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How Does An Annual Dividend Payment Policy Alter A Company Stock Price?

To an investor looking for high and fast capital gains, a company that makes a dividend payment is a low priority. However, for long term investors, research shows that such a payment is an important part of the overall return on investment.

Many of the biggest quoted companies have been paying an annual dividend every year for years. Part of the appeal of their shares as an investment, and part of the valuation in the price is this dividend policy and reliability.

As a general rule, the largest companies also make the largest and most secure dividend payment. Of course, this can never be true of every situation, but the bigger and more established businesses have the security and often the profits to cover a payment comfortably.

It may not be the most rewarding of actions for a company which has a track record of creating a high return on investment to pay funds out to shareholders. Unfortunately, there are too few businesses of this nature. Company management also recognise that by paying an annual dividend their company can potentially be called an income stock.

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Income stocks are not necessarily viewed as 'sexy' in the market, but there is a wide array of mutual type funds that specifically invest in such companies. This of course opens the way to much larger institutional investment in a firm which in turn will help to underpin the price in the market.

As big funds buy big holdings, the number of shares floating in the market will usually be reduced. By lowering liquidity, the share price will generally be assisted.

There are, of course, many investors that will purchase company stock and are specifically attracted by the payment of a dividend. These investors will use the payment to subsidise their income and as such, value stability.

Pension funds, for example, generally have a very good idea about their future liabilities - when and how much they will need to pay out and for how long. Therefore, it is in their interests to create a portfolio that include lots of assets that will pay an income that approximately matches the required outgoings.

It is for this reason that once company management has started paying an annual dividend, they will be fearful of ceasing payment. Should the income or pension funds be forced to sell their holdings, the market price will almost certainly suffer. The bonuses and stock options of management are usually tied to this market price!

A private investor will almost certainly be required to pay income tax on any or all dividend income received. In many countries, some of this tax is deducted at source so that the dividend payment is reduced and the company sends money to the tax authorities on behalf of investors.

For more pages related to the topic od dividends:

To An Investor, A Dividend Is A Valuable Thing!

Understanding And Calculating A Dividend Yield

How High Is A High Dividend Yield?

Dividend Policy And Dividend Cover

What Are Dividend Reinvestment Schemes?

The Definition Of A Dividend

Dividend Tax Rate

Building A Dividend Portfolio

How Does A Scrip Dividend Work And What Is A Scrip Issue?