Answer:
How dividends affect stock prices is not a question for novice investors. It is possible and necessary to answer it - with a multi-page study, with an analysis of statistical data, consideration of historical situations as examples, and so on. However, novice investors still need to have at least a general idea of the interaction between dividends and quotes, so we will try to consider this complex topic simply, briefly and as clearly as possible. Growth of dividends and its impact on quotes Let's start with the simplest situation. Suppose a company declares a high dividend for the past year. Let's say they turn out to be twice as high as expected. And the dividend yield at some point rose to, say, 10%. Then, and rightly so, stock prices will rise sharply in order to equalize the company's dividend yield with its competitors in the same country and industry. Most likely, the shares will not double in price, but will grow significantly in price.
Step-by-step explanation:
Distribution of profits between investments and dividends But this will happen only in the most general case, if it means not only the growth of dividends, but also the profit from which they are paid. However, changes in the amount of dividends may not depend in any way on the current results of the company. Shares of PJSC Gazprom GAZP -15.61% YTD 295.89 price Invest It is quite possible that this year's profit is approximately equal to the results of the previous reporting period. But dividends change - they become more or less. Suppose an enterprise changes its dividend policy, which, for example, has recently happened among Russian energy companies. And one after another they decided that not 50% of their net profit should be directed to dividends, but only 25%. Theoretically, by reinvesting an additional quarter of free money in the business, the company should increase its share price. But in practice, they fell apart. Why? Payoffs vs Investments The answer to this question is obvious from one theory and contradictory to another. On the one hand, let's say, the closer the payment of money, the more it costs. Similarly, the shorter the term of the deposit, the lower the interest on it. Thus, the fall in quotations was influenced by the disappointment of investors: for them, the change in the dividend policy was a signal that money for their investments will be paid in the very near future in a smaller amount, the payback period for buying shares will increase significantly.But, on the other hand, the same energy companies, investing additional funds in the modernization of their business, should ensure revenue growth in the future, and the enterprises themselves should become more expensive. Therefore, at the new prices, after the decline, many institutional investors, on the contrary, declare their interest in acquiring these shares for their portfolios.