When customers are purchasing securities of a company that's in the process of declaring or paying a dividend, you need to be able to tell those customers whether they're entitled to receive the dividend. Because stock transactions settle in three business days, the customers are entitled to the dividend if they purchase the securities at least three days prior to the record date. Here's a list of the four need-to-know dates for the Series 7 exam:
Declaration date: The day that the corporation officially announces that a dividend will be paid to shareholders.
Ex-dividend date: The first day that the stock trades without dividends. An investor purchasing the stock on the ex-dividend date isn't entitled to receive the dividend; because stock transactions take three business days to settle, the ex-dividend date is automatically two business days before the record date.
The ex-dividend date is the day that the price of the stock is reduced by the dividend amount. When a stock is purchased ex-dividend (on or after the ex-dividend date), the seller is entitled to the dividend, not the buyer. Because the dividend may not be paid for up to a month, the buyer is required to sign a due bill indicating that the dividend belongs to the seller.
In the case of a cash dividend, the due bill is in the form of a due bill check, which is payable on the date the dividend is paid by the issuer. In addition, if an investor buys a stock on time to receive a dividend but for some reason will not receive the certificates on time (by the record date), the seller must send a due bill to the buyer. A due bill states that the buyer is entitled to the rights of ownership even though he's not yet receiving the certificates.
Record date: The day the corporation inspects its records to see who gets the dividend. To receive the dividend, the investor must be listed as a stockholder in company records.
Payment (payable) date: The day that the corporation pays the dividend.
As you can see from the diagram, the buyer receives the dividend if he purchases the stock before the ex-dividend date. If the stock is purchased on or after the ex-dividend date, the seller receives the dividend.
To help you remember the sequence of dates, use the phrase Don't Eat Rubber Pickles. I know it sounds ridiculous, but the more ridiculous, the easier it is to remember.
The board of directors must announce three dates: the declaration date, the record date, and the payment date. The ex-dividend date doesn't need to be announced because it's automatically two business days before the record date. However, mutual funds have to announce all four dates because they may set their ex-dividend date at any time (even on the record date).
The following question tests your ability to answer a dividend question.
Wedgie Corp. has just announced a $0.50 cash dividend. If the record date is Wednesday, March 10, when is the last day an investor can purchase the stock and receive the dividend?
(A) March 4
(B) March 5
(C) March 7
(D) March 8
The answer you're looking for is Choice (B). In order for an investor to purchase the stock and receive a previously declared dividend, he must purchase the stock at least one business day before the ex-dividend date. This question is a little more difficult because you have a weekend to take into consideration.
The ex-dividend date is March 8, which is two business days prior to the record date. This investor has to buy the stock before the ex-dividend date in order to receive the dividend, so he has to buy it March 5 or before (because the 6th and 7th are Saturday and Sunday). The last day an investor can purchase the stock and receive the dividend is March 5.
If a stock is sold short (if the investor is selling a borrowed security), the lender of the stock sold short is entitled to receive the dividend. Also, the trades in the example problems are regular way settlement (three business days after the trade date); remember that cash transactions settle on the same day as the trade date. In the case of dividends, if an investor purchases stock for cash, he receives the dividend if he purchases the stock anytime up to and including the record date.