Question

If a company pays dividends on a stock, does that mean that the stock has appreciated in value? Why or why not?

Yes, the payment of dividends indicates that a stock’s value has increased.
No, the payment of dividends indicates that a company has earned profits.
Yes, the payment of dividends indicates that a company’s assets have grown.
No, the payment of dividends indicates that a company can repay investors.

Answer 1

Correct choice:
No — the payment of dividends indicates that a company has earned profits.

Why: Dividends are a distribution of a company’s earnings or retained earnings (cash) to shareholders. Paying a dividend does not by itself make the stock price go up; in fact the market price typically drops by roughly the dividend amount on the ex-dividend date because the company’s assets (cash) fall. Dividend payments show the company has available profits/cash to distribute, not that the share value has appreciated.