Final answer:
Dividends are a part of companies' profits given to shareholders and can affect the share price, often resulting in a decrease in value equivalent to the dividend paid. Over time, the dividend yield of companies has declined, and capital gains have played a more significant role in the total return for investors. Still, dividend-paying stocks attract investors looking for regular income and long-term growth.
Step-by-step explanation:
When assessing the impact of dividend payments on a company's share price, it's important to understand that a dividend is a portion of a company's profits distributed to shareholders. Share prices may decline by the amount of the dividend paid as the company's assets decrease by the dividend amount upon payment. Historically, companies like Coca-Cola and utility companies have paid dividends, providing investors with a steady income stream. Investors often hold these stocks for the long term for this predictable return.
As shown in Table 17.2, since the 1950s, dividend yields have generally declined from an average of 4% to around 1% to 2% in recent years. The dividend payout and the capital gains are two components of the total return an investor gets, with the latter having become more significant over time. In the past few decades, the capital gains have often outstripped dividends, particularly in the 1980s and 1990s.The share price before and after a dividend payment is affected by various factors, but the immediate effect is typically a reduction in share price equivalent to the dividend amount. However, many investors seek out dividend-paying stocks for the regular income they provide, coupled with the potential for long-term capital appreciation.