex-dividend date will be those many days before the Record Date.
► While the Ex-dividend date is usually two business days before the Record Date, the actual Ex-dividend date may vary. This is because, the company sets the Record Date but the Ex-dividend date is set by the Stock Exchange and not by the company. The Stock Exchange sets this date based on its settlement cycle and working days. You can check the Ex-dividend dates for Indian Stocks on the websites of BSE & NSE.
When is the dividend paid?
The board of directors can declare either an interim dividend or a final dividend. Legally, a company must pay the dividend within 30 days from the date of ‘Declaration’ of dividend. When is the dividend considered as declared? When does it get paid? This is where the balance of the confusion stems from.
Interim vs. Final Dividend
An interim dividend is declared and paid by the Board of Directors prior to the approval of the shareholders. A final dividend on the other hand must first be approved by the shareholders in the Annual General Meeting before it is paid. Accordingly the date of actual payment for the dividend amount could differ in both cases. It is correct that the company must make the dividend payment within a period of 30 days from the date of declaration. However, in case of final dividend, this 30 day period will start from the date on which the shareholders approve the dividend in the Annual General Meeting, while in case of interim dividend this period will start ticking from the very date on which the board of directors declare the dividend.
The charts below will clarify the above concepts
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Let’s collect every dividend ever paid – Really?
So holding a share on the record date (i.e. buying before the Ex-dividend date) will entitle you to the dividend. How about if you bought the share just a day before the Ex-dividend date and sold it the next day, will you then get the dividend? Of course you will, but at what cost?
Typically the price of a share adjusts downward after the dividend payment to reflect the amount of dividend. It may adjust exactly by the dividend amount or a little more or less (based on normal market factors) but either ways, there are no guarantees that you will capture the dividend amount and be able to sell the share at the price at which you bought it a day before.
For example: If we look at the previous example of Century Enka Limited – on 26 June 2013, the share closed for trade at a Rs. 107.25. On 27 June 2013 (i.e. next day which was also the Ex-dividend date) it opened for trade at Rs. 102. This downward correction of Rs. 5.25 eroded the benefit of Rs. 6 per share dividend. Remember, the share could have opened at Rs. 100 or Rs. 104 or Rs. 108 but any such deviation in price from the previous closing price factors in the dividend payment and the revision is purely based on regular events and market factors.
Many investors try to buy the share 15-20 days or even a month before the Ex-dividend date and expect to make a profit by selling about a month later (hoping they can still make a 6% return in a month). Practically, this is no different from buying the share a day before the Ex-dividend date and selling it the next day, because no matter how long you hold the share, on the ex-dividend date it will correct for the dividend. Historical price performance of top dividend yielding companies has shown that to the extent you make any profit or loss by trying to capture the dividend, it is based purely on market factors.
In fact, we conducted an experiment on 4 of the safest big dividend yielding companies by hypothetically purchasing their shares at the beginning of the month of the Ex-dividend date and sold them at the end of the month. We did this for 5 years from 2008 – 2012 (both years included) and kept the amount at Rs. 10 lacs at the beginning of each year. The results are a clear lesson on what not to do with stocks.