Timeline for If stock price drops by the amount of dividend paid, what is the use of a dividend
Current License: CC BY-SA 4.0
22 events
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| Nov 5, 2022 at 13:48 | comment | added | Flux | I have asked a question that is relevant to this answer. Do stock prices increase by the anticipated amount of the dividend in the period before the dividend is paid? | |
| Apr 21, 2021 at 14:57 | comment | added | Flux | "But you can't calculate the price of a company's stock by adding up the value of all its assets, subtracting liabilities, and dividing by the number of shares." You are right. However... this may interest you: residual income valuation. It says that the value of a company's stock is the book value + the present value of residual income. Cash is part of book value, so if the company pays a $10 dividend, the value of the company does fall by $10. Residual income valuation is equivalent to the dividend discount model and the DCF model. | |
| Apr 21, 2021 at 14:31 | comment | added | Flux | Okay, I will read the answer again. In the answer, it says "Long term, the value of any stock is not the value of the assets but the net present value of the total future expected dividends". What if the company never pays any dividends? | |
| Apr 21, 2021 at 14:15 | comment | added | Jay | ... If the company is going out of business, the stock will very soon be worth zero. If investors all know that on March 15 the company will go out of business and at that time it will have absolutely zero assets, presumably on March 15 the stock will be worth $0. So if the way the company will liquidate is that on March 14 it will pay a $10 per share dividend that will represent the total of all the company's assets, then (assuming investors all now this and it is all 100% certain) I'd expect that on March 13 the value of the stock would be $10. | |
| Apr 21, 2021 at 14:07 | comment | added | Jay | @Flux You're breaking your own hypothetical. You started out with "the underlying value of the company's stock is $10 per share". My argument is that, if nothing else changes, the company's stock price would rise just before paying a dividend and fall afterward, as anyone buying the stock just before the dividend is getting the stock plus the dividend, while someone buying just after the dividend is getting just the stock. But if you assume that the company is liquidating, then very clearly something is changing that will affect the value of the stock. ... | |
| Apr 20, 2021 at 21:09 | comment | added | Flux | I am starting to understand the essence of your answer: you are claiming that the price pattern of your example ideal stock is similar to a bond's zigzag dirty price graph. This is an interesting insight. However, you may have made questionable statements in your explanation of stock valuation, which I think is the cause of all the downvotes. I really hope you will someday read a valuation textbook and revisit this answer, because it has great potential. | |
| Apr 20, 2021 at 21:06 | comment | added | Flux | The point of my 100% dividend yield is to illustrate an extreme scenario where the pricing you suggest would be nonsensical. Suppose a company's stock is at $10, and the company consists of 100% cash in a bank account. The company holds $10 of cash per share, and decides to issue a 100% cash dividend (i.e. liquidate). It would be nonsensical to suggest that the price would rise to $20 in the period leading up to the dividend. Who would buy the stock at $20 knowing that they would only be left with a worthless stock and $10 cash? | |
| Apr 20, 2021 at 19:55 | comment | added | Jay | @flux I wouldn't say "the day before". I'd say, "in the period of time leading up to", with that period depending on when it becomes known that the company will pay this dividend and how certain investors are that it will really pay. How is the stock price justified? Because investors know that the stock has an underlying value of $10 per share and that if they hold the stock on the divided date they will get this extra $10. There are, of course, wild numbers. It's hard to imagine a stock selling at $10 a share paying a $10 per share dividend. I think 2 or 3% a year is more common. | |
| Apr 18, 2021 at 15:34 | comment | added | Bob Baerker | This answer and many of the comments are wrong on so many accounts. The value of the company has nothing to do with the fact that share price is reduced by the amount of the dividend on the ex-dividend date. It's happening right there in front of you in your account every time your stock goes ex-dividend. All you have to do is look. | |
| Apr 18, 2021 at 15:20 | comment | added | Flux | Suppose a company has no activity and is holding $10 of cash per share in a bank account. The stock sells at $10 per share on the stock market. The company announces a dividend of $10 per share. By your reasoning, the stock price would rise to $20 the day before the dividend is paid. How is the $20 stock price justified? | |
| Apr 18, 2021 at 15:18 | history | edited | Flux | CC BY-SA 4.0 |
Fix typo; fix dashes
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| Apr 9, 2014 at 13:43 | comment | added | Jay | @JoeTaxpayer As I said, "Plus or minus all the other things that affect the value of a stock, which in many cases would totally mask this effect." Also, my logic above does not lead to the conclusion that it pays to buy a stock the day before a dividend just to collect the dividend. Just the opposite: You'd collect the dividend, and the price of the stock would then immediately fall by the amount of the divided, cancelling out the benefit. | |
| Apr 8, 2014 at 19:28 | comment | added | JTP - Apologise to Monica♦ | "we would expect that as the date of that dividend approaches, the price of the stock would rise until the day before the dividend is paid, it is $11" So a $10 stock rises to $11 until the ex div date? Sorry, this is nonsense. The dividend capture play may have been profitable years ago, but today, once the noise is removed, there is no gain to be had. | |
| Apr 8, 2014 at 18:56 | comment | added | Jay | @assylias No, I'm not saying the same thing. See my update to my answer above. You're confusing a company's net assets minus liabilities with its market capitalization. Not the same thing. Or to put it another way, you're confusing the statistical noise created by the fact that most companies pay dividends quarterly rather than every day with the long term trend in the value of the company. | |
| Apr 8, 2014 at 18:52 | history | edited | Jay | CC BY-SA 3.0 |
added 4341 characters in body
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| Apr 8, 2014 at 14:15 | comment | added | assylias | You are saying the same thing - the "package you are buying" is a company with $10m in cash that is going to shareholders tomorrow or a company that just spent $10m to pay shareholders yesterday. Those two companies don't have the same value. Also there is a significant amount of research documenting the fall in price on ex date so I don't think there is much to argue about. | |
| Apr 8, 2014 at 13:44 | comment | added | Jay | ... assets, it has to do with what you are buying: Does the package that you are buying include a dividend or not? Without such an adjustment, sellers would have an arbitrary incentive to delay selling until the day after a dividend is paid, distorting the market. | |
| Apr 8, 2014 at 13:41 | comment | added | Jay | @assylias A company's BALANCE SHEET will show a reduction in assets of $10 million if they pay $10 million in dividends. But total value of stock is not necessarily equal to total assets. You are confusing two vastly different things. I see you are talking about ex-dividend dates. But this is a technicality. If a company is planning to pay a dividend on, say, March 31, then the value of the stock on April 1 is less than the value on March 30 because if you buy on April 1 you will not receive the dividend while if you buy on March 30 you will. This has nothing to do with the company's ... | |
| Apr 8, 2014 at 9:13 | comment | added | jonsca | It is actually you and I that have had the misconception, unfortunately. See www.investopedia.com/articles/stocks/07/dividend_implications.asp under Price Implications. | |
| Apr 8, 2014 at 4:39 | comment | added | Victor | assylias is correct, the value of the company goes down by the amount of the div., because the amount of div. has come out of the assets of the company. Before the ex-div. date $10m was part of the company's assets, as of ex-div. date that $10m has been allocated to the shareholders. What you refer to Jay, is the stock price, which doesn't always relate to the true value of the stock. A stock price always commences ex-div. date at minus the dividend amount and then moves up or down from this point. In less liquid stocks the first trade on ex-div. date might vary considerably from this point. | |
| Apr 7, 2014 at 19:25 | comment | added | assylias | "I'm not a financial expert, but saying that paying a $1 dividend will reduce the value of the stock by $1 sounds like awfully simple-minded reasoning to me." => it is (approximately) the truth though... And it happens to make sense: if a company is worth $1bn and they pay out $10m in dividends it is only worth $990m after the payment: cash has gone out of their bank account. | |
| Apr 7, 2014 at 13:44 | history | answered | Jay | CC BY-SA 3.0 |