Dividends are a very sought-after income in the stock market. There is a large segment of investors who understand the importance of dividends. They build their portfolios to include stocks that offer good dividends and high earnings growth prospects. But few are adept at achieving this feat. Many retail investors buy shares of a company as soon as the dividend date is announced.
However, when they see no money in their bank account, they wonder why? People don’t understand that dividends are not credited just because a company has declared it. There is a defined process for paying dividends. Before we get into the details, let’s take a look at some basic concepts:
What is a dividend?
Dividends can be final or temporary. The final dividend level is announced and paid by the Board of Directors after the company’s shareholders approve the payment plan at the Annual General Meeting of Shareholders. Provisional dividends may be announced and paid without the approval of shareholders at the general meeting of shareholders. Now let’s see how dividends are paid to shareholders. Since shares are traded on the stock exchange, they change hands. The company must decide which shareholders are eligible to pay the dividend. To do this, the record date concept is used.
The board of directors of a company announces the payment of dividends. This announcement includes the dividend amount and record date. The record date is the date the company checks with its Registrar and Transfer Authority (RTA) for a list of shareholders. The RTA maintains and amends shareholder records and assists companies in taking corporate actions such as paying dividends. Dividends are paid to all shareholders named on the RTA’s record as shareholders. It simply means that anyone who buys the stock at least two days before the record date is eligible for the dividend. This is because the Indian stock market follows a T+2 payment cycle.
Ex Dividend Date
The ex-dividend date is the delivery date T + 2. The ex-dividend date is fixed on both exchanges before the record date.
If an investor buys stock in a company on Tuesday in the hope of securing Thursday delivery, but the seller is unable to deliver, this is called short delivery. In this case, the exchange conducts an “auction” and the stock will be delivered to your Demat on a T+3 basis. So if you bought the stock on Tuesday but due to short delivery time If you receive them on Friday or later, you will not be eligible for dividends because you did not have shares in your account at the time of registration.
Clubbing of Settlement
This is a typical phenomenon of the Indian stock market. Whenever there is a holiday for the bank or the stock exchange or for both, the payment will be deferred respectively. In the above example, assume that there are no holidays in that week. If the bank had a day off on Wednesday and the payment was deferred until Thursday, even if a person bought the stock on Monday, they would not be eligible for the dividend. Investors need to watch it.
Efficient dividend payment
The dividend amount will automatically be credited to the investor’s bank account. If you own physical shares of the company or your money order is unregistered, a dividend check will be sent to your registered address. The dividend payment date will depend on whether it is an interim or final dividend. In the case of interim dividend payment, payment must be made within 30 days from the date of notification. However, in case of final dividend, the actual payment must be made within 30 days from the date of holding the General Meeting of Shareholders. So the next time you hear or read the term “dividend”, keep these aspects in mind before making an investment decision.
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