How does payment of a dividend affect the price of a stock?

The topic of this article is how payment of a dividend affects the price of a stock.Let's begin by reviewing what exactly a dividend is. If a company has extra money at the end of the year, they might reinvest it in the company.They might then decide to pay those extra earnings out to the stockholders.Ultimately, at least in the United States, the decision to pay dividends to the stockholders is completely determined by the board of directors of the company.Also, in the United States, the dividends paid by a company to the stockholders is announced quarterly, as opposed to biannually in most other countries.Companies can decide whether or not they want to pay dividends, how much to pay, and when to pay them.Shareholders have absolutely no say in the payment of dividends.However, companies are not prone to changing their dividend policies very often, since cutting out dividends or decreasing the amount of a dividend, particularly cash dividends, is generally a sign that the company is in trouble.Boards of directors will only increase dividends if they are absolutely certain that the company is doing well enough that it can handle the increase.

Typically, companies pay dividends in two ways (though there are others, such as property).The most popular and common way to pay dividends to share holders is with cash.Cash dividends are divided among the shareholders of a company in the form of cold, hard cash.This money comes from either current earnings, from accumulated profits, or from the earnings made by reinvesting money into the company.Cash dividends are taxable and count as investment interest/income.

So, does the issuance of cash dividends have any effect on the price of stock?Well, you might think that it would, for various reasons.But, unless the announcement of the cash dividends is a surprise, then the stock's price will probably not move.Also, if the nature of the dividend is a surprise-if a company normally pays stock dividends and suddenly switches to cash, or vice versa-then the price of the stock will probably move also.But if cash dividends are paid regularly, then they will be taken as a matter of course and will not affect the stock market. If stock prices do change, because the company decides to dramatically reduce or increase dividends, you will probably see the prices change that very day.

What about stock dividends?What kind of effect do they have on stock prices?Stock dividends are a way of paying dividends by giving stocks to shareholders, based proportionally on the number of stocks already owned.Sometimes companies will perform what is called a stock split, which is where they multiply the number of stocks by two, three, or even four.Basically, it's a really big stock dividend.If you are planning on staying invested in the company for a long time, or if you don't need extra money at the time, you can keep your stocks, or you can just immediately sell them for the cash.

The issuance of stock dividends will make the price of the stocks fall.They probably won't fall very much, but the price will fall on the ex-dividend date, or the day four days before the record date.So if you know that a company is going to pay its dividends in stock, and you want to buy stock at a lower price, then you will probably want to buy just before or on the ex-dividend date.However, the drop will be low enough that it will probably be equaled out by transaction costs and taxes.