Hi Everyone.
Do dividends drive the stock price, all else being equal?
For example, say that XYZ stock is at $10.00, and pays a dividend of 50 cents or 5%.
People own XYZ and are happy with the dividend. Some more people buy and the
price goes up, which drives the yield down a bit. So some people sell and the price
goes back down to $10.00.
Now XYZ announces that the dividend is going up 13% next year to 56.5 cents,
or a yield of 5.65%
Now the dividend yield looks better so people buy until the stock price reaches a new
equilibrium of $11.30, with the yield again at 5%.
Does that make sense? That given a boring, reliable company with a good reputation, that the stock price will seek a level that makes the dividend yield be considered reasonable?
And by extension, risky companies would reach equilibrium at a higher yield, while safe companies would reach equilibrium at a lower yield?
I'm thinking specifically of BIP, which has been hovering around 6% yield recently. Recently they started talking about raising their dividend 13% next year, and in the last two days the stock price has shot up to a point that would put next years yield with the higher dividend at 6.5%.
There are in the middle of an acquisition, but it is boring and there hasn't been any news in the last few days. Also, I thought that acquisitions generally made the acquirers stock go down, not up.
Also, BIP seems like a pretty safe company, so I'm wondering why the yield would be so high. Probably it's just because they are perceived as new (3 years old, but a spinoff of BAM), and because they aren't well known.
Any thoughts?
Do dividends drive the stock price, all else being equal?
For example, say that XYZ stock is at $10.00, and pays a dividend of 50 cents or 5%.
People own XYZ and are happy with the dividend. Some more people buy and the
price goes up, which drives the yield down a bit. So some people sell and the price
goes back down to $10.00.
Now XYZ announces that the dividend is going up 13% next year to 56.5 cents,
or a yield of 5.65%
Now the dividend yield looks better so people buy until the stock price reaches a new
equilibrium of $11.30, with the yield again at 5%.
Does that make sense? That given a boring, reliable company with a good reputation, that the stock price will seek a level that makes the dividend yield be considered reasonable?
And by extension, risky companies would reach equilibrium at a higher yield, while safe companies would reach equilibrium at a lower yield?
I'm thinking specifically of BIP, which has been hovering around 6% yield recently. Recently they started talking about raising their dividend 13% next year, and in the last two days the stock price has shot up to a point that would put next years yield with the higher dividend at 6.5%.
There are in the middle of an acquisition, but it is boring and there hasn't been any news in the last few days. Also, I thought that acquisitions generally made the acquirers stock go down, not up.
Also, BIP seems like a pretty safe company, so I'm wondering why the yield would be so high. Probably it's just because they are perceived as new (3 years old, but a spinoff of BAM), and because they aren't well known.
Any thoughts?