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Author: TMFGebinr Big gold star, 5000 posts Top Recommended Fools Old School Fool Supernova Phoenix 1
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Subject: Re: Dividend Adjustment Date: 9/14/2006 9:09 AM
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why would they adjust the price of the share for a dividend

Hi Rafe,

Actually, that happens in real life, too. Usually not seen with the small per share dividends (some number of cents) because it's lost in the day's trading noise, but if you look at large dividends (such as Ameritrade's $6 per share one in late January http://finance.yahoo.com/q/bc?s=AMTD&t=1y) you'll see the price drop as a consequence of paying out the dividend.

Think of it like this. On the day before the dividend is paid, the company is worth the market cap, which includes cash, right? On the day the dividend is paid, the cash is sent to the shareholders, so the company no longer has that cash. Thus the market cap goes down. The markets actually make this adjustment on the ex-div date, but the principle is the same.

However, if you take all the split-adjusted dividends a company has paid out over its lifetime, you can end up with the odd situation of having a starting price of $0.00 per share. That means you've completely recovered your investment just from receiving dividends. This is what is shown in Yahoo!'s historical adjusted prices that whatismyoption linked to.

Cheers,
Jim
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