What Is A Dividend?

A dividend is a payment made to a group of shareholders in the form of cash or stock. Dividends are often paid out of a company’s retained earnings; however, dividends paid out of negative retained income are feasible but uncommon. Dividends have critical dates attached to them that influence whether or not shareholders will be paid a dividend.

The ex-dividend date is the last day on which a shareholder’s eligibility to receive a dividend expires; it usually happens one business day prior to the record date. Second, the record date is the date on which the board of directors determines which shareholders will receive dividends, as well as other significant financial information which is related to the dividend payout.

Impact of Dividends on Share Price

Dividends are irreversible, therefore they often result in money being permanently removed from the company’s books and accounts. As a result, dividend payments have an impact on share prices, which may rise by about the amount of the dividend announced on the announcement and subsequently fall by a comparable amount in the opening session of the ex-dividend date.

For example, a company with a share price of $60 declares a $2 dividend on the day it is announced. The stock price rises by roughly $2 as soon as the news is made public, reaching $62. Let’s say the stock is trading at $63 one day before the ex-dividend date. Because anyone buying on the ex-dividend day will not receive the dividend, it is adjusted by $2 and begins trading at $61 at the start of the trading session on the ex-dividend date.

Keep in mind that this may or may not occur, but the price should adjust to reflect the dividend on the ex-dividend date, decreasing the share price by the dividend.

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