Dividends

Not all shareholders are looking for dividends. An investment in Berkshire Hathaway today, for example, would be made without the issuer stating any plans to pay dividends, ever. The only type of investor interested in this stock, then, is a growth investor.

But, there are growth & income investors and equity-income investors for whom dividends are important.

Dividends are a share of profits paid out to shareholders if the Board of Directors for the corporation votes to declare them. The day the Board declares the dividend is known as the declaration date. The board decides when they'll pay the dividend, too, and we call that the payable date. The board also sets the deadline for being an owner of stock if you want this dividend, and we call that the record date because an investor must be the owner of record as of that date to receive the dividend.
 
Now, since an investor must be the owner of record as of the record date to receive the dividend, there will come a day when it's too late for investors to buy the stock and get the dividend.

Why? Because stock transactions don't "settle" until the second business day following the trade date, which means you might put in your purchase order to buy 1,000 shares of ABC on a Monday, but you aren't the official owner until that transaction settles on Wednesday. Your broker-dealer must send payment to their clearing agency, and the seller must deliver the 1,000 shares before the transaction has settled. This process takes two business days for common stock and is known as regular way settlement, or "T + 2," where the "T" stands for Trade Date. Assuming there are no holidays, a trade taking place on Monday settles on Wednesday, while a trade on Thursday settles on Monday.
So, if an investor must be the owner of record on the record date, and it takes two business days for the buyer to become the new owner, wouldn't she have to buy the stock at least two business days prior to the record date? Yes.

On the other hand, if she buys it just one business day before the record date, her trade won't settle in time. We call that day the ex-date or ex-dividend date.

Starting on that day investors who buy the stock will not receive the dividend. On the ex-date, it's too late. Why? Because the trades won't settle in time, and the purchasers won't be the owners of record with the transfer agent as of the record date. If the trade takes place on or after the ex-date, the seller is entitled to the dividend. If the trade takes place before the ex-date, the buyer is entitled to the dividend.

The regulators set the ex-date, as a function of regular way or T + 2 settlement. The ex-date is one business day before the record date.

Investors don't qualify for the dividend starting with the ex-dividend date; therefore, the amount of the dividend is taken out of the stock price when trading opens. If the dividend to be paid is 70 cents, and the stock is set to open at $20, it would open at $19.30 on the ex-date.

Let's look at how the process looks from a press release: Equity Office declares first quarter common dividend
Mar 16, 2005-- Equity Office Properties Trust (EOP), a publicly held office building owner and manager, has announced that its Board of Trustees has declared a first quarter cash dividend in the amount of $.50 per common share. The dividend will be paid on Friday 15 April 2005, to common shareholders of record at the close of business on Thursday 31 March 2005.
March 16th is the Declaration Date. The Payable Date is April 15th. The Record Date is Thursday, March 31st. The article doesn't mention the Ex-Date (because that's established by the exchange regulators), but we can figure it must be Wednesday, March 30th. If you bought the stock on Wednesday, your trade wouldn't settle until Friday, April 1st, which means the seller's name would be on the list of share¬holders at the close of business on Thursday, March 31st.
A dividend can be paid in the following ways:
•    Cash
•    Stock
•    Shares of a subsidiary
•    Product