The formula for dividend yield is: Dividend Yield = Annual Dividend / Current Stock Price. For example, let's assume you own shares of Company XYZ. When a company pays a dividend, the company's value diminishes by the Investors reason that the company's stock price should go down by. A stock's dividend yield is computed by taking the indicated dividend—the most recent quarterly dividend multiplied by four—and dividing it by the share price.
That means that the price of the stock will drop. If you own this stock, you will not only receive a lower dividend, but you will also watch your share prices fall. The market reacts very quickly to dividend changes, so even a hint of a dividend reduction can cause your stock to go down in price. When Dividends Go Up When dividends go up, the stock becomes more attractive to buyers. That increased demand will cause sellers to raise the price to gain more profits.
If you hold this dividend stock, the share price will go up as the dividend rises. What's the point of paying a dividend if the stock price automatically decreases? Don't the shareholders just break even?
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Companies have to do something with their profits. They beholden to their shareholders to make them money either by increasing the share value or paying dividends.
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So they have the choice between reinvesting their profits into the company to grow the business or just handing the profits directly to the owners of the business the shareholders. Some companies are as big as they want to be and investing their profits into more capital offers them diminishing returns.
These companies are more likely to pay dividends to their shareholders. I assume the price of the stock "naturally" increases over the year to reflect the amount of the dividend payment. This is kind of a vague question but then doesn't it make it difficult to evaluate the fluctuations in stock price in the way that you would a company that doesn't pay a dividend?
It depends on the company. Payouts are only made to shareholders that are recorded on the books of the issuing company. A person must be on record as a shareholder by what's known as the record date in order to receive a dividend. The date two business days before the record date is known as the ex-dividend date, since shareholders who buy the stock after that date are buying shares without the dividend.
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The payout date can be days, weeks or even months after the record date. This is the date that the dividend is actually paid out to shareholders. Stock Price on Ex-Dividend Date Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend.
However, the market is guided by many other forces. If a stock is deemed to be undervalued by investors, the stock price may be bid up, even on the ex-dividend date. Similarly, if investor perception of the value of a stock on any given day sours, the stock may sell off much more than the simple drop due to the dividend. Some investors may choose to buy a stock specifically on the ex-dividend date.