|
Amsterdam
Experience: None
Platform: QuickStrike, CTS
Trading: Derivatives
Posts: 195 since Jul 2010
Thanks Given: 227
Thanks Received: 214
|
Hello and welcome,
You can use the dividend yield to measure how much a company pays out in dividends each year relative to its share price. Dividend yield is calculated as follows:
dividend yield = annual dividend per share/ price per share
When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company and this is reflected by a reduction in the company's market cap. Instead, it belongs to the individual shareholders. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so the exchange adjusts the price downward to reflect this fact.
Historical prices stored on some public websites, such as Yahoo! Finance, also adjust the past prices of the stock downward by the dividend amount. Another price that is usually adjusted downward is the purchase price for limit orders. Because the downward adjustment of the stock price might trigger the limit order, the exchange also adjusts outstanding limit orders. The investor can prevent this if his or her broker permits a do not reduce (DNR) limit order. Note, however, that not all exchanges make this adjustment. The U.S. exchanges do, but the Toronto Stock Exchange, for example, does not.
On the other hand, stock option prices are usually not adjusted for ordinary cash dividends unless the dividend amount is 10% or more of the underlying value of the stock. Source: Investopedia
Personally I am more inclined to purchase a stock after the stock goes ex-dividend for taxation reasons. This way I don't need to pay capital gains tax on the dividend that I receive whilst my asset depreciates at the same time. 
|
