Understanding the effect of dividend announcement and distribution

Before a company can distribute a dividend, the company will first have to declare the date when the dividend will be paid and dividend amount. The company will also have to announce the final date when its shares can be bought in order for investors to start receiving the dividend. This date is known as ex-dividend date. The date is basically two-business days before the record date, which is a date when the shareholders list is reviewed. When these announcements are made, it is the right time for an investor to do stock analysis on the company’s stocks to determine their long-term value.

Naturally, the declaration of dividends always encourages more investors to buy stock or consider dividend investing in that company. Since investors will know that investing in the company by buying its stocks before ex-dividend date guarantees them a dividend, they will be willing to pay a higher amount for the company’s stock. This forces the company’s stock prices to increase just a few days to ex-dividend date. Generally, the increase in stock price is almost equal to the real dividend amount. However, the real price change will be based on the activities in the market and will not be determined by a governing entity.
When the ex-dividend date is finally here, the stock exchange reduces the price of the company’s stock by the dividend amount. This is done as a way of accounting for the fact that any new investor is ineligible to receive any dividend, and is therefore not willing to pay more for the dividend stock. But if the market is very positive about the future prospects of the stock in the days towards ex-dividend date, stock price will increase. The price increase in this case can be larger compared to the amount of the dividend. This will result in net increases even though an automatic reduction is in the offing.

Leave a Reply

Your email address will not be published. Required fields are marked *