How Do Dividends Affect Stock Price?

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Because dividends are paid quarterly, companies issue dividends based on their net earnings for the quarter. Although dividends are not guaranteed, investors can expect to receive the same amount as the previous quarter. However, if an investor determines that the dividend payout might be greater than the previous quarter, this affects the price of the stock.

Considerations

  • Companies are not required to pay dividends on common shares. Whether a company pays dividends is based on its dividend policy, which considers a company's goals. If companies choose not to pay dividends, this can work to the benefit of the shareholder as it will increase company earnings, making the stock worth more in the future.

Declaring Dividends

  • A company will declare dividends on stock by placing an advertisement in major financial newspapers. The advertisement will state the amount of the dividend, the date the dividend will be paid, and most important, the date of record. The date of record determines whether a shareholder is paid dividends, and stocks sold before and after the record date will reflect the dividend payment.

Stocks Sold Ex-Dividend

  • To determine whether a person will receive a dividend, a stock exchange announces an ex-dividend date, usually two business days before the record date. Any person who purchases a stock after the ex-dividend date will not receive a dividend. In consideration of this, when a stock becomes ex-dividend, the stock's price is reduced by the amount of the dividend.

Stocks Sold Cum-Dividend

  • A stock is cum-dividend if it is purchased before the ex-dividend date. A person who purchases a stock when it is cum-dividend will receive the declared dividend. As a result, the price of the stock will not be reduced by the amount of the dividend.

Extra Dividends

  • Sometimes companies pay an extra dividend on their common shares in addition to the regular declared dividend. Often a company will issue an extra dividend because of increased earnings that the company did not anticipate when it declared the regular dividend.

    If investors feel that this extra dividend reflects increased earnings and the dividend will increase in the future, this could raise the price of stock. However, if investors feel that this extra dividend is a one-time bonus, stock prices will stay the same.

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References

  • "Canadian Securities Course Volume One"; CSI Global Education; 2008
  • Marie Zukowski; Professor; Seneca College, Toronto, Ontario
  • Photo Credit stock market analysis screenshot image by .shock from Fotolia.com
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