A Stub Period Dividend is a prorated dividend paid when the regular dividend calculation period is incomplete. This incompletion is often due to a corporate event such a merger or acquisition. The calculation period for the stub period dividend begins on the first calendar day following the previous ex-dividend date. The final date is often the closing date of the acquisition and is included in the calculation. Assuming the rate of the dividend is consistent throughout the period, the length of time passed is prorated against the length of a full payment period to arrive at the level of dividend payable.
Dividends in this fashion are often paid on stocks experiencing corporate events. Therefore the most frequent payment period is quarterly. It is important traders are aware of dividend payments of this nature as they may prove to have a noticeable effect on profitability. and the merger arbitrage spread. Payment specifics of a stub dividend will most likely be found in the merger agreement filed with the SEC.
A more general definition of “stub period” in finance in reference to bonds and swaps, can be given as a period of time over which interest accrues which is not equal to the usual interval between bond coupons.
Stub Period Dividend Example
On February 1, 2019, Vectren Corporation (VVC) announced the final calculation of the stub dividend via a press release issued by Cision PR Newswire
EVANSVILLE, Ind., Feb. 1, 2019 /PRNewswire/ — Vectren Corporation (NYSE: VVC) announced that the final amount of the “stub period” dividend previously declared by the Board of Directors and payable to shareholders of record immediately prior to the effective time of the merger is $0.41145 per share of common stock. The dividend will be paid no later than February 8, 2019.
The amount reflects the regular quarterly dividend rate of $0.48 prorated for the 78 days between the close of business on November 15, 2018, which was the record date for the last regular quarterly dividend paid on December 3, 2018, and February 1, 2019, the effective time of the merger, divided by 91 days.
On June 8, 2020 El Paso Electric also announced the guidelines surrounding a possible stub period dividend
El Paso Electric Co. declared a “stub period” cash dividend on its common stock of 0.4231 cent per share, if its previously announced acquisition by the Infrastructure Investments Fund occurs by, or on, June 16.
At the time of publication, this takeover required further regulatory approval before the parties could consummate the deal. The dividend was therefore was paid in full for this particular period.
