DIVIDENDS
Every so often, both regularly and on the spur of the moment, companies will announce that they are going to pay dividends. When a company pays a dividend to its investors, the company is moving cash from the company books into its investor’s bank accounts, thus making the company less valuable in absolute cash terms. When the dividend is paid, the values of a company’s shares are reduced.
Usually the dividend announcement process is a very organized and precisely scheduled event that begins with the simple announcement that x company will announce their dividend payment schedule on x date. Below you will find a typical schedule.
- Company says we will be announcing our dividend payment on a day in the future. This future day is known as x dividend day.
- Recording day: at some point before the x dividend day a company will have the recording day. The recording day is the day by which time an investor must own the stock in order to be eligible for the dividend.
- On x dividend day the company announces how much of a dividend they will pay and on what day they will pay it. All investors who were holding the stock before the record date will receive the dividend. On x dividend day, the stock usually goes down by some amount corresponding with the size of the dividend to be paid. Example, if a stock is worth 10 USD per share and the company says we will pay a dividend of 1 USD per share, the value of the stock will usually be reduced by around 1 USD.
- Payment day is the actual day when the dividend is paid.
Some indices include dividends in the calculation of the index price some do not. Those indices that do not include dividends are called performance indices.