Final answer:
The market value of a stock will typically decrease by the amount of the dividend paid, reflecting the transfer of value from the company to shareholders. Dividends, along with capital gains, form the total rate of return for investors in a stock. Despite a decrease in dividend yields since the 1990s, dividends remain an important aspect of stock investment returns.
Step-by-step explanation:
All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend. When a company decides to pay a dividend, it is distributing part of its earnings to shareholders. This action reduces the company's retained earnings and consequently can reduce the overall value of the company, at least temporarily. After a dividend is paid, the stock price often decreases by an amount approximately equal to the dividend paid, reflecting the money that has immediately left the company.
Investors seek a rate of return from their investments, which can come in the form of dividends or capital gains from selling the stock at a higher price than they paid. Stable companies, such as utilities and consumer goods firms, often offer dividends, providing income to investors in addition to the potential for capital gains.
Historically, dividends have played a significant role in the total rate of return for stock investments. For instance, from the 1950s to the 1980s, average annual dividends were about 4% of the stock value. Although dividend yields have decreased since the 1990s, they continue to be a crucial factor for many investors when evaluating stock investments.