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Here, the relation between stock price reactions to announced dividend changes and the yields of the underlying securities is examined. A significant positive (negative) relationship is detected between announcement date returns and yield for dividend increases (decreases) even after controlling for the magnitude of the dividend change. Price reactions associated with dividend increases vary directly with the change in yield and, on average, low-yielding companies do not experience abnormal returns when they increase their dividends. Implied in these results is that the information conveyed through dividend changes varies with the yield of the underlying security and the market response is a function of factors beyond the pure information effect.

We provide a plausible explanation for earlier findings that positive abnormal stock returns associated with dividend announcements persist for several days and that abnormal volume and stock returns commence several days before a stock's ex-dividend day. This study links these two sets of findings to the short-term investment strategy of dividend buying by relating the abnormal returns and trading volume to individual stock characteristics favored by dividend buyers, namely the stock's return variance and dividend yield. We conclude that dividend buying is at least partially responsible for the abnormal returns and volume found between dividend announcement and ex-dividend days.

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