One of the reasons to invest in a particular stock may be the opportunity to earn some attractive dividends. To make sure you own shares in time to receive a pending distribution, you should understand how a company decides which investors are entitled to receive the payout. Do not mess up and buy the shares too late to receive that next dividend check.
Dividend payments are one way a company can pay out a portion of profits to shareholders in the company. Other exchange-traded investments such as exchange-traded funds -- ETFs -- and closed-end funds also pay dividends, which are a pass-through of earnings generated from a fund's portfolio. Dividend payments are not an automatic recurring event -- even though it may seem that way for some stocks and funds. Each dividend payment must be declared by the issuer with details concerning the amount of payment and the effective dates.
A dividend announcement includes two important dates: the record or book closure date, and the payment date. The payment date is the day when the dividend checks are sent or the dividend amount is deposited into an investor's brokerage or bank account. The book closure date is the day when the company determines the list of shareholders who are entitled to received the dividends. On that day the books are closed to new investors who buy shares and any new stock buyers will not receive the dividend.
Record Date vs. Book Closure Date
In the U.S., the term record date is commonly used for the book closing date of dividend payments. The book closure date term is more commonly used in other countries such as Australia and India. Many foreign stocks trade on the U.S. stock exchanges in the form of American Depository Receipts -- ADR. When an ADR stock declares a dividend with a closing date dividend, it has the same meaning as record date from a U.S. company. An investor must be a share owner of record on the closure date or record date to receive the dividend.
The final date on the dividend date list is the ex-dividend date. Under Securities and Exchange Commission rules, stock trades settle or become official three business days after shares are purchased. This means that to become a shareholder of record by the book closing date an investor must buy shares at least three business days before the closing/record date. Two business days before the book closing date, the stock goes ex-dividend. Investors buying on the ex-dividend date will become shareholders of record too late to meet the book closing and will not receive the dividend.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.