Accrued Dividends & Stock Values
- There are three important dates to keep in mind when a company declares a dividend. The first is the declaration date on which company sets the dividend payment date, amount of the dividend, and the ex-dividend date. The second is the record date on which the company compiles a list of current shareholders who are due a dividend check. The ex-dividend date, which occurs two days before the dividend date, is the cutoff date that makes new shareholders ineligible to receive a dividend.
- An unpaid, declared dividend is a liability. For accounting purposes, accrued dividends are booked as a liability from the declaration date until the dividend payment date. Companies usually record the accrued dividend entry a few weeks before the actual payment of the dividend. Once the dividend is declared, it becomes the property of the record-date shareholder. Record-date shareholders are still entitled to their dividends in the event of a merger or other corporate action.
- A company's share price declines by the amount of its dividend payout. For example, if the dividend payment is $1, the company's stock price should decline by $1. In theory this makes sense, as new shareholders are not willing to pay full price for a stock that has already paid out a dividend. However, in practice, a company's stock price may not reflect a one-for-one decline in price because of a dividend payment. The stock price might even increase. There may be numerous reasons for this, such as a strong stock market rally.
- Dividend policies vary across companies and industries. Companies tend to have stable and consistent dividend policies when they mature. The share price of a mature company tends to be flat or stable over time. To compensate shareholders for little or no capital appreciation on the stock, the company can maintain a stable dividend policy, perhaps increasing dividends annually to adjust for inflation. Banks and utilities are examples of mature companies. Managements of fast-growing companies refrain from issuing dividends, instead investing excess cash to support growth. Technology companies usually avoid paying dividends.