Professional Documents
Culture Documents
Stock Returns:
Return = P1 - Po + D1
Po
Stock Returns:
Return = P1 - Po + D1
Po
P1 - Po D1
= +
Po Po
Stock Returns:
Return = P1 - Po + D1
Po
P1 - Po D1
= +
Po Po
Capital Gain
Stock Returns:
Return = P1 - Po + D1
Po
P1 - Po D1
= +
Po Po
• If we pay dividends,
P1 - Po D1
Return = +
Po Po
Three viewpoints:
1) Dividends are Irrelevant. If we
assume perfect markets (no taxes,
no transaction costs, etc.) dividends
do not matter. If we pay a
dividend, shareholders’ dividend
yield rises, but capital gains
decrease.
P1 - Po D1
Return = +
Po Po
P1 - Po D1
Return = +
Po Po
3) Low Dividends are Best
Dividend Payments
2) Ex-Dividend Date:
Jan.4 Jan.30 Feb.1 Mar. 11
Declare Ex-div. Record Payment
dividend date date date
Dividend Payments
2) Ex-Dividend Date: To receive the
dividend, you have to buy the stock before
the ex-dividend date. On this date, the
stock begins trading “ex-dividend” and
the stock price falls approximately by the
amount of the dividend.
Jan.4 Jan.30 Feb.1 Mar. 11
Declare Ex-div. Record Payment
dividend date date date
Dividend Payments
3) Date of Record:
Jan.4 Jan.30 Feb.1 Mar. 11
Declare Ex-div. Record Payment
dividend date date date
Dividend Payments
3) Date of Record: 2 days after the ex-
dividend date, the firm receives the list of
stockholders eligible for the dividend.
• Often, a bank trust department acts as
registrar and maintains this list for the
firm.
Jan.4 Jan.30 Feb.1 Mar. 11
Declare Ex-div. Record Payment
dividend date date date
Dividend Payments
4) Payment Date: date on which the
firm mails the dividend checks to the
shareholders of record.
Stock Dividends and Stock Splits
• Why bother?
• Proponents argue that these are used to
reduce high stock prices to a “more
popular” trading range (generally $15 to
$70 per share).
• Opponents argue that most stocks are
purchased by institutional investors who
have millions of dollars to invest and are
indifferent to price levels. Plus, stock splits
and stock dividends are expensive!
Stock Dividend Example
stock price
P/E =
( net income
# shares )
Before the 50% stock dividend:
• EPS = 750,000 / 250,000 = $3
• P/E = 84 / 3 = 28.