Ex-Div Dates and reduction in Shareprice

[oldaudi]

Good Morning,

Ive been investing in Dividend shares for many years, both in SIPP, my ISA and my daughters' accounts.

I notice that when a share becomes ex-div (today for example National Grid and Imperial Brands) the share price drops. Are there "investors" who genuinely just wait for the ex-div date to qualify for the dividend payment but then sell their holding? Or is it because the share price is recalculated due to the cash the business now has to give away?

Can anyone explain this trading practice? I just hold hold hold and reinvest my divs when they arrive.

Thanks

Edited by oldaudi on Thursday 23 November 09:39

[sammatty]

Spot on plenty of people will wait for the dividend to sell the shares even if it costs them money due to the share price dropping.

Similar thinking to the sunk cost fallacy of holding onto losses in the hope of recovering, despite missing out on gains elsewhere.

[BOR]

As I understand it, it's simply a mechanical revaluation of the company after dishing out 5% of the share price to holders.

The company itself has less cash, therefore is worth 5% less than the day before.

[Simbu]

The example shares you gave have a fairly low 'beta' (fluctuation in price), so holding on before selling after the dividend lands is probably considered a low risk for a guaranteed payout.

[thr32]

Morning all,

I’d suggest the reason is more mechanical than that: if it happened differently, someone would make money for nothing (a ‘risk-free arbitrage’):

A stock is trading at 100p. Holders on Thursday morning (the ex-date) are entitled to a 5p dividend.

All other things being equal, if the stock didn’t open at 95p on Thursday morning, I could buy it on Wednesday, collect the dividend, and sell it on Thursday to make a guaranteed return. An efficient market won’t let me make money for nothing.

HTH

TH

[bitchstewie]

Why do people invest in equities specifically for dividends?

I never quite get why some people invest in a stock at 100p take the 5p dividend and see their stock go down to 95p rather than invest 100p which hopefully grows into 105p then take the 5p

I know Terry Smith has some strident views on investing for total return v investing for income but on the investing for income side I've never seen much that's convinced me other than "I don't care about the capital value so long as I know I'm getting a regular income".

[WayOutWest]

bhstewie said:

Why do people invest in equities specifically for dividends?

I never quite get why some people invest in a stock at 100p take the 5p dividend and see their stock go down to 95p rather than invest 100p which hopefully grows into 105p then take the 5p

I know Terry Smith has some strident views on investing for total return v investing for income but on the investing for income side I've never seen much that's convinced me other than "I don't care about the capital value so long as I know I'm getting a regular income".

It's all mental accounting really, but some people would rather have reasonably predictable streams of income that pay out throughout the year than very lumpy capital gains that may incur trading costs to sell down for drawdown purposes, and worse still having to sell down in a bear market which can lead to sequence of returns risk.
Not that dividend stocks are completely unimpacted to the above, and they can alway cut dividends, have lower/stagnant growth and so on, but I see the appeal for people investing for retirement income. And let's not forget companies have to be profitable to pay dividends in the first place.

And now that bonds are actually providing an income again at last you can have a reasonably diverse and balanced (if growth/tech light) portfolio with a predictable yield of ~5% and just live off the natural yield in retirement without having to make any decisions on what or when to sell.

Edited by WayOutWest on Thursday 23 November 15:22

[Mr Pointy]

bhstewie said:

Why do people invest in equities specifically for dividends?

I never quite get why some people invest in a stock at 100p take the 5p dividend and see their stock go down to 95p rather than invest 100p which hopefully grows into 105p then take the 5p

I know Terry Smith has some strident views on investing for total return v investing for income but on the investing for income side I've never seen much that's convinced me other than "I don't care about the capital value so long as I know I'm getting a regular income".

Because out of the 5p you make when you sell you have to pay dealing charges & maybe CGT and you end up with fewer shares, so next year the price has to go up more for you to get the same amount of income. Eventually you'll have no shares left at all. What do you do then?

[Hoofy]

Isn't it also because people want the payment as it gets close to dividend date so people buy the shares which pushes up the price, then there's a price correction as people sell because they've collected the dividend?

[Hammersia]

bhstewie said:

Why do people invest in equities specifically for dividends?

I never quite get why some people invest in a stock at 100p take the 5p dividend and see their stock go down to 95p rather than invest 100p which hopefully grows into 105p then take the 5p

I know Terry Smith has some strident views on investing for total return v investing for income but on the investing for income side I've never seen much that's convinced me other than "I don't care about the capital value so long as I know I'm getting a regular income".

Because stock picking is impossible, as proven by 99% of professionals.

[clubsport]

Have a look at the Dividend Discount model, considering the cashflows and time value of money!

https://www.investopedia.com/terms/d/ddm.asp#:~:te...

[sayerbloke]

Apologies for going slightly off topic but when you have an investment fund (let’s say accumulator for this) with an ex div date of, say, end of April and a payment date at the end of June, how exactly is the payment made at the end of June to only those who were invested in April? With the div going back into the fund, the price itself surely would go up for everyone in June if it simply added it on then… Never been able to get a proper answer to that question!