For instance, Volkswagen announced a special dividend payment of €19 in December per share. The share price dropped the next day by €19 as well. So as an investor, I didn’t gain anything (at least in the short term)? I received the dividend but my equity share is worth less that amount.
In: 3
You’ve noticed that the share price drops by the dividend amount on the ex dividend date. Naturally, because a share that’s going to guarantee you $5 if you own it tomorrow is less valuable than one where you have to wait for a year to get the $5.
What you don’t see is the gentle pressure pushing the share price up as the year goes by, and next year’s dividend date gets closer and closer. A share that guarantees you $5 in a six month’s time is worth more than a share that guarantees you $5 in a year’s time. When the ex dividend date is only 3 months away it’s worth even more.
You won’t notice that and can’t notice that effect for ordinary shares, because there are so many other factors that affect the share price much more strongly. But you will see this exact effect if you look at the price of exchange-traded fixed income instruments: these are tradable on the exchange but give you literally a fixed amount of cash regularly. The price drops on the ex date, then slowly climbs until the next ex date. You earn the same amount per day no matter how many ex dates you cross.
If a company is making a steady profit, but otherwise everything is remaining the same then one of two things should happen:
1. The company keeps its profits in the company, meaning that the company gets more valuable over time since as well as the profitable business it now has cash in the bank
2. The share price increases slightly each year and then falls when it pays the dividend, repeating a constant cycle each year
The shareholders see the same return either way, either in cash or an increased stock price
Let’s say that a worker gets paid weekly. On payday they cash their check and put some of the money into envelopes for their budget.
The act of paying the dividend is like putting the money into the envelopes to spend, that’s not a process that adds value so we’d expect the price to offset the change. Over the next period of time though we normally expect the company to earn money and that’s when we’d traditionally expect the price to rise. Just like the worker earns his pay until the next pay period.
Let’s say that a worker gets paid weekly. On payday they cash their check and put some of the money into envelopes for their budget.
The act of paying the dividend is like putting the money into the envelopes to spend, that’s not a process that adds value so we’d expect the price to offset the change. Over the next period of time though we normally expect the company to earn money and that’s when we’d traditionally expect the price to rise. Just like the worker earns his pay until the next pay period.
Let’s say that a worker gets paid weekly. On payday they cash their check and put some of the money into envelopes for their budget.
The act of paying the dividend is like putting the money into the envelopes to spend, that’s not a process that adds value so we’d expect the price to offset the change. Over the next period of time though we normally expect the company to earn money and that’s when we’d traditionally expect the price to rise. Just like the worker earns his pay until the next pay period.
I had this question when I went through my finance class. The way the prof explained it to me is that typically company’s that pay dividends do so in a recurring fashion, so the stock price has it figured in – I.e if the company pays a $1 per share dividend every quarter, they effectively are announcing another $1 dividend immediately after they pay the current one, so the stock never drops.
I had this question when I went through my finance class. The way the prof explained it to me is that typically company’s that pay dividends do so in a recurring fashion, so the stock price has it figured in – I.e if the company pays a $1 per share dividend every quarter, they effectively are announcing another $1 dividend immediately after they pay the current one, so the stock never drops.
I had this question when I went through my finance class. The way the prof explained it to me is that typically company’s that pay dividends do so in a recurring fashion, so the stock price has it figured in – I.e if the company pays a $1 per share dividend every quarter, they effectively are announcing another $1 dividend immediately after they pay the current one, so the stock never drops.
Well of course, if this weren’t so then you would only ever buy stock immediately before ex-dividend date and sell immediately after. Alas, payout just moves value around, it doesn’t create anything extra.
Well of course, if this weren’t so then you would only ever buy stock immediately before ex-dividend date and sell immediately after. Alas, payout just moves value around, it doesn’t create anything extra.
Latest Answers