Return On Investment

The immediate effect of dividends is the possibility of an increased return on investment (ROI). Take any two stocks that have similar performance and the one paying dividends will offer more value than one that does not pay dividends. Many long-term investors capitalize on this by using dividend reinvestment plans (DRIPs) to subsequently purchase additional shares of stock with dividend payments.

Selling Stock

Just as investors must buy a stock before the ex-dividend date to receive a dividend, investors who sell a stock prior to the ex-dividend date are obligated to deliver shares acquired from a dividend payment to the buyer on the payable date. Therefore, investors wishing to avoid this situation must hold the shares through the dividend payment. This makes the ex-dividend date an important time for both buyers and sellers in the market.

Market Perception

The announcement of a dividend payment often affects a stock’s price. When a company increases its dividend payment, this is seen as a sign of strength and often has a bullish impact on the stock price. On the other hand, a lowering of the dividend payment often has a bearish effect on the stock price.

Funds

References

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