How do dividends affect stock price?

Enk Loui gave an illustration about the Dividend Discount Model, but this model is flawed also, and I think it's a bit too theoretical. But in essence, if dividends paid out is expected to increase, price of shares will increase, while the converse is true also

Basically, dividends are priced into how investors view the shares because that is a return on the original investment of what is paid on the share. The share price does not increase as much as the dividends because the dividends paid are discounted back to its value today. They are discounted backwards because of the opportunity cost that is incurred from purchasing the share, and not investing elsewhere.

However, this is not easy to predict because we can't really predict whether a company will keep paying dividends. Most of the time, the amount of dividends paid out won't be the same over the years, so it's quite tough to actually predict it this way. There are also other ways to value shares, such as through intrinsic or relative valuation so im kind of doubtful about how useful this model is.

Hi there!

1) Dividends can affect stock price if you are trying to find the fair value of the stock through the dividend growth model. The formula is shown below:

Asssuming the dividend that this particular company is $2 per share, cost of equity of the company is 10%, and the dividend is expected to grow at a rate of 2%, the fair value of the stock would be: 2/(0.10 - 0.02) = $25

2) Dividend can also affect stock price on the ex-dividend date, where If you purchase a stock on this date, you would not be entitled to the dividend that it promises to pay. Hence, on the ex-dividend date, investors may drive down the stock price by the amount of the dividend to account for the fact that they are not eligible to receive dividends and are therefore unwilling to pay a premium.

In short, the price of stocks is usually adjusted downwards on their ex-dividend date by the amount of dividend it promises to pay.