Chartered Financial Analyst (CFA) Practice Exam Level 2

What effect does a dividend have on the price per share?

1. It increases the price per share

2. It has no effect on the price per share

3. It reduces the price per share

4. It stabilizes the price per share

The correct answer is: It reduces the price per share

When a company declares a dividend and pays it to shareholders, the price per share typically decreases by about the same amount as the dividend paid. This occurs because the dividend represents a transfer of value from the company to the shareholders. On the ex-dividend date, which is the date on which the stock starts trading without the right to receive the upcoming dividend, the share price is usually adjusted downward. This adjustment reflects the fact that new buyers will not receive the upcoming dividend, and thus the intrinsic value of the stock is perceived to be lower by the amount of the dividend being paid out. While it's important to acknowledge that various factors including market conditions, investor perceptions, and overall company performance can influence stock prices, the fundamental principle in the context of dividend payouts remains that the payment of dividends generally results in a reduction of the share price. This reflects the outflow of cash from the company and the shift in value to shareholders.