Due Bill: What It Is and How It Works With Dividend Stocks

What Is a Due Bill?

A due bill is a financial instrument used to document and identify a stock seller's obligation to deliver a pending dividend to the stock's buyer. A due bill is also used when the stock's buyer is obligated to deliver a pending dividend to the stock's seller. Due bills can be used in a similar fashion when a company issues rights, warrants, or stock splits.

Key Takeaways

  • A due bill ensures that pending dividend payments that are entitled to a certain party are paid even after the party disposes of its shares in the intervening period.
  • These promissory notes ensure that shareholders are paid on the ex-dividend date—even if they sell their shares before the record date occurs.
  • The due bill period is that time between the ex-dividend date and the date of record within which such dividend rights are a potential issue.

How Due Bills Work

Due bills function as promissory notes and ensure that the correct owner receives a stock's dividend when the stock is traded near its ex-dividend date.

For example, a buyer that purchases a stock ex-dividend, but before the dividend is actually paid, would provide a due bill to the seller stating that the dividend payment belongs to the seller. The timing of the ex-dividend date is set according to the rules of the stock exchange on which the stock is traded. This date is typically set for two business days prior to the record date. If a company issues a dividend in stock rather than cash, the ex-dividend date is set on the first business day after the stock dividend is paid out.

On the other hand, if a buyer purchases a stock on or before the ex-dividend date, they would be entitled to the dividend, but if they are not listed as the owner on the record date, the seller would receive the dividend on the payment date. Since the buyer is the rightful recipient of the dividend, the seller would issue a due bill to the buyer. This due bill entitles the rights of ownership to the buyer, even though the buyer has not yet been listed as the shareholder of record.

A due bill protects the stock's buyer, making sure the rights of ownership is established, regardless of whether the buyer has been listed yet as the shareholder of record.

What Is the Due Bill Period?

Suppose a stock is planning to issue a regular quarterly dividend. A list of stockholders of record who will receive the dividend is prepared on the record date. The ex-date is set (usually two days earlier) for when shares will trade on the open market without the right to the dividend. The period beginning on the record date and usually ending two days later (four days after the earlier ex-date) is when the identities of the holders of record are known and payment is due to them. This is known as the due bill period, during which remittances to investors are due after the stockholders of record are established.

Example of Due Bill

As an example of how companies due bills work to allocate stock dividends, consider the company 3M (MMM), which has issued quarterly dividends to its investors for more than 100 years.

Each dividend is announced several weeks before the ex-dividend date. The following trading day, ownership shares are recorded, and stockholders who hold 3M shares are entitled to receive dividends as investors. In 3M's case, these dividends are paid out about a month after the date of record.

The due bill period is the period between the ex-dividend date and when the dividend payments are received. A due bill ensures that shareholders receive the payments they are entitled to, even if they sell their shares before the dividend is paid out.

How Do You Find a Company's Ex-Dividend Date?

Companies that issue dividends will state their ex-dates when they announce dividends. You can find this information on the company's investor site. Some news aggregators may also list a company's dividend information along with the stock price and financials.

How Are Ex-Dividend Dates Decided?

The ex-dividend date for stocks is determined by the rules of the stock exchange where the company's shares are traded. It is usually set as the date of record for that dividend, or the nearest business day before. Shareholders are only eligible to receive dividends if they hold the stock on the day of record. However, there are special rules if the dividend is worth 25% or more of the share price: The ex-dividend date will be deferred until one business day after the dividend is paid.

What Do You Need to Do to Receive Dividends?

In order to receive dividends from a dividend-paying stock, you must buy shares in that company and hold them until after the dividend date. If you hold the shares through a broker, the dividend will be deposited into your brokerage account. Otherwise, the dividend will be sent as a check to the owner of record.

The Bottom Line

In investing, a due bill represent's an investor's right to receive a dividend payout when a company chooses to distribute a portion of its earnings. In order to qualify for dividends, a shareholder must own stock shares until the ex-dividend date, when they are listed on a due bill. Even if they sell shares after the date of record, the shareholder will still qualify to receive dividends.

Article Sources
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  1. 3M. "Dividends for 3M Company (MMM)."

  2. Investor.gov. "Ex-Dividend Dates: When Are You Entitled to Stocks and Cash."

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