Clarity on Cash Dividends

Jonathan · August 5, 2020, 8:28pm

Trying to get some clarity on Cash Dividends.

When considering payments I read it this way:

Regular Way Settlement-Prior to Record Date

Cash Settlement- Same day as Record Date

Ex-Dividend Date for Stock Split- Day after Record Date

But then I came across this question on a quiz:

Question: Cash settlement ex-date for cash dividend is?

My Answer: The same day as the record date

Answer Provided: One business day after the record date

So I’m a little confused.

Also, I know the B.O.D. is responsible for:

Declaration Date/ Record Date/ Payable Date

NYSE: Ex-Date

I came across a question on a practice exam that says,

“Ex-Date for Mutual Fund distribution is set by the B.O.D?”

So for Mutual Funds, B.O.D. sets this date? I’m reading this correctly?

Thank you!

brandonrith · August 5, 2020, 10:46pm

Hi @Jonathan,

This is quoted from our reading material:

Most of the time, the test will focus on the ex-dividend date with regular-way settlement. However, you might see a question regarding cash settlement trades, which settle the same day. Remember, all that is required to receive the dividend is to be a settled owner on the record date. If an investor does a cash settlement trade on the record date, they’ll settle the same day and receive the dividend. Therefore, the ex-dividend date for a cash settlement transaction is the business day after the record date.

The ex-date for cash settlement is definitely the business day after the record date. This is reflected in both the reading material and the practice questions. Remember, the ex-date is the first date an investor purchasing the security wouldn’t get the dividend. If an investor purchases the stock and settles same day, that means they can buy it on the record date and settle in time to receive the dividend (the transfer agent looks at the book of shareholders at the end of the record date). If they buy it the next business day through cash settlement, they settle one business day after the record date and will not get the dividend.

Let’s use a specific example assuming this:

Record date: Wednesday, August 5th

If an investor purchases the stock through cash settlement on Wednesday, the trade will settle on Wednesday, and they will get the dividend. They’ll be on the shareholder list by the end of the day when this occurs, and the transfer agent will earmark them for the dividend.

If an investor purchases the stock on Thursday, August 6th, they will settle on Thursday. This is one day later than when the transfer agent looks at the shareholder list, which means they will not get the dividend. Thursday is the ex-date.

For the second part of your post, the ex-date is built around settlement. The reason the ex-date is one business day prior to the record date for regular-way settlement, or the business day after the record date for cash settlement, both relate to how long it takes a security transaction to settle (T+2 for regular way, same day for cash settlement). It all goes back to one thing - who is on the stockholder list on the record date (another way of saying “who’s a settled owner of this stock on the record date”)?

Settlement times for stock are set and determined by FINRA or the NYSE. Therefore, the BOD for a stock does not determine the ex-date. An issuer of stock has no choice over settlement timeframes - this is 100% decided by FINRA (for OTC stocks) or the NYSE (for NYSE-listed stocks).

You may have noticed we didn’t discuss settlement for mutual funds. In most cases, settlement will take place same day, in 1 business day, or in 3 business days. However, there is no set standard other than redemptions (sales of mutual fund shares) must be paid out within 7 days. Because mutual funds are redeemable and do not trade in the open markets, the issuer (the investment company / BOD of the mutual fund) determines their settlement timeframes. If they want it to be 1 business day (or any other timeframe), they can make it so.

That’s why the BOD sets the ex-date for mutual funds. It’s because they set their own settlement, so they technically control when the ex-date is. If stock issuers could determine their own settlement timeframes (which they can’t), then the BOD for common stock issuers would also determine their own ex-dates.

I hope this helps! Please respond with any further questions or clarifications.

Jonathan · August 12, 2020, 8:51pm

Hi Brandon,

Thank you for your response. I think I have a better understanding. I’ve been looking at the problem working from the acronym, D.E.R.P.

and plugging in everything from there. I think what I overlooked was purchasing and settlement.

Here is how I interpret what you sent me:

Regular way settlement has to be at least one day day prior to the record date because regular way settlement is 2 days (T+2) so actually receiving the dividend is the day after the record date.

If purchasing and settling a security on the Record Date, would need to be a cash transaction in order to be eligible for the Dividend. Since cash settlement are 1 day (T+1). Receiving the dividend is still the day after the record date in this case.

So in both cases, whether they were an owner by a regular way settlement the day before the record date or made a cash transaction and settled owner on the record date, they’d receive dividend one day after the record date.

Is this correct?

In terms of the other question and deciding these days:

D. (Board of Directors)

E. (NYSE for Regular way or FINRA for OTC/ BOD for Mutual Fund)

R. (Board of Directors)

P. (Board of Directors)

Does that look correct?

brandonrith · August 13, 2020, 3:31am

Hi @Jonathan!

Thanks for responding! I’ll break everything down here:

Regular way settlement has to be at least one day day prior to the record date because regular way settlement is 2 days (T+2) so actually receiving the dividend is the day after the record date.

I think you’re saying regular way settlement must occur prior to the record date in order to receive the dividend (correct me if I’m wrong). To receive the dividend, the investor must settle by the record date (on or before).

For example, let’s say the record date is Wednesday, August 12th. As long at the trade settles by August 12th, the investor will receive the dividend. If it’s regular way settlement, the trade must occur by Monday, August 10th because a T+2 settlement would occur on Wednesday, August 12th. Purchasing the stock any day after Monday will result in the investor settling after the record date, resulting in them not receiving the dividend. That’s why Tuesday, August 11th would be considered the ex-date. If the investor buys the stock on Tuesday, they don’t settle until Thursday, one day after the record date. The investor must settle by the record date to get the dividend.

If purchasing and settling a security on the Record Date, would need to be a cash transaction in order to be eligible for the Dividend. Since cash settlement are 1 day (T+1). Receiving the dividend is still the day after the record date in this case.

Let’s use my previous example of Wednesday, August 12th as the record date. Remember, the buyer must settle by the record date to get the dividend. Because a cash settlement transaction settles same day, the investor could buy the stock on Wednesday, August 12th and receive the dividend. However, if they bought it on Thursday, August 13th through a cash settlement transaction, they would not get the dividend. The trade would settle on Thursday, August 13th, one day after the record date. Therefore, Thursday is the ex-date.

So in both cases, whether they were an owner by a regular way settlement the day before the record date or made a cash transaction and settled owner on the record date, they’d receive dividend one day after the record date.

Here’s the bottom line - to receive the dividend, they need to be a settled owner of the stock at the end of the day on the record date. The shareholder list changes constantly because people buy and sell stock every day the market is open. Some people buy and hold their stock for years, while some only invest for short periods of time. The shareholder list changes daily, and those who are on the list on the record date will be paid the dividend.

To summarize, assuming a record date of Wednesday, August 12th:

For regular-way settlement (T+2):
- Must purchase the stock on or before Monday, August 10th to get the dividend
- Tuesday, August 11th is the ex-date because settlement will not occur by record date
For cash settlement (same day):
- Must purchase the stock on or before Wednesday, August 12th to get the dividend
- Thursday, August 13th is the ex-date because settlement will not occur by the record date

In terms of the other question and deciding these days:

D. (Board of Directors)

E. (NYSE for Regular way or FINRA for OTC/ BOD for Mutual Fund)

R. (Board of Directors)

P. (Board of Directors)

This is perfect! 100% correct.

I hope this solves some of your challenges with dividends. It takes a bit to get used to it, but you’ll have a “light bulb moment” if you continue working at it. Please respond with any further questions.