The sentiment about a company that is planning to pay a dividend is usually positive, which has a tendency to send stock values higher. This is especially true if the dividend price is being raised. When a company decides to lower its dividend payout, this tends to have a negative impact on stock values. There are, however, several milestone dates in the dividend process that have varying effects on the stock values.
It is difficult to pinpoint precisely how stock values will react to dividends because many factors influence trading in the financial markets. Nonetheless, historical trading patterns do show some link between dividends and stock values. A 2002 study cited in a 2008 UCLA Anderson School of Management report suggests that stock values advance an average of 1.3 percent in the three days following a dividend increase. Stock values fall an average of 3.7 percent in the same period for companies lowering dividend payouts.
Investors have to own shares of a company by a given day, known as a record date, to be eligible for dividend distributions. As a result, there is a period of time between a dividend announcement and the record date when the stock price is most likely to increase as investors rush into the stock for the payout. To benefit from a dividend, investors must purchase shares before the "ex-dividend date," which occurs after a dividend announcement and before the record date. This gives the trade enough time to settle in time for the record date.
On the ex-dividend date, which is established by the stock exchange on which a dividend-paying company lists its shares, stock values usually decline, according to MSN Money. The usual drop is in proportion to the amount of the dividend that a company is paying. Companies use extra profits to pay dividends, and the drop in stock price value is reflective of the fact that the company has less cash for operations after paying dividends.
While the usual impact on a stock price on the ex-dividend date is a decline, this is not always the case. Dividend payments have influence over a stock's market value, but other things drive a stock price, too. For instance, if buying activity is dominating the stock market on the day a company is going ex-dividend, that upward momentum may be enough to send a stock price higher, according to a 2007 article on the "USA Today" website.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.