How Does the Stock Price Change When a Dividend Is Paid?

When a company pays a dividend, the company's value diminishes by the amount of the total payout. Investors reason that the company’s stock price should go down by the same amount as the dividend to reflect the company’s reduced value. In practice, this doesn’t always happen. Dividends affect stock prices, but not always on the payout date. Though dividends are one of the many factors that affect stock prices, demand and forecasts for future profits also have an impact.

Ex-Dividend Date and Record Dates

When a company declares a dividend, the stock exchanges set a date when the stock won’t pay a dividend to new buyers. That is the ex-dividend date. The stock trades “ex-dividend” for two days before the record date, which is the date you must own the stock to receive the dividend. If you buy during the ex-dividend period, you will not be the owner of record when the record date comes, because the money from a stock purchase takes three days to transfer to the seller’s account. You must buy before the ex-dividend date if you want to be the owner of record on the record date.

Stock Price on Ex-Dividend Date

When the ex-dividend date arrives, the dividend stock tends to drop in price by approximately the amount of the dividend per share. That's because buyers won’t receive the dividend for the current quarter, so they want to pay that much less for the stock. Don’t treat this as a hard-and-fast rule. If a dividend stock has high demand, the price might not drop much on the ex-dividend date. Eager buyers can see the price drop as a buying opportunity because the company might have strong prospects for future profits, and therefore for higher future dividends.

Payment Date

The date that the dividend actually is paid to investors can be as long as a month after the ex-dividend date. On that date, the company actually makes payments for stockholders who owned the shares two days after the ex-dividend date. The payments often go to the stockholders’ brokers, who pass the dividend on to the stockholders.

Stock Price on Payment Date

Many investors look at the drop in company value on the payment date as a factor that the market has already priced into the stock. The payment date is published, so anyone buying the stock before the payment date sets a price to reflect the upcoming payment. That means the actual payment date might not result in a drop in stock price. High demand for a stock can keep the price up, even though the company value drops on the payment date.

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About the Author

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.

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