March 27, 2011

Do Stock Values Drop After Dividend Payouts?

Have you ever seen someone make the following kind of statement.

After a stock pays out the dividend the market value of the stock will drop by that same amount the day the dividend is paid out. For example. ABC corp trades at $20 and pays out a $0.50 quarterly dividend the day the stock pays the 50 dividend the shares will drop by the same 50 amount down to $19.50. The market may cause the stock to go up or down which would otherwise hide this effect.

The above statement is not a direct quote but a paraphrased version of what I’ve seen several people say. I actually only heard this for the first time myself recently (probably within the past 6 months?). When I first heard this I thought to myself. Oh, huh, I didn’t know that. I tried to verify it by looking at the value of stocks but when you look at a company that pays a 10 dividend and the price of the stock bounces up and down +/- 50 in a given day its impossible to differentiate the impact of that 10 dividend from other daily market movements.

On Feb. 23, 2011 the stock closed at $20.37. They then paid a dividend of 14. It opened at $20.12 on Feb. 24th. Thats $0.25 lower than the close price which might include that 14 dividend. The stock was down more than 14.

But back on Feb 18th GE closed at $21.44 and then opened on Monday Feb 22nd at $20.88. So the difference between closing on Friday and opening on Monday was down $0.66. With that kind of swing between close on one day and open on another its hard to see the impact of a 14 dividend.

But a 14 dividend is less than 1% of the market value of GE and the day to day volatility can easily be more than 1%. In order to see the phenomenon better it would be best to find a company that pays out a really big dividend that is not easily confused with the market volatility. If the dividend is 0.7% and the market goes up or down 0.5 to 1% daily then you’ll never really see the impact of that 0.7%. Lets look at the change in market value from close to open in GE stock on a daily basis. I’ve highlighted the dividend dates in yellow:

As you can see the yellow dividend dates are just buried in the noise of the normal market fluctuations for GE stock. So its impossible to see any real pattern from the dividend payouts.

What you need is a stock that pays out a large dividend that might cause a drop that is much larger and clearly not a result of typical market fluctuations. If a company has a very large dividend of say 5% then its a lot easier to see the impact. Its pretty rare to find a company that pays out such a high dividend rate.

I was able to find a company with a very large dividend. American Capital Agency Corp. (AGNC ). Their dividend is $1.40 per quarte r and they are trading around $28 lately. So their quarterly dividend is pretty close to 5% of the stocks market value. Plus they’ve been paying that $1.40 dividend for 7 quarters straight so it would be easy to see some history.

Here is how the stock closed and opened around dividend payouts for AGNC in the past 7 quarters :