Do dividends drive stock price? (BIP)

Discussion in 'Stocks' started by lynx, Sep 14, 2010.

  1. lynx


    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?