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by Super_Jambo 5987 days ago
Sure, but the fundamental value of the share obviously goes down at the instant the company pays out a dividend, so the expectation is that the companies price will drop.

Since everyone expects it to happen it generally does.
2 comments
dschobel 5987 days ago
Except that dividends are announced well in advance so if the price did drop automatically on the day the cash is paid out, it would be trivial to short the position.

The fact is, there is nothing predictable in the stock market.

edit: as BobbyH points out, my point about shorting is mistaken but that does not change the key point about unpredictability of the markets vis a vis declaring a dividend.

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andrew1 5986 days ago
A good example of dividend behaviour can be seen in the 16th December dividend from Sycamore Networks (see http://www.google.com/finance?q=scmr). This dividend was announced on the 18th November (roughly a month before the effective date). The share price doesn't change at that point, but on the effective date it falls by $9.70, almost exactly the dividend amount of $10. I chose this example as Sycamore gave out a quite ludicrous amount of cash (something like 35% of the company value) so the price drop is very obvious. Another unusual feature of the dividend is that the pay date is actually before the effective date. The dividend is paid on the 15th December, even though its the people who own the shares at the market open on the 16th who qualify for the dividend. This comes about due to a rule that NASDAQ have that if a distribution is greater than 25% of a company value, then the effective date is set to be the day after the pay date.

I think that while there is a lot that is unpredictable about the stock market, you can be fairly sure that on a dividend's effective date, the share price will fall by roughly the amount of the dividend. It won't be exact due to all the other factors which would affect a stock's price on any day, but it will be roughly correct.

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BobbyH 5987 days ago
dschobel, when you short a stock, YOU are responsible for paying the dividend to the person you borrowed it from, c.f. http://en.wikipedia.org/wiki/Short_%28finance%29

That's why investors can't make an infinite amount of money by shorting stocks right prior to the dividend date...

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