What Is the Record Date and Why Is It Important? Plus an Example

The record date is the cutoff established by a company to determine the shareholders eligible to receive a dividend or distribution. This pivots from the ex-dividend date, when the stock started trading without the value of its next dividend payment.

The record date is needed to decide the list of the company's shareholders since shareholders are constantly changing. The shareholders of record on the record date are entitled to receive the company's dividend or distribution.

Understanding the Record Date

The record date is essential because of its relation to another key date, the ex-dividend date. On and after the ex-dividend date, buyers of the stock don't receive the dividend; the sellers, presuming they hadn't bought it in quick transactions after the record date, receive it, which occurs on the payable date.

The company's record date should be known before trading dividend-paying stocks. The ex-dividend date is set precisely one business day before the record date in the U.S. This is because of the "T+2 system" used in North America, where stock trades are settled two business days after the transaction is carried out. When an investor buys a stock one business day before its record date, the trade settles the day after the record date, and this person wouldn't be the shareholder of record for receiving the dividend.

Different rules apply when the dividend is 25% or more of the stock value, which is relatively rare. The Financial Industry Regulatory Authority says the ex-date is the first business day following the payable date. In other words, you're entitled to dividends or distributions worth 25% or more of the share price if you buy the stock at least a day before the pay date.

Example of a Record Date

Assume company Alpha has declared a dividend of $1, payable on May 1, to shareholders of record as of April 10. The record date is, therefore, April 10, and the ex-dividend date is one business day before the record date, or April 9 (if April 9 to 10 are in the middle of a typical week).

If investors want to receive the dividend from Alpha, they must buy the stock before its ex-dividend date. If they buy Alpha shares on April 8, their trade will be settled on April 10; since they are a shareholder of record as of April 10, they will receive the dividend. However, if they buy Alpha shares on April 9, the ex-dividend date, their trade will be settled on April 11, too late to receive the dividend.

Record Date vs. Ex-Dividend Date

The record date and the ex-dividend date are both pivotal for dividend-paying stocks. The record date is when the company determines the roster of shareholders who receive the dividend. The ex-dividend date—set one trading day before the record date—kicks off when new buyers no longer have the right to the payout.

If you want to be on the books as a shareholder of record in time to receive a dividend, the latest you can buy is the day before the ex-dividend date or two days before the record date.

The Bottom Line

The record date, also known as the date of record, is when a company offering a dividend or distribution establishes its list of shareholders who will receive the payout. The record date generally occurs a day after the ex-dividend date, the first trading day when new buyers no longer qualify for the dividend.

You must be on the books as a shareholder on the record date to collect a dividend. For North America's T+2 settlement system, this means buying at least two days before the record date.