Dividend investing is a great stock market strategy that many investors employ to generate long-term wealth. The strategy involves choosing and investing in well-established, profitable companies that pay dividends consistently. The logic behind such a move is that the dividends act as a source of steady income for the investors, while also giving them the opportunity to take advantage of future stock price appreciation.
If you’re an investor who is looking to adopt a similar strategy, it is highly essential for you to be aware of everything there is to know about dividends. This includes concepts such as the ex-dividend date and the record date. And since many investors seem to get confused between the two, here’s some much needed explanation including the difference between ex dividend date and date of record.
What is the record date?
A company that’s listed and traded on the stock exchanges would see changes in its ownership almost every single day. This is because its shares are bought and sold during every trading session. And since the ownership of the equity shares of the company changes ever so frequently, it can get quite hard for a company to declare and pay out dividends to its shareholders accurately.
So, to make the job of dividend payouts easier, the company fixes a particular date. All of the on record equity shareholders of the company as on that particular date will be automatically eligible to receive the dividends paid out by the company. Any equity shareholders entering into the books of the company beyond that particular date will not be eligible to receive any dividend payouts.
This date that the company fixes for the purpose of dividend payouts is what is commonly referred to as the record date. The ‘record date’ is also referred to by many investors as the ‘date of record.’
Let’s take up an example to better understand the concept of record date.
A company, ABC Limited has planned to issue dividends to its equity shareholders. To keep the entire process of disbursing dividends fair and easy, the company has notified the record date as November 03, 2020.
All the equity shareholders appearing on the company’s shareholders’ records as on the said record date are eligible to receive the said dividends. And so, after the end of the trading session on November 03, 2020, the company would pull up its shareholders’ register and credit the declared dividends to all of the shareholders appearing on the list as on that day.
What is the ex-dividend date?
On the other hand, the date on or after which the buyer of the stock of a company becomes ineligible for the dividend payout is what is commonly referred to as the ex-dividend date.
Before we move on and explore the concept of the ex-dividend date, here’s a brief look at how the current stock market settlement goes.
The shares of a company that you buy on the stock market get credited to your demat account only after T+2 days. This effectively means that if you buy the shares of a company on a Monday, the shares will get credited to your demat account only on Wednesday. And your name is entered into the shareholders’ register of the said company only after the shares are credited to your demat account, which happens on Wednesday.
Now that you know how the stock market settlement process works, let’s take up an example to better understand the concept of ex dividend date.
Assume that a company, ABC Limited has declared a dividend. The record date fixed by the company falls on November 27, 2020. Now, in order for you to be eligible to have a claim over the dividends declared by the company, your name should be on the shareholders’ register on or before the record date. In such a situation, the last date for buying the company’s shares would effectively fall on November 25, 2020, taking into consideration the stock market settlement process of T+2 days.
In the above case, the ex-dividend date would be November 26, 2020. Any buyer who purchases the stock on or after November 26, 2020 would automatically become ineligible for dividends. This is because it takes T+2 days for the shares to get credited to the demat account of the buyer, which would invariably happen after the record date set by the company.
Difference between ex dividend date and date of record
Now that you know what these two concepts are, let’s try to understand the difference between ex dividend date and date of record.
When it comes to ex dividend date vs record date, the primary difference lies in what these dates stand for. For instance, the record date is the date on which you, as an investor of a company’s shares, are required to be on the shareholders’ register to have a claim on the dividends declared by it. On the contrary, the ex dividend date is essentially a cut-off date on or after which you, as the buyer of the company’s shares, become ineligible for claiming the dividend declared by it.
Another difference in the ex dividend vs record date is that the record date only takes into account the ownership of the shares, whereas the ex dividend date takes into account only the date of purchase of the shares. Also, due to the nature of the stock market settlement being T+2 days, the ex dividend date is always one day ahead of the record date.
Now that you’re well versed with ex dividend date vs record date, you can now go ahead and adopt a dividend investing strategy. That said, here’s a point that you should note. Since the record date set by the company is almost always after the date of declaration of the dividend, the share price will usually witness an increase after the dividend declaration. However, the share price will usually drop back down again on the ex dividend date.