why does the price of the stock fall when the dividends are anounced? e.g. let’s say rs.5 dividend per share is announced by company X. Then it is said that the stock price would fall by Rs. 5? What is the rationale bebhind this?
And if this is the case, as a shareholder, what advantage would i get? i am getting a dividend of Rs.5 per share but at the same time the value of the share is also going down by Rs. 5. So what is the point here?
The dividend is paid through market price of company as the cash is paid by reserves or either profit so either way money is outflow from company and hence there will be a reduction in market price of the company.
Advantage is that you are getting a part of profits directly in your account and also decreased market value will seems to be attractive for the investors.
The reason for drop in price is because the amount paid out no longer belongs to the company.
Dividends are beneficial for buy-and-hold investors not for short term holders. For long term investors, dividends are similar to earning interest on their share holdings (or earning profit without selling shares), and long term investors are unfazed by small drop in price of stock relative to dividends paid.
Companies who pay regular dividends are fundamentally strong, which instills confidence in current shareholders and also attracts new buyers which in turn helps appreciate stock’s value, which is beneficial to long term investors.
To add to this: dividends also act as emotional support against draw-downs. As in “The stock price may be currently 30% lower than my purchase price, but I got 10% of my cost as dividends in each of the last 5 years so I am fine.” Indeed, if I have seen a company offer dividends consistently over many years, then I would prefer its price to remain low so I can buy it whenever I wish.
Dividends add up significantly over the years. Here are couple of personal data points:
I am not mentioning the stock names because I don’t want to seem to be offering recommendations. My first purchase of stock A was in 2005, and that of stock B in 2009 .