One of the perks of investing in a stock is that you can receive dividends from a company. Dividends are a way for companies to share the profit they generate with investors. When a cash dividend is declared by a company, it can have immediate effects on the price of its stock.
When a company pays a dividend, some important dates come into play. When the company originally decides to issue a dividend and announces it to the public, this is known as the declaration date of the dividend. On the declaration date, the company also sets an ex-dividend date. The ex-dividend date is the day after the last day you can own a stock and still receive a dividend. If you buy a stock on the ex-dividend date (or later), you will not receive a dividend.
Effect on Price
Once a cash dividend has been announced by a company, it can affect the value of the stock in the market. After the declaration day, the price of the stock generally is raised to include the amount of the dividend. For example, if the company announces a $2 dividend and the stock price was $28 per share, the price would usually increase to $30 after the announcement. This compensates sellers for the dividend that was declared.
While the price jumps up after the declaration date, it also is affected by the ex-dividend date. Once the ex-dividend date arrives, the stock price typically declines by the amount of the cash dividend. For example, in the previous example, once the ex-dividend date arrives, the price of the stock would move back down to $28, with all other factors being the same. This is because any buyers of the stock will not receive the dividend.
Dividend Capture Strategy
Some investors try to take advantage of dividends with a strategy called dividend capture. With this strategy, investors try to buy stocks they believe are due to declare a dividend. After the ex-dividend date, the investor sells the stock. The investor then collects the dividend even though he does not own the stock anymore. The effectiveness of this strategy is debatable because of the pricing changes in the market that take place after a dividend is declared and issued.