A dividend is approved by the Board of Directors at the Board of Directors meeting. Dividend paid periodically, commonly, monthly, quarterly, or annually to the shareholders whose names were listed in the register at the record date. The percentage of dividends is not permanent, and the board of directors can adjust it periodically.
Usually, Shareholders prefer cash dividends, but dividends can be paid through Cash and Scrip. Even, sometimes management may not distribute dividends, they may reinvest the retained earnings for future growth.
However, every shareholder is not entitled to dividends. If you think, you will invest as you wish and get the dividends, it may not happen. Securities and Exchange Commission set some rules and set some dates i.e. Record date and Ex-date for the investors to be entitled to the dividend payment.
The Record Date is the cut-off date fixed by the company to determine which shareholders are eligible to receive a dividend. In a listed company shareholders are frequently changed. Record date helps to ascertain the shareholders who are the shareholders at the record date. The shareholders who were listed on the record date are entitled to dividend distribution.
To be eligible for the dividend, you must buy the stocks at least two business days before the record date.
The ex-dividend date, usually set to be one business day before the record date. If an investor intends to receive the dividend, he must complete his stock purchase by the ex-dividend date. If the stock sale is not completed by the ex-dividend date, the seller of the stock will be considered for the dividend.
Stock Reaction to Ex-Dividend:
The price of the stock will fluctuate as the ex-dividends are near. The stock will typically increase in price by the expected dividend amount. After the ex-dividend date, the share price will usually fall by the estimated dividend payment amount.
This is because the stock retains the value of the dividend up to the ex-dividend date, as shareholders will pay a premium for the dividend income. On the ex-dividend date, investors will discount the stock for the absence of the dividend payment and it will fall in price.