The total return from investing in a company's stock comes from the dividend payments you receive and any change in the share price between the time you buy shares and when you sell them. Knowing the relationship between dividend payments and stock prices can help you make prudent trading decisions.
When a company reaches the point that its earnings exceed the amount that it can reasonably expect to invest and achieve efficient growth, those earnings can be distributed to shareholders as dividends. The amount of that dividend becomes factored into the price of the stock as it is trades daily in the financial marketplace.
Pay attention to a stock's ex-dividend date because it determines which investors are eligible for a company's dividend payment. You must own the stock before the ex-dividend date to receive the next scheduled dividend payment. The exchange on which the stock is traded sets the ex-dividend date after the company announces its record date. This is typically at the same time it announces the amount of the next regularly scheduled payment or payments.
On its ex-dividend date, a stock is considered to be trading ex-dividend because any buyer on that day will not receive the next scheduled dividend payment. In a perfectly efficient marketplace, the price of the stock would drop by the precise amount of the dividend payment at the beginning of trade on its ex-dividend date. The price change reflects the decrease in the company's assets as a result of the dividend payment.
Because other factors, including speculation enter into a stock's marketplace price, identifying a dividend's impact on the stock's price can be difficult. But speculation on a company's ability to maintain or increase its dividend payout rate will have an impact on its stock price.
Capturing the Dividend
Dividend capture strategy is based on an attempt to collect the dividend and then sell the stock, possibly replacing it with another, just short of the second stock's ex-dividend date. Such a strategy requires exquisite timing and works best in a steadily rising market.