Learn why it’s important to know a company’s record date, and why you might be surprised when expecting a dividend distribution.
Definition and Example of Record Date
A company’s board of directors sets a record date when you must be on the company’s records as a shareholder to receive the dividend. Companies also use this date to determine who should receive investor information such as proxy statements and financial statements. With a dividend investing strategy, investors seek out stocks that will provide a steady stream of income. It’s important to be aware of the record date to be assured of receiving a dividend payment. If a stock purchase falls too close to the date of record, a dividend may be paid to the seller of the stock rather than the purchaser. In addition to the record date, an investor must pay attention to the ex-dividend date to determine if they will receive a dividend payout. The ex-dividend date is the first day of trading that an investor buying the stock is ineligible to receive the current dividend. It usually falls one business day before the record date. For example, in October 2021, the Bank of America board of directors declared a dividend of 21 cents per share to shareholders in the fourth quarter of the year, payable on Dec. 31. The board set the date of record as Dec. 3 and the ex-dividend date as Dec. 2.
Alternate name: Date of record
How Record Date Works
The record date and ex-dividend date are closely tied. When a company’s board of directors declares it will issue a dividend, it sets a date of record on which it will determine who the shareholders of record are. The company also sets the ex-dividend date at this time, as well as the date when the dividend will be paid. Shareholders of record are declared on the record date. The company then pays the dividend, typically through the brokerage in which an account is held or via mailed checks. An investor who purchases shares of stock on its ex-dividend date or after will not receive the next dividend payment. Instead, the seller receives the dividend. Most companies pay dividends on a monthly, quarterly, or annual basis. Although dividends are usually paid in cash, a company may pay a dividend in the form of additional shares of stock. Some investors set up their brokerage accounts so that cash dividends are automatically reinvested in additional shares of that company’s stock.
What It Means for Investors
Dividend-paying stocks are key sources of income for many investors. As such, there are important facts to keep in mind. Dividends that are received in a taxable account are counted as income and must be reported on a tax statement, even if they are reinvested in additional shares of stock. Dividend payouts can cause a stock share price to drop, which is why investors may be smarter to wait until a dividend is paid before purchasing shares. Holders of dividend-paying stocks may wish to factor the record date for an upcoming dividend payment into any decision on whether to sell shares or buy additional shares.
