Finance

Dividend Payment Process

Dividend Payment Process

What is a Dividend?

A dividend is a reward or cash that a publicly-listed company decides to give its shareholders. Dividends can be issued in various forms, such as cash, cash equivalent, stocks, or any other form. The company’s board of directors decides the rate of dividend and it required the approval of the majority of its shareholders. It is not mandatory for a company to pay dividends to its shareholder, it is usually a part of the profit that the company shares with its shareholders. If the company decides to pay a dividend to its shareholders they have to follow a particular process for dividend distribution.

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Process for Dividend Payment:

  • Declaration Date:

The first step in the dividend distribution process is to decide on a Declaration Date. It is a date on which the company’s directors officially declare the payout of dividends to its shareholder. The actual payment is not made on this date but along with the declaration date, the directors also provide the Ex-Dividend date, Record date, and Payment date. As it is not mandatory for any company to pay a dividend but once the company declares the Declaration date it becomes the legal responsibility of the company to pay a dividend.

  • Ex-Dividend Date

The second step is to declare the Ex-Dividend date. The main reason to decide this date is to know how many investors are made eligible for dividends. The ex-dividend date is declared two days before the recorded date because the shareholders who buy its share on or later form the ex-dividend date are not able to get the dividend. In the share market, every trade takes three days to complete its trading this is the main reason why the company does not allow the investor for the payment of dividends who purchase its share on or on a later date of the ex-dividend date.

  • Record Date

This is the date on which the director of the company decides who is eligible to receive the company’s dividend payment. If an investor buys the company’s share on this date them they are not eligible for the payment. If any investors want to take the advantage of the company’s dividend them they have to purchase its share before the ex-dividend date because the ex-dividend date is two days prior to the record date.

  • Payment Date

The final step in the dividend payment process is the Payment Date, on this date the actual payment of the dividend is made to the shareholder who has got eligible for it. The dividend can be paid to the shareholder by mailing the check to the shareholder, by depositing the cash it into their bank account, or in the account for the respective broker. Many companies use the Dividend Reinvestment Plan (DRIP) for the payment in this the investors can use the dividend amount to purchase the additional share of the company.

 

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Example:

Let say that on 9/10/2020 the board of directors of XYZ. Ltd announced a payment in cash dividends of Rs. 100 per share on 10/10/2020. The record date is set as of 9/24/2020. Therefore, the ex-dividend date falls on a business date before 9/24/2020. For example, if 9/24/2020 is a Wednesday, the ex-dividend date will be Tuesday 9/23/2020, but if the record date falls on Monday, the ex-dividend date will be the previous Friday (if it is a business day). If an investor intends to purchase shares and receive cash dividends, it should be done before the ex-dividend date.

Impact of Dividend on Share Prices:

First of all, it is not mandatory for any company to pay a dividend to its investor, but by providing a dividend to its investor the companies try to create a good image of it in the market. Many of the time it is observed that when the company declares its dividend date the price of its share increase and sometimes it may raise so high that it may be more beneficial than that of the dividend offer. But in the same way when the date of the dividend expires the price of its share decrease rapidly.

Bottom Line:

There is a usual scenario seen in the price of the company’s share when they declared a dividend on a company’s ex-dividend date, shares generally drop by an amount approximately equal to the company’s next dividend payment. As stated earlier, dividend payments are a means for corporations, though not all companies pay dividends, to allocate profits to shareholders. Instead, some firms tend to maintain their profits to reinvest in growth opportunities. To either issue it and what amount is determined mainly on the basis of the company’s revenue (excess cash) and on the basis of long-term earning capacity.

 

Author: Charmi Mehta

About the Author: Charmi Mehta is currently pursuing an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.

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