Does the settlement date have to be before the ex-dividend date to receive a dividend?

Dividends are a key source of investment income, but there is considerable confusion about the mechanisms for paying dividends. In particular, when you buy a stock near the time it will pay a dividend, it is important to know whether or not you will actually receive the dividend payment. This is where concepts like record date, ex-dividend date, trade date, and settlement date all come into play.

The short answer: No
The simple answer to the question in the title is that the settlement date does not have to occur before the ex-dividend date for the shareholder to receive the dividend. To fully understand, however, you have to go into detail.

When a company pays a dividend, it sets what is called the registration date. This is the date the company reviews its official list of shareholders to decide who will receive the dividend. He then sets a payment date ranging from a few days to several weeks later; it is on this day that shareholders actually receive their dividends.

It would be simple if stock transactions were instant. However, exchanges still use rules that give brokers three business days to settle stock transactions. This means that, if you trade to buy stocks, they won’t officially arrive in your account until three business days later, which is known as the settlement date.

Accordingly, one way of expressing the rule is that in order to receive the dividend, your settlement date must be on or before the registration date that the company sets for the dividend. If it’s after, you won’t receive the dividend.

Why the ex-dividend date matters
The problem is, traders don’t really focus on when their trades settle, so it’s important for them to understand exactly when they can buy and sell stocks in the open market while still receiving dividends. The concept of the ex-dividend date makes this simpler.

The ex-dividend date is defined as the day a transaction settles too late to give the buyer payment of the dividend. Simply put, the ex-dividend date is typically two business days before the record date.

Since the ex-dividend concept already includes the settlement period, the settlement date can occur on or after the ex-dividend date. However, the trade date must be before the ex-dividend date for the settlement date to be on or before the record date – and therefore for the buyer to receive the dividend.

The dividend schedule can seem complicated. The easiest rule to remember is that, if you want the dividend, be sure to trade your shares before the ex-dividend date. This will allow the details of the settlement to fall into place properly.

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