How Does the Stock Price Change When a Dividend Is Paid?
Numerous factors affect stock prices. Supply and demand plays a major role in the rise and fall of stock prices. Fear and greed are also driving factors. Something else plays a role when a company pays a dividend, however. Theoretically, a stock trading without rights to a dividend is worth less than the same company trading with that dividend. In actual stock market trading, however, this is not always the case. In any event, you should be aware of the terms ex-dividend, record date and payout date to understand how a company's dividend policy can affect the trading price of its stock.
Generally speaking, stock prices are reduced by the amount of a dividend once the ex-dividend date arrives. However, a variety of other factors can also affect price.
Understand Dividend Terminology
Dividends are typically paid in cash and given to shareholders quarterly, although some companies pay dividends irregularly or make payouts in the form of shares of stock. Payouts are only made to shareholders that are recorded on the books of the issuing company. A person must be on record as a shareholder by what's known as the record date in order to receive a dividend.
The date two business days before the record date is known as the ex-dividend date, since shareholders who buy the stock after that date are buying shares without the dividend.
The payout date can be days, weeks or even months after the record date. This is the date that the dividend is actually paid out to shareholders.
Stock Price on Ex-Dividend Date
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.
However, the market is guided by many other forces. If a stock is deemed to be undervalued by investors, the stock price may be bid up, even on the ex-dividend date. Similarly, if investor perception of the value of a stock on any given day sours, the stock may sell off much more than the simple drop due to the dividend.
Some investors may choose to buy a stock specifically on the ex-dividend date. Since companies usually pay dividends every quarter, an investor who buys on the ex-dividend date may get the stock at a lower price but will still be entitled to a dividend three months later.
Still others may buy a stock before the ex-dividend date to capture that dividend, then sell the stock the next day. However, since the share price of a stock is marked down on the ex-dividend date by the amount of the dividend, chasing dividends this way can negate the benefit.
Record And Payout Dates
On the record and payout dates, there are no price adjustments made by the stock exchanges. Those dates are mainly administrative markers that don't affect the value of the stock. From an investment perspective, the important date is the ex-dividend date, as that is the date that determines whether you are entitled to a dividend or not. Payout dates are important to investors, as that is the day they actually receive their money. However, it doesn't affect the value of the company on the open market.
Taxation Of Dividends
Taxation is another concern for dividend investors. Although most corporate dividends are "qualified" and taxed at a special rate, you have to hold a stock for 61 days or more to earn that status. This means your first couple of dividends will be taxed at your ordinary income tax rate. If you intend to buy and sell stocks immediately before and after their ex-dividend dates simply to capture the dividends, you may face a large tax bill. You'll also have to factor in the commission you may have to pay every time your buy or sell a stock.
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.