A dividend paying asset pays a dividend on a specific date. When brokerages auto-reinvest these proceeds (DRIP), won't that influence the price (assuming that it's a market order)? In other words, wouldn't there consistently be a spike in price the day after a dividend is paid out?
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You may know this, but remember that the price drops by the amount of the dividend. So are you theorizing a "spike" after the drop?– D StanleyFeb 21, 2020 at 13:40
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@D Stanley - He's referring to the payable date (when dividends are reinvested) rather than the ex-div date.– Bob BaerkerFeb 21, 2020 at 13:46
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2@BobBaerker Right that's what I'm asking - a drop on ex-div followed by a spike on payable.– D StanleyFeb 21, 2020 at 13:59
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2 Answers
When brokerages auto-reinvest these proceeds (DRIP), won't that influence the price (assuming that it's a market order)?
Yes and no.
Yes, in theory. If the mass of buy orders is big enough (i.e. enough dividends are reinvested like that).
No, because they may have stocked up awaiting the gain.
For reinvestment of dividends, brokers combine the expected cash distributions to be received from dividends and they then purchase shares at the open on the payable date. Some studies indicate that this creates buying pressure that results in an increased share price as the dividend payout date approaches. Some authors suggest that share price then drops after the payable date.
OTOH, traditional Dividend Reinvestment Plans (DRIP) with the company, the dividends purchase the shares directly from the company's treasury stock. When sold, such shares are sold back to the company. So these DRIPs have no effect on share price.
answered Feb 21, 2020 at 13:45
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I didn't know that about DRIP... what effect might this have on dilution (and later, reversing it)?– user12515Feb 21, 2020 at 17:03
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When outstanding stock bought back from shareholders by the company (investor sells DRIP shares), the number of shares on the open market decreases, reducing shareholder equity. Such shares do not receive dividends and are not part of the calculation of earnings per share. For lack of a better word, it's anti-dilutive. Feb 21, 2020 at 17:33
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DRIP shares don't receive dividends? I wouldn't expect them to receive dividends as treasury shares (the company would be paying itself) but wouldn't they pay dividends to shareholders that have bought them through DRIP? It just seems like some funny accounting going on here... (guess I'll have to read up on this some more)– user12515Feb 21, 2020 at 21:07