Why do stocks go down more than div when ex-div?

[markrmau]

Hi

I haven't done a statistical analysis on this (so it may not be true), but
it seems to me that stocks often go down by more than the dividend when ex dividend.

For example, there seems to be no reason AGL plumeted last week. AGL has modest P/E for company that is expected to increase earnings next year, and pays an ok dividend.

 

[richbb]

That's because there are some franked credit within the dividends, say, you get 70 cent divident, you'll have 30 cent credit(supposing the dividends are fully franked currently at 30% tax), so it ABC shares goes ex-dividends of 70cents today, it should at theoritically go down 100cents. But not always, it depends today's overall market and individual stock. If it's in strong uptrends, it may down less than the actual dividends or may even raise, like today, SMS ex of 60c, it didn't drop but raise more than 30cents because of good news.

Hope it could help



Safe trading

richbb

 

[kooka1956]

I agree with Richb . There are some people who trade in franking credits purely to get the tax bill down . The 30% tax that the company pays can be ofset against your own income, so if you are on the highest tax bracket and earn enough franking credits your effective tax could come down to about 17% tax . If you are under the 30% tax rate (lower income earner) the difference between your tax rateof say 21% and 30% you can get back on your own income, thus increasing the dividend yield for the lower income earner. Regards KOOKA

 

[crashy]

from my course:

Source - Brown & Clarke: XD BEHAVIOUR OF AUSTRALIAN SHARE PRICES

http://www.agsm.unsw.edu.au/eajm/9306/pdf/brown.pdf

“A positive abnormal rate of return before the ex-dividend day followed by a negative abnormal return after the ex-dividend day is consistent with short term trading. It suggests that cum-dividend shares are bought at a premium, held for the dividend entitlement, and then sold at a discount. The incentive to engage in such dividend stripping by taxpayers may be greater for shares offering higher dividend yields.

The drop-off ratio, as conventionally defined, was unchanged by the introduction of a tax on previously exempt funds and the extension of imputation to them on 1 July 1988.” (this means that investors did not understand that the change was beneficial)

“A positive abnormal return before the ex-dividend day, followed by a negative abnormal return immediately after it, is consistent with the short term traders buying cum-dividend at a premium, “capturing” the dividend, then selling at a discount to encourage other buyers back into the market.

For the 1988 to 1991 time period, positive abnormal rates of return were found for the four day period ending on the last cum-dividend day. The ex-dividend day had the largest positive abnormal rate of return, averaging 2% on a grossed-up basis from 1988 to 1991.

The Australian share market has continued to discount dividends relative to capital gains since 1985. Brown and Walter’s (1986) finding: there is strong evidence that Australian listed shares have not declined by the full amount of the dividend when they have been quoted ex-dividend.

The Drop-Off Ratio and the Dividend Yield (Tax Clientele Hypothesis)
Elton and Gruber (1970) found that the ex-dividend day drop-off ratio was positively related to dividend yield, i.e. the better the dividend yield, the higher the drop-off ratio was.

In sum, the tax laws are not the whole of the explanation for the ex-dividend day trade-off between dividends and capital gains. The Australian share market, on average, still preferred returns in the form of capital gains over dividends, despite successive tax changes which increased the attractiveness to Australian shareholders of dividends relative to capital gains. Moreover, we estimate that the market, on average, has taken some time to access the implied value of the tax credit.

The results of our empirical analysis suggest that, on average, investors consistently preferred capital gains to dividends.”

 

[tech/a]

There are actually trading methods based around Stock dividends.

This is a thread you may find interesting.

http://www.reefcap.com/ubb/Forum8/HTML/000389-2.html