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 in order 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 do not need to worry about paying your buyer a dividend you owe them. Similarly, as a buyer, you do not 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 two trading days after 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 will be paid out accordingly.
When there is 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 sellers 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