Dividend declaration may impose a positive or negative impact on stocks’ price. Simply, investors expect high return on their investment. If a company declares low dividend, investors become frustrated. Hence, they decide to sell their holding. As a result, stocks’ prices move to downward.
On the other hand, if a company declares high dividend, existing investors want to hold their shares. Moreover, new investors want to buy this company’s shares. As a result, this company’ share price begins to surge.
Negative impact of dividend declaration
Perhaps, an investor has been holding a specific stock for long time. He is always observing the quarterly performance. But at the final moment, he hears the news of low dividend declaration of that company. Naturally, he becomes frustrated for low dividend’s news. Finally, like other investors, he is to sell his holding in order to buy another good company’s stock.
Many investors desire to buy shares when they expect more return. But, when they hear the news of relatively low dividend rate, they decide to sell their holding. Moreover, they want to buy better stocks. Thus, sale pressure creates for this stock and price starts to decline. Many investors make mistakes in buy or sell decision in this unstable time.
For example
A company’s EPS is 15 dollars. Per share market value is 160 dollars. Company has declared 2.5 dollars dividend per share. Dividend yield is (2.5/160)*100=1.56%. You should learn about EPS, Dividend Yield and P/E ratio to understand this example. This dividend declaration impacts negatively on its stock price. Investors decide to sell this stock immediately after hearing this dividend declaration. At least an investor expects 5% to 10% return from his holding.
When all the investors want to sell a company’s stock, this stock price will definitely decline.
This above example is a real scenery of a company. I just change the currency type. All the information similar to a reputed company. This dividend declaration has declined the stock price more than 12% in next trading day.
Positive impact of dividend declaration
Think above example alternatively. Let me share another real example: A power and fuel company has declared 2.2 dollars dividend per share. Its current market price is 38 dollars. Dividend yield is (2.2/38)*100=5.79%. This company’s stock price also decreased. Later, its price started to increase for high dividend yield.
What’s the difference between two company’s earning?
First example is a cement company’s stock. Second company is a power and fuel company’s stock. First company’s return on investment (ROI) is 1.56% and second company’s return on investment (ROI) is 5.79%. A prudent investor always tries to buy second company’s stock. And he wants to sell first company’s stock. As a result, whole market becomes unstable at the time of dividend announcement period.
What is the dividend declaration impacts on whole market?
Dividend declaration also affects the whole market. Generally, company’s financial year ends at 30 June or 31 December. Dividend announcement time frame may vary from country to country. Suppose, your trading stock exchange imposes a rule. A June closing company has to declare dividend within three months of financial year ending. That means last month of dividend announcement is October.
Similarly, last month of dividend declaration for a December closing company is March. But, dividend declaration date and record date are not same date. Simply, company declares dividend on annual general meeting(AGM) and fixes a record date to pay dividend. As a result, stock market negatively affects in October for June closing and in March for December closing companies. You can apply candlestick chart to know the price movement.
What action should an investor take in dividend declaration month?
Dividend declaration month affects the market negatively. Investors can’t predict market movement. Broad index starts to decline. Taking perfect decision is difficult. In this paradoxical situation, newbie or less experience investors should avoid trading. When the market behaves positively, they should start to take trade. Otherwise, they may make loss for mistake.
Dividend declaration month is very sensitive time for trading and investing. All on a sudden, market begins to behave unpredictably. You may lose your investment. To safe yourself, you should trade more carefully. Follow the golden rule of stock trading- stop loss rule early if you make any trading mistakes. Try to buy strong fundamental and dividend payee stock.
Founder of The Financial Ask
