The Effects of Dividends for Company and Shareholders
Jaap de Jonge, Management Consultant, Netherlands
The declaration of a dividend obviously encourages investors to purchase stock. SInce they know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date. In general, the increase is approximately equal to the amount of the dividend.
On the ex-dividend date, the stock price is likely to decrease by the approximate amount of the dividend to account for the fact that new investors are not eligible to receive dividends and are therefore unwilling to pay a premium. But if the market is really optimistic about the stock leading up to the ex-dividend date, the price increase this creates may be larger than the actual dividend amount, resulting in a net increase despite the automatic reduction.And if the dividend is very small, the reduction may go unnoticed.
Some shareholders invest in certain stocks at certain times solely for the purpose of collecting dividend payments. They purchase shares just before the ex-dividend date and then sell them again right after the date of record.