Profiting from a stock investment relies on selling your shares when prices are high, after buying them at a comparatively lower price. Many factors play roles in determining when stock prices increase. In some cases, dividends affect stock prices. However, there is not always a direct link between declaring dividends and price increases.
Stock prices increase when demand for a stock is high. This usually occurs when investors get new information to suggest that the company is doing well. It can also happen if investors believe the company will soon declare a dividend. Dividends are payments to investors for owning stock. Companies can issue them quarterly, or on special occasions, such as after a successful expansion or period of growth. When a company declares a dividend each shareholder receives a payment, whether she has held the stock for years or just bought it recently. When investors suspect that a dividend declaration is forthcoming, demand will rise, pushing up the stock price.
Stock prices can increase at any time, including before or after a company declares a dividend. Acquiring stock before a dividend is declared is key to receiving the payment for each share you own. If you're hoping to see the price of your shares rise while also collecting a dividend payment for immediate income, waiting until the dividend has been declared is too late. Some companies issue dividends every three months, which means you can see a pattern to their dividend history and buy just before a dividend is declared. However, other investors will be able to see the same trend, meaning that stock prices could rise well in advance of the dividend as investors position themselves to receive it.
News of Dividends
Even before companies declare dividends, stock market analysts may have specific expectations for dividends. Rumors of a company's decision to start offering a dividend for the first time may raise stock prices. However, if that company doesn't declare a dividend in the expected time frame, the price may return to its original level. Companies use dividends to attract investors and encourage them to keep their stock, which raises cash for the company. They do not use dividends, or information about their plans for dividends, to manipulate stock prices directly.
Investing Based on Dividends
A company's board of directors is responsible for declaring dividends, as well as selecting the amount of the dividend and deciding whether to cancel dividend payments. This means that no dividend is certain until it's declared, even if a company has a long history of offering dividends as incentives to invest. Just as declaring a dividend can cause a stock's price to increase, canceling one can cause the price to fall. Make sure that your investment decisions are based on more than just information about dividends. Factor in the company's overall health, its potential for growth and the status of the overall economy.
Video of the Day
- Comstock Images/Comstock/Getty Images