Do Dividends Lower Stock Prices?

There are many investors who have a hard time accepting the fact that when a company pays a dividend the payment results in a permanent relatively lower price (relative to what the price would have been the dividend had not been paid), not just a lower price on the day it makes the distribution. The problem results from the fact that over time, as long as a company earns more than it pays out in dividends, the stock price will eventually increase to above the price it was before the dividend was paid (assuming valuations, or P/E ratios, remain the same or rise). Hopefully, the following examples should clarify why stock prices are permanently lowered in relative terms.

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