EXPLANATION

Declaration Date is the date on which a company announces that the company will be paying a dividend. This information is shared with the shareholders through notices to the public and the market participants and stock exchanges, by way of advertisements in newspapers.

The last Cum-dividend date is the last date on which the shares can be bought in the stock market and be eligible to receive a dividend. This date is fixed by the exchange.

To decide those shareholders who are entitled to receive the dividend, the record date is fixed. The company checks its records to identify the shareholders who held the shares on this record date. Only those who are listed as holders of shares on this date in the records of the company have are eligible to receive the dividend from the company.

Those who would like to acquire stocks of a company to receive dividends must know the last cum-dividend date and ex-date. The ex-date normally precedes the record date by a couple of days. The shares of the company will be traded without the dividend on or after the date. In other words, even if one were to buy the shares just a day before the ex-dividend date, one would be eligible for the dividend. But, if one were to buy on the ex-dividend date, he or she will not be eligible.

What happens when you buy on ex-date?

Every time a company announces a record date or book closure date, a ‘No Delivery’ period for the security is set up by the exchange.

Although trading of the security is permitted during this period, these trades are settled only after the completion of the no-delivery period. So even if one may have bought the shares before the record date, the person will not be a shareholder as per the records, because the shares are yet to be delivered to the account. Therefore, those buying shares on or after the ex-date do not become eligible. But, those who sell shares on the ex-date will be eligible for dividends.

The date of payment is the date on which the company will send the dividend to the eligible shareholders.

EFFECTS ON STOCK PRICES

The price of a share starts moving up from the date of the announcement, until the record date, because investors start to purchase the shares to be eligible for dividends. But the prices fall on ex-date.

Let us assume that a share is trading at Rs.2000/- per share and this company decides to declare a dividend of 50% with a record date of Monday, August 20.

The face value of the stock is Rs.10/- which would mean that the dividend will work out to Rs.5/- per share. Investors who buy this share will be entitled to the dividend. This explains the increase in the price of the share when it is cum-dividend, or trading with dividend before ex-date).

The stock market however sees the pay-out of dividends as giving up a part of the company’s profits, which reduces its cash reserves.

Further, as buyers are not entitled to dividends on or after the ex-date, we see a drop in share by an amount equal to the dividend per share. That is why the company’s share price fall by Rs.5/- when the stock is ex-dividend or without dividend.

DIVIDEND INVESTING.

A falling market does not allow capital appreciation. But this also means that investors can benefit during this period. One can look for companies that are promising and reward investors through dividends. This is where choosing a company, with a good growth record, and having a history of paying dividends, becomes important.

The start of the new financial year will bring in the annual dividend payment season. From the middle of April, companies will start to announce the annual dividends to their shareholders. So March -April is the time to keep a watch for some of the dividend-paying stocks. Dividends are tax-free and a dividend yield of 6.5% is equal to 10% interest earned in one year, which is taxable.

Dividends also turn out to be more stable than the profitability of the company. Many companies increase the dividend payout ratios during a period of low profitability, as against reducing the dividends to match the decline in profitability.

We can see that quite some companies had consistently maintained a record of paying a dividend over the previous 10 or 15 years regardless of the performance in their business. We have to appreciate the fact that the promoters of these companies also depend on dividends as a source of income. We can assume that companies that have not missed a single dividend pay-out in the previous10 years, will have healthy cash-flows, a debt-to-equity ratio that is comfortable and has performed fairly well in the first 9 months, is potentially a good dividend-paying company.

One must note that paying a dividend is purely the discretion of company management and investors must not treat it as a right.