Excuse the silly question but I always thought that dividends lowered the price of the stock. Here is the question:
If the expected growth rate in dividends for large capitalization stocks increases by 60 basis points, which of the following would benefit the most? An investment in: a. long futures on the S&P 500 index b. short futures on the S&P 500 index c. long put options on the S&P 500 index The answer says that the long futures on the S&P 500 index will increase in value due to the increased growth rate in dividends for large cap stocks. So the answer given is a. One way to look at it is that using the constant growth model clearly the value of the company in question will increase if the dividend rate is increasing. Understandably this would cause the value of the Index in which this is a constituent to increase. On the flip side, you can argue that the moment a dividend is paid by a firm, that firm’s stock price decreases by the amount of the dividend. I’m pretty sure that stock indices such as the S&P 500 pay dividends, so wouldn’t the value that a particular stock contributes to the index decrease, thus decreasing the value of the index? Can someone please correct my train of thought? Just to be absolutely clear, the answer provided is A.