Capital appreciation is the common way of making money in stocks investing. This should be obvious given the fact that stocks continuously change its price every single day, which means more opportunities out of it.
But receiving dividends can also be a thrilling experience for new investors.
In fact, when I just started, I remember giant companies giving me few bucks as dividends. While they were pretty small amounts (less than a hundred pesos), at least they’re all aware that I’m one of their part-owners HAHA.
But as my positions become bigger, I started welcoming dividends from several hundreds to few thousands. Oftentimes, I got surprised once I noticed that my cash available has increased in value because of this addition. And I really like that idea of money coming to you in unexpected ways.
For some investors, dividend is one of their main considerations when choosing what companies to buy. This type of investors who look at dividends as regular income are specifically called income investors. They are contrasted to growth investors who are primarily after fast-growing companies that prefer to re-invest their earnings rather than sharing it with all the stakeholders as dividends. These growth-investors are then those who are after capital appreciation as preferred way of growing their money in the stock market.
But do you know that there are several implications when receiving dividends from your company in the Philippine Stock Exchange?
Below is a crucial one taken from Investopedia.com regarding what happens to the price of a stock on its ex-dividend date.
Price ImplicationsSo for stock dividends, you can calculate the opening price of these companies giving these dividends when the ex-dividend date comes.
When a dividend is paid, several things can happen. The first of these is what happens to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movement of a normal day's trading. However, this becomes easily apparent on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company and this is reflected by a reduction in the company's market cap. Instead, it belongs to the individual shareholders. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so the exchange adjusts the price downward to reflect this fact.
To get what a stock price will be on ex-date, you can use this formula:
Stocks’ opening price on ex-date = (Closing price day before ex)/(1+stock div rate).
Thus, for a 50% dividend, stock price will be adjusted to 67% of the price before ex-date.
Your total number of shares on the other hand will then be
Total Number of shares after dividend = Original Number of shares x (1+stock div rate).
Thus a stock dividend will automatically result in a lower price on ex-date.
And in the Philippine stock market, this is adjusted by the Philippine Stock Exchange.
So stop getting shock now if you see stocks’ price went down on their ex-date. It’s a normal consequence of the dividend-giving process.
Have fun investing (and receiving dividends)!