Date of Record for Dividends (Meaning, Example)

What is Date of Record of Dividends?

The date of record of dividends is the cut-off date decided by the top management before which the investor’s name should be present in the books of the company to get the dividend payment of particular security.

In simple words, it is the date announced by the board of directors of any firm on or before which a stockholder or a shareholder must own the shares of the firm for being eligible to receive a dividend. The shares which are sold after this date are known as ex-dividend shares.

It should be determined stringently since it is essential to ascertain who the company’s shareholders are as of that date because shareholders of actively traded stock are changing continuously. The shareholders who are in the record as of the record date are entitled to receive dividends or distributions which are declared by the company.

How Does it Work?

Suppose a company decides to give its shareholders the dividends for which it has to go through various steps.

The first and foremost step is to formally declare to issue a dividend. This decision is taken by the Board of Directors.
In the second step, the number of existing shareholders needs to be counted and then kept in records. The record date comes with this second step in the dividend payment process.
The third and the final step is when the dividend is actually paid and the checks are written and issued. The number of shareholders is to be kept in the record as of the date of records date because for a small firm it may be possible for the board of directors to know the number of shareholders but in case of public firms, the number of shareholders can be large.

It is very much important because of its relationship with another important factor- the ex-dividend date. It must be kept in mind that on and after the ex-dividend date, the stockholder or shareholder will not receive any dividend as the seller is entitled to it.

The ex-dividend date is the date which is set exactly two business days before the record date. This system exists because of the T+3 system of settlement presently in use in North America as per which stock trades settle three business days after the transaction is carried out.

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So if an investor decides to buy a stock two business days before its record date then his trade would only get settled the day after the record date. Then the investor will not be a shareholder of record for receiving dividend or distribution.

Example of Date of Record Dividend

Example #1

Suppose a company XYZ Ltd has made a declaration of dividend on November 1^st and identified November 16^th as the Record Date. The dividend declaration is made by the company’s board of directors in writing. This declaration implies that all the stockholders or shareholders on November 6^th will receive a record date of a dividend. It is irrelevant that who owns stock on November 1^st because November 16^th is the date that the company XYZ Ltd. will account all of its shareholders.

Example #2

Let us take an example of company ABC Ltd. which has made a formal declaration of $2 dividend per ABC share payable on August 1, 2017, to the shareholders of record as of August 20^th, 2017. The date of record is August 20^th, 2017 and the ex-dividend date is to be set to two business days which is 18^th August 2017.

So if a shareholder wants to receive the dividend of $2 per ABC share, then he must buy the stock before its ex-dividend date.

So if an investor hears that a company has declared dividends then he must buy the stock on or before the ex-dividend date. No journal entry is made on the record date since no transaction has actually happened on that date. The company only keeps a list or record of its shareholders on this date.

Conclusion

Record Date is usually set to ascertain the holders of a particular stock to understand who is entitled to receive the distribution and who are not. When a company makes preparation to distribute the dividend among the shareholders, this record of shareholders is used to understand who own the stocks. The record date varies from among the types of securities. When any trade is executed then the investor becomes the owner of the record on the settlement.