Understanding Unpaid Dividends: Definition and Process Explained
Key Takeaways
- An unpaid dividend is one that is due to shareholders but not yet distributed due to timing differences between declaration and payment dates.
- Four key dates are important in the dividend-payment process: declaration date, ex-dividend date, record date, and payment date.
- Companies record unpaid dividends between the declaration and payment dates, which are eventually eliminated once dividends are paid.
- Understanding these dates helps investors know their entitlement to dividend payments and reduces confusion.
What Is an Unpaid Dividend?
An unpaid dividend refers to a declared dividend due to shareholders that hasn’t been distributed yet. It represents a liability to the company until it is fulfilled. Unpaid dividends typically exist due to timing gaps between several critical dates involved in the dividend payment process—like the declaration date, ex-dividend date, and payment date. Whether you’re an investor or a finance student, this article will enhance your comprehension of how unpaid dividends work.
Understanding the Process of Unpaid Dividends
To understand unpaid dividends, it is helpful to review the four key dates that are part of the dividend-payment process. The first is the declaration date, which is also known as the “announcement date”. This is the date when the company’s board of directors announces the upcoming dividend. This date is followed by the ex-dividend date, the date when new buyers of the stock will not be eligible for the upcoming dividend payment.
The record date, also known as the “date of record”, is the next important date. In order to be entitled to the upcoming dividend, shareholders must be recorded on the company’s books by this date. Typically, the record date is two days after the ex-dividend date. Last, the payment date is the date when the dividend will be paid to shareholders of record. The record date generally occurs about one week after the ex-dividend date.
Between the declaration date and the payment date, a company will have unpaid dividends on its books. Once the payments are made, the unpaid dividends will be zeroed out accordingly.
Real-World Example of Unpaid Dividends
XYZ Corporation is a publicly-traded company with a price of $30 per share. Many of its investors view XYZ as a stable income-producing investment because of its consistent track record of dividend payments. Eager to maintain this reputation, XYZ’s managers declare an upcoming dividend of $1.50 per share on July 30th. Its record date is set as Thursday, August 8th. The company’s ex-dividend date is set for Tuesday, August 6th.
In this scenario, only shareholders who bought their shares on Monday, August 5th (or before that date) would be entitled to receive a dividend. The payable date can vary depending on the preferences of the company, but it is always the last of the four dates. For the period of time between the announcement date on July 30th and the payment date, XYZ will have unpaid dividends on their books. However, these will be eliminated once the dividends are paid to shareholders.