A statement made by many is that the market determines share price change on the ex-dividend date. This is supported in an article at Investopedia:
On the ex-dividend date, investors may drive down the stock price by the 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.
Other web sites state that the specialist/exchange marks share price down. From Zacks:
Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend. For example, if a stock trades at $50 per share and pays out a $0.25 quarterly dividend, the stock will be marked down to open at $49.75 per share.
Who should you believe?
Let's look at some stocks going ex-div tomorrow morning. The number in parens is the dividend, followed by today's close:
- ESS (1.95) $288.30
- AVB (1.52) $201.28
- WPC (1.03) $ 81.30
Tomorrow morning, look up the closing before trading resumes. The closing quote (technically the adjusted close) will be lower by the exact amount of the dividend. If trading has resumed, subtract the price change from the last price and that will give you the adjusted close.
If this ex-dividend share price adjustment did not occur, everyone would place MOC orders (market on close) this afternoon to capture the dividend overnight and then sell immediately in the morning, making free money. No one would ever need to trade anything else. There is no such arb yet there are numerous web sites and newsletters dedicated to hyping the idea that Dividend Capture provides free money. It’s bogus.
The idea that dividends are income and you can live off of them in retirement is also bogus. Because share price is reduced by the exact amount of the dividend, it creates an equal and offsetting capital loss, resulting in zero total return (before dividend taxation if non sheltered). It reduces your cost basis by returning a portion of your investment to you. Let's not get sidetracked by 'dividends come from corporate earnings". This is all about what happens in your brokerage account on the ex-div date.
As a no return example, if you bought AT&T exactly three years ago at $42.03, you would have received $5.94 in dividends. Say you spent them to live. Your position has lost $9.48 and you are net down $3.54 at yesterday's close of $32.55. The dividends received simply lowered your cost basis to $36.09. This is metaphorically no different than withdrawing cash from the bank and spending it for living expenditures. The dividend does not become true income until share price recovers by the amount of the dividend (slightly less if dividends are reinvested). Only share price appreciation provides total return.
Stock exchanges reduce share price by the exact amount of the dividend on the ex-dividend date so if one does nothing and the security is held in a non sheltered account in the U.S. then all one would gain would be a taxable event and negative total return. Most retail traders and investors are not aware of this and have no clue what's going on in their own brokerage account(s).
Further supporting this exchange adjustment mechanism is FINRA Regulation 5330 which is "Adjustment of Orders":
(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01), as follows:
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
EDIT: 7:00 AM EST (the next morning)
Here are yesterday's closes with the dividend in parens:
ESS (1.95) $288.30
AVB (1.52) $201.28
WPC (1.03) $ 81.30
Here are the closing prices listed this morning before trading has resumed:
ESS now displays a close of $286.35
AVB now displays a close of $199.76
WPC now displays a close of $80.27
$1.95, the amount of the dividend, has magically disappeared from the closing price of ESS overnight.
$1.52, the amount of the dividend, has magically disappeared from the closing price of APC overnight.
$1.03, the amount of the dividend, has magically disappeared from the closing price of WPC overnight.