Dividends

What's the good of dividends if the stock price falls?


Q: What's the good of dividends? The prices of my stocks usually fall by the amount of the dividend after they're paid out.


A: The day investors get a dividend should be a happy one. Who wouldn't like to get a cash payment?

But the smile on dividend day can often fade away after taking a closer look at the stock price. It's pretty typical for the current stock price to fall on the day that dividends are locked in.

Specifically, on the day that companies cut off which investors get the dividend, the stock price can fall by the amount of the dividend being paid. This day is called the ex-dividend date, and after that day, investors who buy the stock aren't entitled to the dividend. If you're a dividend investor, you owe it to yourself to understand several key days when it comes to these important cash payouts:


The reason the stock falls when a stock goes ex-dividend is simple. When a dividend is paid, a portion of the company's value is being transferred from the company's bank account to the accounts of investors. That draw down in value is to be expected because paying a dividend reduces the value of a company's assets. The ex-dividend date is such a powerful force that it's usually noted in the printed stock price tables in the back of most newspapers.

Some investors might feel slighted when a stock falls on ex-dividend date, but they shouldn't. The stock price is merely adjusting the fact that some of the company's value has been transferred directly to shareholders. The value of investors' total ownership, the value of the stock plus the value of the dividend, is unchanged.

But be careful. While a stock certainly will have a tendency to fall the day stocks go ex-dividend, it's not a guarantee. Some investors try to speculate on this phenomenon by betting against a stock on the ex-dividend date.

Remember, though, that many factors influence a stock's short-term value other than the dividend schedule. If a stock goes ex-dividend on a day that the market is up sharply, for instance, the upward bias of the market can erase the downward pressure from the payment of the dividend.

more @ http://www.usatoday.com/money/perfi/columnist/krantz/story/2012-01-05/stock-prices-dividends/52397766/1