Overview

A due bill is a type of contract that confirms the obligation of one party in a security transaction (either the buyer or seller) to pass on a dividend they receive to the other. Due bills are issued when a dividend’s ex-dividend date falls after the record date. This typically happens when a dividend is greater than 25% of the security’s price. 

• Ex-dividend date: The first date at which the security trades at a value that excludes its next dividend payment. You must own a stock before the ex-dividend date to be eligible to receive a dividend.
• Record date: The date that a company uses to determine which shareholders are eligible to receive a dividend.

On electronic trading platforms such as Wealthsimple, the due bill process happens automatically. This means that as a seller, you don't need to worry about paying your buyer a dividend you owe them. Similarly, as a buyer, you don't need to worry about getting your seller to send your dividend to you. 

Why do due bills exist?

In a standard dividend payout, the record date falls on the ex-dividend date. When the dividend is paid out, anyone who bought the security on or before the ex-dividend date is then eligible to receive the dividend, and they'll be paid out accordingly. 

When there's a due bill process, the record date falls before the ex-dividend date. In this case, if the security is traded after the record date, but before the ex-dividend date, then a due bill is issued. The time between the record date and the ex-dividend date is known as the due bill period.

This means that the seller's name will still be on record as the legal shareholder even though they sold the security before the ex-dividend date. In this case, the seller will issue a dividend that legally belongs to the buyer. A due bill is issued to confirm a seller’s obligation to pay the dividend that they received to their buyer