The dividend payment procedures of a firm can be outlined as follows:
1. Declaration Date
The board of directors of the company announces that a specified amount of dividend will be paid to the stockholders. It is paid to the stockholders who will be on the record on the company's record at some particular future date. The date on which directors meet and announce dividend is called declaration date. Generally, the dividend is announced as a percentage on the par value of the stock. However, in some cases, it can be the absolute amount as $ 2 dividend per share.
2. Date Of Record
Along with the dividend announcement, the board of directors also specifies a date of record. For example, if the board of directors meets on June10, 2010, and declares a 10 % cash dividend to the stockholders of record on September 15; the July 10 is called declaration date and the September 15 is called date of record. The company prepares a list of stockholders from the stock transfer book at the close of business on the date of record. All the stockholders of the record date are entitled to receive dividend as declared by the board. The new stockholders would receive dividend if the shareholders' name is recorded in the shareholders' registered on or before the date of record. But, if the company were notified of the transfer after the date of record, the old owner of the stock would receive the dividends.
3. Ex-dividend Date
There can be delay of several days from the time a transfer takes place to the time the firm is informed of the transfer. Therefore, shares transferred on, say September 12, would not generally recorded on the company's book. In normal practice, the buyer and seller of the stocks have four business days to settle the transactions prior to the date of record. For example, if the date of record is September 15, the transaction must take place before September 11 to entitle the new holder to receive dividend. Thus, the date when the right to the dividend leaves the stock for new owner is called ex-dividend date. In our example if stock is bought on or after September 11, the new shareholder is not entitled to receive dividend. As a result of this, we normally expect that stock price will decline exactly by the amount of dividend per share on the ex-dividend date.
4. Payment Date
At the time of dividend announcement, the board of directors also specifies the date on which the payment of dividend is actually made and it is called the payment date. On this date the company actually pays the dividend to all the stockholders of the date of record.