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Subject 2. Dividends: Payment Chronology
- Declaration date: The date on which a firm's directors issue a statement declaring a dividend. At the time of the declaration, the company will state the holder-of-record date and the payment date.
- Ex-dividend date (ex-date): The date on which the right to the current dividend no longer accompanies a stock. This is the first date that a share trades without ("ex") the dividend. For a share traded on the ex-dividend date, the seller will receive the dividend. That is, if you buy a stock before this day you can get the dividend; if you buy a stock on or after this day the prior owner gets the dividend. This date is determined by the exchange on which the shares trade.
- Holder-of-record date: If the company lists the stockholder as an owner on this date, then the stockholder receives the dividend. On this day the company closes its stock transfer book. It is typically two business days after the ex-dividend date. Unlike the ex-dividend date, this is determined by the company.
- Payment date: The date on which a firm actually mails dividend checks (or, more recently, electronically transfers dividend payments). The date is determined when the dividend declaration is made, and can be any day, including weekends or holidays.
Interval between key dates:
Except for the time between the ex-date and the record date, the time between the other pertinent dates is determined by each company and can vary substantially.
Practice Question 1In order to have a claim on the dividend, a share must be bought no later than the ______.
A. last day before the ex-dividend date
B. last business day before the ex-dividend date
C. ex-dividend date
D. last day before the holder-of record dateCorrect Answer: B
Practice Question 2In the US, if the ex-dividend date is Tuesday, December 26th, shares must be bought by ______ to receive the dividend.
A. December 26th
B. December 25th
C. December 24th
D. December 22ndCorrect Answer: D
Markets are closed on Christmas day, Monday (25th), and are not open on Saturday (24th) and Sunday (23rd).
Practice Question 3If a share closed at $10 on the day before the ex-dividend date, and the upcoming dividend is $0.20, on the ex-dividend date the shares will start the trading day at ______.
C. $10.2Correct Answer: A
On the ex-dividend date, the money value of the upcoming dividend should be subtracted from the previous day's closing price, because the shares no longer carry the right to the next dividend payment.
Practice Question 4The ex-dividend date is important because this date is when the purchaser ______
A. gets the right to a dividend and the market price recognizes the added value.
B. does not get the right to the immediate dividend and the market recognizes this added value.
C. has their name registered on the books of the company (no change in value occurs).
D. will have the dividend check mailed to them by the corporation.
E. does not get the right to the immediate dividend and the market recognizes this loss in value.Correct Answer: E
Practice Question 5If a marginal investor has a tax rate of 33% and a company has announced a dividend of $3.00, the price of stock should decrease by ______.
A. $2.00 immediately after the date of record
B. $2.00 on the ex-dividend date
C. $4.48 immediately after the date of recordCorrect Answer: B
Practice Question 6On ex-dividend day, the drop in price is ______.
I. an efficient reaction to the loss in value
II. an inefficient and unwise market reaction
III. completed within the first few minutes of tradingCorrect Answer: I and III
Practice Question 7Which of these occurs last (when arranged in chronological order)?
A. Payment date
B. Ex-dividend date
C. Record date
D. Dividend declaration dateCorrect Answer: A
Practice Question 8The time at which the next dividend is announced is known as the ______ date.
A. dividend declaration
B. holder of record
C. ex-dividendCorrect Answer: A
The date of a dividend announcement is called the dividend declaration date.
Practice Question 9The date on which a share must be owned in order to receive a given dividend is called the ______ date.
A. dividend declaration
C. ex-dividendCorrect Answer: B
The holder-of-record date is the date on which a share must be owned in order to receive a given dividend.
Practice Question 10The last day that the buyer of a share will receive the dividend is the ______.
A. ex-dividend date
B. last business day before the ex-dividend date
C. last business day before the holder-of-record dateCorrect Answer: B
Practice Question 11Assuming everything else remains the same, when a stock goes ex-rights its price should ______.
C. remain the sameCorrect Answer: B
Practice Question 12WePay, Inc. made the following dividend declaration:
"The Board of Directors of WePay, Inc. has declared a regular quarterly dividend of $0.25 per share payable June 13, 2011 (a Wednesday) to all stockholders-of-record as of the close of business on May 17, 2011 (a Thursday)."
Assuming a three-day settlement for WePay stock and no holidays in the weeks surrounding the record and payment dates, determine the ex-dividend date.
A. Tuesday, May 15
B. Monday, May 14
C. Monday, June 11Correct Answer: A
With a three-day settlement, the ex-dividend date would be two days prior to the holder-of-record date, which would be Tuesday, May 15, 2011. If an investor bought WePay on Monday, May 14, 2011, they would settle for it on Thursday, May 17, 2011 and would be the holder-of-record at the close of trading on that date. Hence they would receive the dividend. Alternatively, if they bought it on Tuesday, May 15, 2011, they would settle on Friday, May 18, 2011, which is the day after the holder-of-record date. Hence they would not receive the dividend.
Practice Question 13Which of the following is the correct sequence of dates for dividends?
A. Holder-of-record date; Declaration date; Ex-dividend date; Payment date
B. Declaration date; Ex-dividend date; Holder-of-record date; Payment date
C. Declaration date; Holder-of-record date; Ex-dividend date; Payment dateCorrect Answer: B
Remember that stock transactions typically settle in three business days.
Practice Question 14The date of record of stock X is Thursday, July 31. If an investor wants to avoid receiving a dividend and thereby avoid paying tax on the distribution, what is the earliest day on which the investor can currently purchase stock X?
A. Monday, July 28
B. Tuesday, July 29
C. Thursday, July 24Correct Answer: B
The ex-dividend date is the date on which investors are cut off from receiving a dividend. If for example, an investor purchases a stock on the ex-dividend date, that investor will not receive the dividend. This date is two business days before the holder-of-record date.
The ex-dividend date is important as, from this date and forward, new stockholders will not receive the dividend. As a result, the stock price of the company will be reflective of this. For example, on and after the ex-dividend date, a stock most likely trades at lower price, as the stock price is adjusted for the dividend that the new holder will not receive.
Practice Question 15Company X pays a dividend. Which of the following events is least likely to cause its stock price to fall? Company X ______
A. increases its debt to 80% of capital to maximize the level of earnings per share.
B. issues more common stock.
C. pays its quarterly dividend.Correct Answer: C
Stock prices tend to fall on the ex-dividend date, not on the pay date. While a stock repurchase is a positive signal to investors, a stock offering is a negative signal. While a higher debt level may maximize a company's earnings, that level is not likely to maximize the firmÔ??s price since it is likely to be associated with a higher level of risk.
Study notes from a previous year's CFA exam:
b. describe dividend payment chronology, including the significance of declaration, holder-of-record, ex-dividend, and payment dates;