Dividends are a key source of investment income, but there's a lot of confusion about the mechanics of how dividends actually get paid. In particular, when you buy a stock close to when it will pay a dividend, it's important to know whether you'll actually receive the dividend payment or not. That's where concepts like the record date, ex-dividend date, trade date, and settlement date all come into play.
The short answer: NoThe simple answer to the question in the headline is that the settlement date doesn't necessarily have to occur before the ex-dividend date in order for the shareholder to receive the dividend. To understand fully, though, you need to get into the details.
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When a company pays a dividend, it sets what's called the record date. That's the date when the company looks at its official list of shareholders to decide who will receive the dividend. It then sets a payment date that's anywhere from a few days to several weeks later; it's on this day that shareholders actually receive their dividend payments.
That would be straightforward if stock trades were instantaneous. However, stock exchanges still use rules that give brokers three business days to settle stock trades. That means that, if you make a stock trade to buy shares, they won't officially land in your account until three business days later, which is known as the settlement date.
As a result, one way to express the rule is that, in order to receive the dividend, your settlement date must happen on or before the record date the company has set for the dividend. If it's after, you won't receive the dividend.
Why the ex-dividend date is importantThe problem is that traders don't really focus on the settlement date of their trades, and so it's important for them to understand exactly when they can buy and sell shares on the open market and still receive dividends. The concept of the ex-dividend date makes that simpler.
The ex-dividend date is defined as the day on which a trade will settle too late to give the buyer the dividend payment. Simply put, the ex-dividend date is typically two business days before the record date.
Because the ex-dividend concept already includes the settlement delay, the settlement date can happen on or after the ex-dividend date. However, the trade date has to be before the ex-dividend date in order for the settlement date to be on or before the record date -- and therefore for the buyer to receive the dividend.
Dividend timing can seem complicated. The simplest rule to remember is that, if you want the dividend, be sure to make your stock trade before the ex-dividend date. That will make the settlement details all fall into place correctly.
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The article Does the Settlement Date Have to Occur Before the Ex-Dividend Date to Receive a Dividend? originally appeared on Fool.com.
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