You may hear the term, Dividend Declaration when your company earns a handsome profit. What does declaring a dividend mean? Does every company need to pay dividends to its shareholders? What impact does it have on my share value?
This article will answer all these questions and more.
Dividend declarations are the means by which shareholders and investors in companies get returns on their investment. You get dividend distributions only after your companys Board of Directors approves the date when dividends will be distributed. you can read more about “Dividend Meaning” here
Significance of a Dividend Declaration
A Dividend Declaration is a formal announcement made by a company that it is going to pay dividends to certain categories of its shareholders.
The decision to pay dividends is always made by the Board of Directors through a resolution passed under the companys Memorandum and Articles of Association. This Board Resolution would also specify the time frame and the amount that will be paid as dividends.
In accounting terms, a Dividend Declaration results in a Debit in the Retained Earnings account and a credit in a new Dividends Payable account. While Retained Earnings are assets, dividends that must be paid at some future date, are a liability.
Distributing dividends is just a neat way of saying that your company wishes to retain the trust of its shareholders and future potential investors. And so, the Board of Directors decide to distribute a part of the profits that the company has earned to shareholders who own their shares before the specified cutoff date.
This cutoff date is called the Expiry Date, the Ex-Dividend Date, or more popularly, just the Ex-Date.
Important Dates Associated with Dividend Payouts
Dividend Declaration Date
After the Board has passed the resolution and sanctioned the release of dividends, it has to make this information known to investors and the stock market. It does so by formally announcing the payout on the Dividend Declaration Date.This date must be approved by the shareholders themselves via voting.
The Ex-Date is the date on which new share buyers will cease to expect dividend payouts announced on the Declaration Date.If you were to buy shares on which dividends were payable, even one business day before the Ex-Date, you would be eligible to receive the announced dividends.
Date of Record
This is different from the Ex-Dividend Date because on this day, the company checks its records to separate existing shareholders eligible to receive dividends from those that are not eligible.
Date of Payment
This is the date on which the payouts are actually made. Note that this day may be one to three months after the Dividend Announcement.
Rise and Fall of Share Prices Around the Ex-Dividend Date
Those who buy the companys shares on or after the cutoff date wont receive these dividends. Those buying before will receive dividends.
Note that those who want to buy shares before the Ex-Date will do so in expectation of receiving dividends. This is because the Dividend Declaration Date is at least one business day prior to the Ex-Date.
Because of this expectation, the price of these shares will rise correspondingly. After the Ex-Date, the price will fall because buyers can no longer expect a dividend.
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