Dividends are highly desired income in the stock market. There is a large section of investors who understand the significance of dividends. They construct their portfolio to have stocks that provide good dividends and high prospects of strong earnings growth. But not many are skilful in achieving this feat. Many retail investors buy shares of a company immediately after the dividend date is announced. However, when they do not see money credited to their bank account, they wonder why is it so? People fail to understand that dividends do not get credited just because a company has announced it. There is a defined process for paying dividends. Before we get into the details, let’s look at some of the basic concepts:
What is the dividend?
Dividend is a cash payout to shareholders of a company. It is a way profits are shared with shareholders. Dividend is expressed as a percentage of face value and not the market price of the share. For example, when a company announces 20% dividend, it plans to pay ₹2 per share which is calculated on face value of a stock which in this case stands at ₹10. So, if an investor holds 100 shares, then he/she is eligible to receive ₹200 as dividend.
Dividends can be final or interim. Final dividend is announced by the board of directors and paid out after the payout is approved by shareholders of the company in the Annual General Meeting (AGM). Interim dividends can be announced and paid without such an approval by shareholders in the AGM.
Now let’s look at how a dividend is paid to shareholders. Since shares are traded on the stock exchange, they keep changing hands. A company has to decide shareholders who are eligible for payment of a dividend. To do this, the concept of record date is used.
What is a record date?
The board of the directors of a company announces a roll out of dividends. This announcement includes the amount of dividend and the record date.
Record date is the date on which the company checks with the registrar and transfer agent (RTA) of the company for a list of the shareholders. RTA maintains and changes the records of shareholders and assists companies to carry out corporate actions such as dividend payouts. Dividend is paid to all those shareholders whose names appear in the records of RTA as shareholders.
It simply means whoever purchases shares at least two days before the record-date is eligible for receipt of the dividends. This is because Indian equity markets follow T+ 2 settlement cycle.
What is the Ex-dividend date?
The ex-dividend date addresses the issue of T+2 delivery date. The ex-dividend date is fixed as 2 trading prior to the record date. For example, if the record date is 20th May, the ex-dividend date will be 18th May. If there are trading holidays in between then, the ex-dividend date will be pushed accordingly. What does the ex-dividend date indicate? You have to buy the shares of the company before the ex-dividend date so that you get the delivery by the record date and therefore are entitled to dividends.
These things can be understood with an example.
Company A has announced that Wednesday 13th October 2021 to be the record-date for payment of dividend. Two days prior – that is on Monday 11th October 2021 if you buy shares of the company then your name and details of shareholding will appear in the records of shareholders of the company. All purchases before this date will also make the buyer a shareholder if transactions are not squared off till Monday 11th October 2021. But if a person buys shares on Tuesday 12th October 2021, then shares will be credited to his/her account on Thursday 14th October, 2021 – a day after record date, following the T+2 settlement system. Hence, Tuesday 12th October 2021 (one day before the record date) is treated as ex-dividend date.
Is there any exception to this rule?
There are two situations when this does not apply and you should be careful if you are keen on pocketing dividends.
Clubbing of settlement
This is a typical phenomenon in the Indian stock market. Whenever there is a business holiday for the bank or stock market or for both, the settlement is postponed accordingly. In the above example it is assumed that there is no holiday in that week. If there is a holiday say on Tuesday (12th October, 2021) and the settlement is getting postponed to Thursday, then even if one buys the shares on Monday, they won’t be eligible to receive the dividend payout. Investors should keep a track of it.
Short delivery
If an investor purchased shares of a company on Monday(11th October) hoping to get the delivery on Wednesday(13th October), but the seller could not deliver them, it is called short delivery. In this case, the stock exchange conducts an ‘auction’ and shares will be delivered to your Demat on a T+3 basis. So, if you've purchased shares on Monday but due to short delivery, you get them on Thursday or later, then you will not be eligible for the dividend payout as you didn't have the shares in your account on the record date.
Actual payment of dividend
The dividend amount will be automatically credited to the bank account of an investor. If you hold physical shares of the company or your bank mandate is not registered, then the dividend cheque will be mailed at your registered address. The dividend payment date will depend on whether the payout is an interim dividend or a final dividend. In the case of an interim dividend, the payout has to happen within 30 days from the announcement date. However, in the case of final dividend, the actual payment has to be made within 30 days of AGM.
So, next time you hear or read the term “dividends”, keep these aspects in mind before taking investment decisions.
Download the Upstox App Today