How changes in dividend payouts can affect stock prices

While many investors tend to invest in companies that pay dividends, the truth is that a company in the stock market does not have to pay the dividend. But even for a company that pays dividends to its shareholders, the company can lower its dividend during recessions. In fact, a company can simply decide to stop paying dividends altogether during hard economic times. In that case, the yield an investor would expect from a dividend will drastically go down to zero. Before investing in any dividend stock, an investor must conduct stock analysis to figure out how dividend payment will affect the stock price.

Rather than going for dividend investing due to the dividend paid by a company, an investor should generally look at stock prices. This is because when investing in a stock, there will be two ways in which the investor will earn revenue. First, the investor will earn revenue through dividend paid by a company to its shareholders. Secondly, the investor will earn revenue based on the anticipated increase in price of the stock invested in. Since stock prices and dividend are mentioned in both cases, they will always have an effect on an investor’s revenue stream in future.
In simple terms, stock prices always react instantaneously to any change in dividend payout. In uncertain economic times, dividend paying stocks can go down drastically in value since there is a possible risk that any future dividend will be cut or eliminated. If the issuing company declares that it is lowering the dividend, its stock price will be affected instantly. Once the economy shows positive signs of improvement, the company’s dividend stocks price is likely to rise since investors will anticipate that the company will increase dividend. But if the economy remains uncertain, the stock price can even fall further since the company is more likely to eliminate paying dividends.

Raquel (Author)