Special cash dividends make up a large percentage of a stock’s price. Many times this means that these large special dividends are applied with certain rules that differentiate them from normal dividends. The biggest difference concerning special dividend stocks is that the ex-dividend (for special payouts) comes after the record and pay date, not before (like is the case with regular dividends or smaller special dividends).
This difference occurs because on the ex-dividend date the stock exchange adjusts the stock price to account for the dividend to be paid out. If this same procedure were to happen in the case for a large dividend, say 25% of the stock price or more, then this might signal a huge drop in share price that could affect many traders and investors.
Rather than deal with these headaches, the stock exchanges apply a special rule to deal with these large one-time dividends. The exchanges (not the companies) set an ex-dividend after the record and pay date. Now, you may be wondering how some might receive their dividend if it is paid before the ex-dividend date (the date on which owners of a stock have the right to receive the dividend). To get around this obstacle, the stocks bought or sold in the period from the record date to the ex-dividend date (the due bill period) are tagged with something called a “due bill.”
The due bill documents are a contract that lays out a stock seller’s obligation to deliver the dividend to the stock buyer. For example, let’s say company XYZ is offering a special dividend that is worth 30% of the current share price. This dividend is tagged with a record date of March 1, a pay date of March 15, and an ex-dividend date of March 18. If an owner of stock from XYZ holds the asset through March 15, he would receive the dividend paid at that point. However, if he were to sell that stock on March 17, then the new owner of the asset on the ex-dividend date of March 18 would have the right to the dividend that the original owner has already pocketed. Therefore, the due bill attached to the stock is a promissory note mandating that the original owner passes on the dividend to the new owner.
This process is a bit complicated, but it is in place so that a stock’s value is not unfairly compromised in a manner that might impact margin calls or other trading transactions. However, this 25% or more rule is a general rule, not a strict one. Many times foreign dividend paying stocks are not held accountable to this stipulation by the stock exchanges. Moreover, some domestic shares are granted an exclusion from this process. It would benefit investors if the criteria to determine which stocks are subject to these rules were made public, but currently the factors FINRA uses to make this call are determined on a case-by-case basis.
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