How Do Dividends Affect Stock Price?
Your total return from dividend stocks consists of the rise in your stock prices plus the corporate profits companies pay out as dividends on your shares of their stocks. You profit when stock prices rise and dividends remain steady. Knowing the relationship between dividends and stock prices will help you protect the value of your portfolio.
When Dividends Go Down
If a company reduces the dividend it pays on its stock, the stock becomes less attractive to investors. That means that the price of the stock will drop. If you own this stock, you will not only receive a lower dividend, but you will also watch your share prices fall. The market reacts very quickly to dividend changes, so even a hint of a dividend reduction can cause your stock to go down in price.
When Dividends Go Up
When dividends go up, the stock becomes more attractive to buyers. That increased demand will cause sellers to raise the price to gain more profits. If you hold this dividend stock, the share price will go up as the dividend rises. Investors generally consider rising dividends a sign of a company's good health. Always make sure the company that issues the dividend stock reports growing profits along with the increased dividend. Avoid companies that raise their dividends without increased profits to make their stock look more attractive, because those companies may not be able to pay the increased dividend over time.
You can anticipate changes in dividends by going on the company's website, reading the annual report, participating in quarterly calls and paying close attention to any press releases issued by the company regarding dividend changes. The stock price will react before the actual dividend change based on company news. Your stock price will also rise or fall based on profit and sales projections, because these tend to be leading indicators of a coming change in dividends.
Anticipating Dividend Changes
You should also pay attention to many non-company indicators so you can anticipate changes in dividends. Keep up with analyst ratings and expectations, news headlines and industry announcements that could affect the particular company that issues your stock. Use such market signals to determine whether the dividend is likely to rise or fall so you can make buying and selling decisions long before any announcement of a reduced or increased dividend.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.