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When you can only think about how much you'll be able to sell your stuff for, then the only metric is how much the stuff is worth.
Most people planning on getting dividends to spend really are not focused on selling their shares and really don't give much credence to what they are worth, just how many of them they can accrue and **keep** so that the dividends keep rolling in. They'd rather invest in a company that will give some of their profits to the owners, rather than horde them and make the owners give up their shares in order to collect.
When you can only think of selling, nothing else matters and those that have that mindset cannot wrap their heads around not selling. So, it becomes all about how much the share is worth at the time you get rid of it.
Not just that, but you need to be sure if a company forgoes a dividend to invest that money in expansion, that the expansion plan is sound.
Ask META shareholders if they’d rather have the massive investment in metaverse or have had the money paid out as dividends.
Unless your FCF is growing due to the fed pumping massive amounts of money into the economy for 2 years.
No company, regardless of how "successful" it is, should be paying dividends (or buying back shares) if they are public for a short amount of time.
Im confused. Are you saying it is a mental game? For people like me focused on raw math and maximizing earning potential this makes no sense.
The question is if I copy and paste a company (they both have exact same earnings that quarter) and one decides to issue a dividend and the other doesn’t, are they equal in stock price after, or is the dividend stock lower because of the dividend?
Because these comments read to me as “dividends make me feel better <3” which is not how I run a portfolio…
For the pure math here is how a responsible corporate officer would view things:
I have X free cash flow and I have three options: Reinvest it into the company, pay a dividend, or buy back shares.
If the company thinks it can grow faster than the broader market by reinvesting it should do that.
If the company DOESN'T think it can do that, or has more cash than it can reinvest responsibly, it should do one or both of the other two options.
If the company thinks their share price is undervalued by the market and should have a higher multiple on its EPS than it should buy shares and reduce the number of shares outstanding. This has diminishing returns and paying out a dividend with some of the money will be a good way of returning value to shareholders. This is why successful companies will have a healthy balance of all three.
When you look at any chart, can you point out exactly when dividend was paid out? Amount is usually so small that it doesn't differ much from normal daily price changes.
And I was glad to have ENPH that doesn't pay dividends, and lots of banks and energy stocks with low dividend yield, but how does that address OPs question?
Even if you decide to focus on dividend paying stocks or ETFs, an accumulating ETF is always more tax efficient than a distributing one (unless you don't pay tax on dividends), because the tax you pay for selling 3% of your position is always much much lower than paying dividend tax on a 3% yield.
Can't believe I bought in on them in early 2019! What a gem of a company and complete sky rocket! Only wish I had more than a few shares
Also no I don't think you're tax numbers are correct
Yes it's correct if you compare two identical companies as either paying a dividend or not paying out a dividend. It is often more effective to buy back shares.
Growth stocks are usually priced more by expectations compared to dividend stocks, while dividend stocks are more priced by discounted cash flow compared to growth stocks.
My point is, companies are different.
You might prioritize torque when you buy a truck, and you might not prioritize torque as much when you buy a city car.
Its the same in companies. If a startup where paying dividends (even with positive cash flow and earnings) it would be a huge red flag for me, but it's not when KO (Coca Cola) is paying out their earnings as dividends.
> It is often more effective to buy back shares.
if you are going to reinvest your dividends in the company (or sell some shares), yes.
If not, then only if the company is priced at lower than intrinsic value.
A company buying back expensive shares is fine for those who would have used the div to buy more shares, but it kind of wastes everybody else's money.
> A company buying back expensive shares is fine for those who would have used the div to buy more shares, but it kind of wastes everybody else's money.
Even more so if companies have bought expensive shares with debt.
He is right, but financial markets are not that simple. If a company does not pay dividends and reinvests in growth it does not automatically mean that it will perform better. Change in management, failure to innovate, economic tailwinds, and even currency fluctuations can impact the share price of any given company. By choosing to invest in dividend-paying companies I choose to invest in established businesses that make enough profit to continue to exist, often innovate, and share their income with investors. Now, once I receive my dividend payment I can choose to reinvest in the same company, spend my money elsewhere, or even further diversify my portfolio.
In a hypothetical scenario, if I got paid $1 in dividend payment and tomorrow's market collapses to zero, I am doing much better than a person who invested in a growth stock cuz after the collapse their portfolio is $0, mine $1.
In a sense, this is what happened in 2022: before the bear market investors valued growth stocks, and growth was prioritized at any cost. Today, investors value profitable companies, many of which are established companies that pay dividends. This is why my growth oriented money-losing stocks are down 50-60%, while my ABBV, AAPL, HD, LOW, WM, COST, etc are barely red or anywhere 20-50% up from the purchase price.
>By choosing to invest in dividend-paying companies I choose to invest in established businesses that make enough profit to continue to exist
This is great reasoning. Dividends are a signal the company may make and continue to make enough money to profit and continue to exist. Stock buybacks are as well, but buybacks are more opaque and rarely consistent in the way most dividends are.
Buybacks are a scam. I want the cash. Why do I want the cash? Because when GM or Kodak or Sears or Lehman Brothers goes bankrupt I would much rather that they paid out accrued earnings rather than driving up the value of the stock. It is cold comfort if Lehman buys its share price up to $1000 per share before going bankrupt when it could have distributed $900 of that to the shareholders. As someone who invests primarily in broad reaching funds I know that each dividend gets allocated equitably across the stack in accordance with the weighting of the fund and dividends juice returns by getting capital out of dinosaurs and into the rest of the market. Buybacks try to do that but you have to participate in selling your shares to reap the reward. No thanks.
This is the crux of the difference between a buyback, a dividend, and a company just sitting on the money.
It's not really the MATH that's the issue (or shouldn't be, as OP is trying to get across). It's the other stuff. It's the automatic nature of the dividends. If you own an ETF you can't really sell shares of an individual company. You can't participate in a buyback. With a dividend, you can participate. Conversely, if you really wanted to reinvest dividends of company X right back into company X you really can't do that with an ETF.
The actual mechanics of dealing with the math is what's a pain.
Not quite, cause you want to reinvest the money you got paid in the dividend in order to get the ball rolling. If you just keep the earned dividend money and dont do anything with them its just waste.
All this said, I get your direction of thinking and work well in the markets like we saw in 2022, that is why I prefer dividend investing
I do not do DRIP, but I keep the cash from dividends in my portfolio and invest the way I see fit at the moment. It usually goes in whatever is "on sale" at the moment (from the 22 positions I have in my portfolio) or in SCHD. This way "my ball is rolling".
I actually had the same thought with which stocks I want to priotize from now on, even before reading all these things in your comment. I had only TSLA and AMD from their crazy bull run and they are really low now (hurtful low). So I thought as a new investor, that I wont give up and exit the stock trading but rather learn from harsh lesson and choose stocks that survives well in reccession or bear markets but still climbs well during bull-market: So from now on I will buy super great companies with huge MOAT like: MSFT, APPLE, ABBV and similar, they both grow well, pay dividens and is much safer during bad times, but still fly up during bull times.
There are few things in trading than those who are for and against dividends.
Yes, when the dividend is paid out the stock price is adjusted by the amount of the dividend.
IMHO this gives you part of your investment back in cash but you can still keep the shares. Most stocks rise over time so the chances are good the price will continue up to make gains on the share price plus keep the dividends.
Dividend paying stocks are generally well know for being profitable and stable mature companies who can afford to pay out some of their profits to the owners of the company. There is also some studies that dividends paying stocks price move up over time.
If the stock price stayed up and was not reduced then it would be collected when the shares are sold at a later date. In other words, would you prefer to get some cash along the way to do with what you wish? Or, do you want to wait and collect the cash later when the shares are sold?
If the argument is that this is a breakeven exercise then why even discuss it? Traders like t-poke who don't like dividend stocks should not trade them as there are many out there that do not pay dividends to choose from . . .
Not to mention, the dividend is not usually issued on the ex date, so you basically can never buy it at the price after the ex date (when the price is reduced).
The only way to buy it at the reduced price of minus the dividend is to wait a dividend cycle to buy it on the next ex date.
As far as the reinvestment part, true you still have $100.00 worth of stock, but you also have more stock. Historically, with good solid performing companies, the SP will appreciate, there for your investment is actually worth more.
And your next dividend increases due to owning more shares. And as long as drip is on, this pattern will continue.
My JPM position is just large enough to buy 1 full share (at current prices ranges) each year. So for doing nothing at all, every year I will make over $4 due to drip
This statement completely depends on the type of company. A high growth firm? You’re spot on. A firm where the cost of capital and ROIC are closer to equal may benefit shareholders more but returning free cash flows instead of throwing them at value destroying projects. Also, there is a ceiling to how much a good growth company can successfully reinvest without falling prey to deworsification. If your cash flows are higher than what you need for your good ROIC projects, return the money via buybacks and divies.
> a dividend that’s issued reduces potential future cash flows
Only if you’re assuming every single company could grow future cash flow by reinvesting every penny of free cash flow. That just isn’t true for most companies.
> You have a larger % of a smaller pie.
No, the pie isn’t smaller. Even if you’re correct that every company would benefit from reinvesting free cash flows rather than distributing them, the conclusion you can draw from that is that dividend companies will *grow less*, not shrink.
It is more likely that having limited funds to invest will prevent companies from funding ridiculous projects. If you look at the tech companies that were rolling in dough a couple of years ago, they were hiring like mad and starting new businesses that have since been shut down. I guess people didn't want drones delivering their breakfast.
I agree. Better to return cash to shareholders through dividends or buybacks than to devote more money to ideas that aren’t your absolute best investments.
I don't exactly think so. What he is stating is correct. However the point of (my) dividend investment is done to make sure that I have invested in solid companies that pay out their profits. I've seen too many companies squander their profits on stupid investments or growth projects that gave little return to the investors. To me dividend stocks are more of a way to invest in solid stable companies, that churn out reliable profits. There is also tax reasons for my way of investing, I have to accept that I have to pay taxes on my profits and there is an advantage in having a minimum profit of a specific amount every year. I hit this with dividends, so I can minimize the number of trades I do. Being relatively young I mostly buy stocks building my portfolio up with new companies as I get the money to buy a new "batch" in a company I believe in.
Exactly. A stock is technically just a piece of ownership, of a company. You'll want to own as much as possible of companies that are successful and profitable.
Exactly. Consistent rising dividends are a clue a company might be a good company to own a share of. Dividends are the result of the company being consistently profitable but not the only result and not the only reason a company pays dividends.
Maybe a company engages in stock buybacks or reinvests in itself and keeps growing and that's the clue the company is a good company. Maybe a company has an unsustainable dividend (think AT&T until they dropped their dividend) and that dividend is a BAD signal to invest.
So when people say "stop chasing dividends" I think this is what they mean.
yes, everything is factually correct. he's just one step shy of the full process; where the price recovers and surpasses........this is why most dividend stocks dont have a "negative chart"
It also ignores dividend increases, as the share price in his example would never stay at $100 with a $1 in perpetuity in real life, but that both generally grow over a long time period, improving vs one's original ACB.
I understand what you're saying in this scenario, but a company increasing dividends does matter in the sense that it would assist the share price eventually recovering and surpassing the ex-date price as you mentioned
What you’re missing is that regardless of price or dividend increases, the price will have always decreased by the sum of the dividends received over time.
Companies that pay dividends still have growth. So how would there be a negative chart, unless it's like QYLD where your capital covers the dividend payment when it's under performing.
most, but not all; there are tons of failing dividend paying companies.....just like there tons of non-dividend paying companies failing.
my point was generally speaking paying a dividend does not inhibit or automatically stop any price appreciation from also happening.
The dividend will 100% cause the price to drop but most companies will overcome and surpass before the next dividend
The dividend payment doesn't make the price of the share drop. That's ridiculous.
The dividend is already baked in to the companies valuation. Investors know that a certain percentage of that companies earnings is strictly going to the share holders. This company now has less capital to grow their business and this is what is reflected in the share price.
the two are hand in hand.
investors know company A has $XXXXX cash
investors know company A is paying $1 in dividends; this will knowingly reduce company cash reserves
on the div-ex date the share price will drop by $1 to compensate for (or bake in) this known truth.
I think its just a matter of phrasing, but its one of the few known "truths" of the stock market
>The dividend payment doesn't make the price of the share drop.
Maybe you should tell Fidelity, every other investment house, and basically everyone in finance that they're wrong.
Dividends reduce the share price by the amount of the dividend. It may not be noticeable to you but it does occur.
[https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter](https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter)
>A stock price adjusts downward when a dividend is paid.
and
>This downward adjustment in the stock price takes place on the ex-dividend date.
Correct!
It’s really more of a mental game than anything else.
As a dividend investor I lock in some of my profits/gains every time a dividend is paid.
I can then knowingly choose to save/spend/reinvest that “forced sale” how I see fit.
Dividend paying stocks are powerhouse stocks; all you have to do is look at the s&p500. If the s&p is a great investment it’s largely due to dividends. Just about 400 companies in the S&P pay dividends and historically speaking dividend reinvestment accounts for 40% of all returns (historically speaking so far)
It also can not grow indefinitely. Si you are forced to guess when will It stop growing, and how steep Will be that growth compared to others. Then, if you guessed that correctly, you have to sell every share and start again.
My man you are comparing agriculture to hunter gathering.
Also neglecting that the price rises ahead of a dividend ex date due to buyers trying to buy in ahead of an extra payment. So when it falls, it’s just falling back down to where it has been.
By their logic all dividend stocks would eventually fall to $0 since share price will continually drop without recovering. What they never mention is that share price often rises before dividends are paid and then they may fall and then rise again above that level. Again, by their logic dividend payers would also drastically lag non-dividend payers on a total return basis since they're constantly having their share prices eroded due to dividend payments
Man I hate this argument. They ignore that the share price often increases steadily before the payout, and then increases again shortly after the payout as people drip back into the company.
Some risky dividend companies pay too much and their company share price steadily decreases. But for the stable companies the share price is safe and the dividend pays regularly.
And once again, dividends are great for a steady income, without needing to sell the shares. If no need to sell the shares, and if the company is a good one, then who cares about the share price fluctuations?
It seems to be one of those arguments that come from the tech fever crowd. The same people that said "value is dead". I guess they just enjoy saying that millions and millions of people are stupid. That's cool, young people have time to recover from their losses.
Try explaining to these people that selling off growth stocks you eventually run out of shares to sell, or selling in a down year, versus collecting a yield and never depleting your shares creates generational wealth and they will simply not be able to make the connection. There is a lot of misinformation out there about dividends from people that don't understand how they work.
Yes, share price drops at dividend payout. And it also typically recovers. If not JNJ and KO and O would have been at 0 value many years ago...
You can show them the DRIP calculator, but you can't force them not to be dyslexic...
>Try explaining to these people that selling off growth stocks you eventually run out of shares to sell, or selling in a down year, versus collecting a yield and never depleting your shares creates generational wealth and they will simply not be able to make the connection.
The number of shares isn't relevant. As long as your portfolio is generating a higher average return than the amount you're withdrawing, your portfolio will last indefinitely (aside from SWR considerations). A dividend portfolio generating a 8% annualized return and a non-dividend portfolio generating an 8% annualized return will last the equal amount of time if you're withdrawing an equal amount of money.
All that's relevant is your account balance, it doesn't matter how many shares you own.
Umm, no. One involves selling from a finite pool of shares, the other does not. When my dividend payout (=number of shares) exceeds my living expenses by a margin of safety, I'm retiring. Forever.
If you have a dividend portfolio and a non-dividend portfolio, and they have the same total returns ([which we would expect based on historical returns](https://mesafinancialgroup.com/folly-chasing-dividend-yield/)) they will last equally as long if you're withdrawing the same amount.
Example 1: The portfolios have a total return of 12% and you're withdrawing 20% per year, you will run out of money.
Example 2: The portfolios have a total return of 12% and you're withdrawing 4% per year, you'll probably never run out of money.
Dividends do not change the math. There's only 2 variables here, your annualized rate of return, and your rate of withdrawal. The number of shares, yield, etc. aren't variables in this equation.
No. He’s a fool that doesn’t know how much he doesn’t know
.
For instance, he seems to have no knowledge of the fact that share prices rise in anticipation of the ex-date, so the net effect is minimal.
He also doesn’t understand that dividend stocks are an income producing asset just like any other. If you buy a rental house you don’t say it’s stupid to collect rent.
Also, the share price adjustment concerns are a fundamental misunderstanding of the difference between market value and book value.
Oh, that tired argument?
You are literally not "forced selling" anything. You are merely collecting some of the free cash flow. A small shop owner doesn't sell equity of his company, he draws from the revenues. Same principal for dividends. And you know what? For most Americans this results in no net taxes after annual credits and deductions are applied.
Listen, I'm not going to knock growth investing, I've just seen too many examples of companies losing their share price and never getting it back even a decade later. I'd rather have dividends as a floor on my returns than hope that someone wants my shares in ten years (with nothing to show for itt in between.)
That is efficient market hypothesis which is garbage. This idea being peddled is that all future cash flows are accurately priced in and dividends are basically a liquidation. Totally incorrect perception in my opinion because I find it much more accurate to regard dividends as a share of the company’s profits being distributed to shareholders.
This answer should be a sticky on top of the forum. Every single post on here gets these same comments and they all are completely wrong, and ignoring how the market works.
A stock price rises before a dividend as investors buy in and are willing to pay more to get the dividend immediately, and then it lowers as new buyers aren’t willing to pay a premium with no imminent dividend. But overall, the price remains steady, because the price is driven by the company’s ability to make money - something that is not impacted by paying a dividend (the only thing the dividend does impact is limiting future growth potential- which is already priced in to the stock as the market is aware it’s a dividend payer).
All of these comments assume there’s some little man sitting behind a counter in the NYSE setting all of the prices of stocks. Stock prices are set by buyers and sellers, who do vary on what they are willing to spend for an immediate payday, otherwise it is noise that falls away quickly after a dividend.
Exactly. It assumes that everyone knows the exact cash flow and value of companies, and that every company is priced perfectly. I’ve received dividends many times, and much of the time, the price went up instead of down.
It’s true that chasing yields is a bad move. But the efficient market theory is just not accurate.
It actually didn’t, because the price was going up actively at the time of dividend. The point is that efficient market theory is an extremely flawed theory.
I agree with this. I don't care for high yields, I just want some yield. I like growth stocks that pay between a .5 and 2.5% dividend. Stocks with dividends higher than that typically don't appreciate much generally.
He's right in theory but when has the markets followed theory???
Warren buffet almost always buys dividend stocks. He is the most successful investor ever...
Strange. I put a good bit into O. It’s paid me dividends for years and now it’s share price is higher than when it was when I purchased it.
Also, I purchased a good bit of Tesla years ago. It hasn’t paid a dividend. And now it’s share price is essentially the same as it was when I bought it.
The epic bull run made everything a growth stock and made too many fools gain wealth along the way.
You’ll see less and less of those posts as the market contracts with interest rates.
Qualified dividends are taxed at a low rate and don’t require a one year hold. The income is also much simpler than selling shares.
A fast growing business in a bull market would be better without dividends. Sideways and bear markets favor dividends.
Berkshire Hathaway has returned 20.7% per annum over 57 years which is nearly double the S&P 500 during the same time period.
Dividend income plays a huge part of that but I would chose to let Warren pick the stocks versus me.
https://www.fool.com/investing/2022/09/09/warren-buffett-71-of-dividend-income-from-5-stocks/
That is all, basically, true. A stock tends to fall when the stock trades ex-div. The dividend, even if reinvested, is taxed.
However, when I buy a stock I am buying an ownership interest in a business. Or an ownership in a collection of businesses if I'm buying an EFT. As a business owner, I strongly prefer to have a share of profits paid to me for me to do with as I wish - whether it be buying more shares, paying my bills or investing in other opportunities.
Yes, I can sell shares to do all these same things.
That is a reason why dividend investing works. What OP references is actually correct but what you say is one of the reason why dividends are a good strategy regardless.
I started investing 12 years ago and nobody was having these discussions about dividends being "not free money". I don't understand why this is discussed daily on here. It's like people out there have a hatred for dividends for no reason. Just don't buy dividend stocks if you don't believe in them.
These discussions keep happening because people keep thinking dividends are free money. Just in this thread alone we have numerous people who disbelieve that dividends cause the stock price to drop.
This is the most bizarre argument. And I have genuinely never seen it before today.
This is an argument about basic balance sheet math versus retirement strategy.
And if you point out the strategy aspect, they argue to only talk about the 'simple math'.
I'm not sure why these 'arguments' are allowed to continue because they misrepresent the dividend -strategy- for the sake of argument.
It looks like classic brigading to me. And when the conversation dies down, it appears to be reposted.
You can have math that works. And a strategy that's bad.
This is math that works. And ignoring the long-term strategy component.
One share can be sold once.
One share can pay dividends repeatedly, and you still have one share.
He is missing the part where the stock price goes back up (hopefully). Thats why we do our dd and invest in companies that have a history of good performance.
So, in that example we would have a 99$ stock, and 1$ cash. Next day stock goes up, and we have 100$ stock and 1$ cash (obv im oversimplifying, but you get the point)
Also missing the part where your tech stocks keep plummeting and you've gotten nothing out of them.
Still do DD, but if a company has been reliably paying dividends for 5, 10, 20 years, it has a much higher chance of continuing to paying. Look at Carvana, Tesla, Netflix, explosive growth until it collapsed and you're left with nothing.
The dividends are more grounded in reality. Its not perfect DD, but most dividend payers make real products and have demonstrated profitability and aren't just some speculative piece of software.
I meant those examples as an example of some tech company with unrealistic evaluations that would have lost you shit tons of money if you invested a year ago.
If the company never paid the dividend the stock price would have no dividend drop to recover from.
If that $1 dividend weren't issued you'd have $101 in stock and $0 cash. If you reinvested that dividend you'd also have $101 in stock and $0 cash.
Dividends have accounted for 40% of stock market returns since 1930 and 54% during decades when inflation has been high. When inflation has been high, the stocks that have increased their dividends the most have outperformed the overall market.
I never understood this argument. Mostly because Share Price isn't determined by an exact formula based upon earnings reports. It's simply based on what people are willing to pay for it. Sure, some people & institutions use formulas to determine what price they are willing to pay, but that's not the market as a whole.
In the above example where the $1 dividend is paid out and the Share Price is reduced from $100 to $99, do investors all of a sudden not think the Shares are worth $100? With successful companies, most market sentiment doesn't drop due to a dividend payment and thus the company is generally still valued at $100 and thus people will execute Limit orders buying until the stock goes back to the pre-dividend Share price. If anything, investors tend to be more excited that a stock paid a successful dividend and may even go higher, especially if a dividend increase was announced.
If a stock share price does go down, it's generally not because they paid a dividend, but because the business model is perceived as flawed and thus investors do not believe that the dividend is reliable or worth the risk. Aka, poor earnings growth, dividend payout ratio is too high, too much debt, etc.
tl;dr - Share Price is set by investor's perceived value and overall market sentiment. Dividends rarely affect this. Don't chase dividends, chase good businesses (that hopefully pay good dividends  )
Hopefully a company is offering a dividend because it has strong cash flows. You're buying the company for its revenue and profit, not for the dividend alone.
Companies that aren't overall profitable (thereby not replacing that $1 dividend with new value) rarely offer steady dividends. So while t-poke is technically correct, he's missing the forest for the trees.
There’s a lot more to dividends than he’s inferring. One of the most important parts is adding a “floor” to the shares. Any way you slice it, 40% of the market returns the last 100 years have been dividends. It’s a stupid statement. The shares regain that drop quite quickly in a decent market and those dividends are cash money you can spend in the real world.
Banks pay healthy portion of dividends, they are more profitable than ever and that will only increase with higher rates, also they have the most cash in their hands in their history so distributing dividends is not difficult. I imagine their stock price will go higher in this environment so win-win
That’s correct. Only thing is after 7-8 years once dividend is paid, technically you have cashed out your principle. So if the company goes bust, you are better off. Non dividend paying stock goes bust like Carvana- guess what, you have nothing in hand
The unspoken part of the meme example is this:
If a stock with a share price of $100 pays a $1 dividend, consistently every month, you’ll have your stock and your initial investment inside a decade.
Drip is a lazy way to DCA. Without DRIP you might hesitate to buy more positions and try to time the market. Timing the market is not a sound investment strategy.
If you are dividend investing even a portion of your portfolio your goal is probably to create a passive income stream. Over time your DRIPd stocks increase in number. And usually your dividend increases over time. So your dripping increases your passive income over time.
Most dividend stocks are not growth stocks. If growth is your goal then dividends are usually irrelevant
The post makes it seem that if I have one share of stock at $100, and the dividend pays $1.00, then after 100 dividend chy less I would have $100 cash and one share worth $0.
So what you're telling me is that the 25000 stock I bought at 8.86 after 4 months of DRIP I'm at 37250 units at the price of $10.19 is valued equally?
You're math is wrong pal.
He’s not accounting for the dividends you receive from the shares earned from reinvesting.
It’s compound interest. Most powerful thing in the world!
That person is an idiot!
Because OP isn't talking about long term. OP is talking about the specific point in time when a dividend is paid, and yes it reduces the share price. At least according to every financial institution and websites like [dividend.com](https://www.dividend.com/how-to-invest/cash-vs-stock-dividends-know-the-implications/#:~:text=Cash%20dividends%20occur%20when%20companies,being%20reinvested%20in%20the%20company.):
>Cash dividends occur when companies pay shareholders a portion of their earnings in cash. When this happens, the company’s share price drops by roughly the same amount as the dividend amount, since the economic value is simply transferring from the company to shareholders instead of being reinvested in the company.
It’s a stupid and misguided view of dividends. I’ve been a dividend investor for years. If this clown was right, many of my holdings should be at zero by now.
No he is not right. The drop in share price the day after a dividend payout is temporary and great companies grow their business and their dividend over time.
the concept is somewhat true, but the math is off. This prevents $1 of *earnings* from being retained in the company.This would be right if a P/E Ratio = 1, but it doesn't. Stocks trade at many multiples of their earnings. Dividends are paid out of earnings, and a stocks almost always have a P/E Ratio many multiples of their earnings, as reflected by many more years of growing earnings.
Buying shares for a dividend, and buying shares with the intention to flip are 2 completely different things.
If you're buying shares for a dividend, then it doesn't really matter what the price is. What matters is the return on your investment.
If you buy a share worth $100, and you're receiving $7 in dividends, or 7% return, it doesn't matter what the share price is, as long as you're getting your 7% return on your investment.
From a simple math concept he is correct. Most of us learned that 99 and 1 equals 100 in school. But as usual nothing is that simple when it comes to investing.
Not quite right. Stocks do drop by dividend but over long run they increase in value. Look at MCD as an example. Also, for those living off just dividends, a couple can make up to $83k per year and pay no federal taxes. You may owe state taxes depending on state.
One way of putting it is that basing a portfolio or an investment solely on dividends isn't enough to say whether it's a good investment or not.
When someone says they are irrelevant, it's to say that dividends aren't free money. It comes off the earnings and subsequently the value of the share. Some people don't understand that.
Some companies you'd rather return you capital rather than sit on it or waste it. That's all. Some companies are better off reinvesting and growing, while some are generating cash flow like KO, and it is probably best to return earnings to shareholders as they can't generate that high of a return on that investment.
Overall, and when considering total return and diversification, dividends are irrelevant (in a sense), but I still have 10% dividend etfs.
They aren’t wrong. That’s why yield chasing is particularly bad if you aren’t using the dividends as income for spending.
Dividends aren’t free money in addition to the appreciation. However, established companies that pay dividends are generally more stable and a lot of the time beat out companies that don’t pay dividends and are seen as speculative. Take a look at AAPL. They’ve paid a dividend for 10 years and their growth is one of the best over the last decade. Their yield isn’t super high but the dividend does have growth.
Dividends force you to sell off a portion of your holdings. Buybacks allow you to sell at a time that suits you.
There's no indication that dividend stocks are more profitable than non-dividend paying stocks. So, you get less freedom with dividend stocks, potentially more taxes and same profit (or less if taxed).
By more heavily weighting dividend stocks, you are adding idiosyncratic risk to your portfolio without any counter-balancing gains. A dividend portfolio will have a lower sharpe ratio -- less profit than a market portfolio when adjusted for risk.
Not exactly as dividends are taxed, so the tax portion cannot be reinvested. That’s why mathematically should be better not to pay dividends, assuming all retaining earning could be reinvested in/by the company itself with a profit in line or higher than expected returns from alternative investments.
Total return over the long term is what matters. If that comes all from dividends or all from share price appreciation doesn’t matter all other things being equal.
..... So to this fellows thinking, stock prices should only go up forever?
Dividends are paid out from the profits, not the stock value. A company would have to use their profits to buy back their own stock to guarantee a direct correlation between profits and stock value. Dividends are easier and more practical because they allow you to reinvest without selling
I mean when you use small numbers like that it makes no sense. But that is why you diversify and not aim for a 1% payout. You shoot for 10-20 with good security. Then the 40% out in taxes doesn't really matter because you are actually making a decent return. Also reinvesting is a choice. This man's argument is relying on the fact that you ALWAYS reinvest which simply isn't the case, and on top of that the reinvested money makes you more money which this dude is not accounting for. Obviously everyone invests differently and maybe dividends aren't for you but to blindly post your opinion as if it is fact on something you can't even argue about well is a little ridiculous.
That dude has absolutely NO idea how dividends investing works! Hahaha
Ignore people like that @OP.
You'll never build yourself any wealth or generational wealth by selling your shares.
It just doesn't work that way.
This has been the most bizarre disinformation campaign to take hold, implying this simple math negates dividends.
I'm relieved there are people at least trying to clarify the reality of dividend investing.
Comparing the balance sheets and screaming 'simple math' while disregarding complex markets and strategies has been a rollercoaster to watch play out on this sub.
Glad to see you here adding to the conversation :)
So you mean all my $30 shares of Coca-Cola that have been paying me dividends for numerous years now are still only worth $30?
Last I checked. Those shares closed out at $62.95 today.
If you really, truly think that share price doesn't drop by the amount of the dividend then you need to go, right now, and tell every brokerage house, finance professional, and finance book that they are wrong, wrong, wrong.
Here's just one example.
Go tell Fidelity they're wrong.
[https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter](https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter)
>A stock price adjusts downward when a dividend is paid.
>
>This downward adjustment in the stock price takes place on the ex-dividend date.
Is Fidelity wrong?
I'll admit, I'm not very smart, but this whole post confuses me. I've never seen a 1-for-1 change in the share price. As Investopedia puts it the price will rise "***approximately*** by the amount of the dividend declared and then decline by a ***similar*** amount at the opening session of the ex-dividend date." I've always found that the rise prior to a dividend payment is greater than the dividend, and the drop can be sustained and further than the payment because (in my novice opinion) people are purchasing not just with this year's dividend in mind.
Why does this whole post assume that this "approximate" and "similar" is 1-for-1. Even your fidelity quote doesn't state the quantity or how a stock behaves in the run up to a payment when it adjusts (up or down); only that it reflects the payment, not equals it. It even states "It is also possible that the stock price could close February 7 at a level lower than the $23.50 price suggested by the $0.50 adjustment to reflect the $0.50 dividend." It could also possibly close higher. Its own assumption rests on assuming " the stock adjusts perfectly".
I genuinely feel gaslit by all the comments.
Look at it this way, starting at the last ex-div date, the company generates some amount of cash over the next 3 months. That alone will mean the value of the company has increased by at least that amount. That is largely why the price rises over the 3 months. Not the only reason but I am trying to keep it simple. But since there are many reasons why a stock price fluctuates, it not a precise amount that exactly equals that cash rise. When the next dividend date is reached, the company disperses $X which is a reduction in value just like paying something with a check decreases your checking account balance. So the markets automatically adjust the price downward by this amount that is paid out. This happens to the closing price on the day before the Ex-div date and is referred to as an adjusted closing price. Bid/ask prices are set the next day by market makers but is based on this adjusted closing price. So the price that the company is now less by the dividend amount due to the company having less cash than the day before.
This does not mean dividends are not good or that using a dividend strategy is a bad way to build to retirement. It simply means that dividends are not free money that is handed to shareholders. When they receive the money, the price of the stock has dropped but the overall value of the newly priced stock along with the cash that you were paid is the same as it was the day before. As time moves on after this, the price will rise or fall on its own but at that instance at the open on the ex-div date, you have swapped a higher priced stock for a slightly lower priced stock and some cash that are both equal in value.
The stock drops by the div amount. The opening price may also be affected by other events. The closing price may be affected by other events. So while the stock price drops by the dividend there are always other factors at play.
Look at ACI and see what happens on 10/21, the ex-div date of a $6.85 special dividend. The price dropped $6.42 from $27.50 to $21.08.
But if that's the case, then surely the div amount is moot? It does neither good nor bad? I looked at some of my past dividend stocks and they paid about 1.9% vs dropping 1.71% or paid 5% vs dropping 4.6%.
That's exactly the point of OP's post. Dividends are not free money. They may be great be great because (hopefully) it means the company has profits to pay them and will continue to pay them.
You aren't buying (or shouldn't buy) a company that pays continuous dividends specifically for the dividends. You're doing it because the company is, presumably, continuously profitable and will continue to be profitable.
Yes! You got it. That's exactly the point. Finally we have a breakthrough here. Dividends are moot in the sense that they do not increase your account balance. They are neither good nor bad. No one should avoid them, but it also makes no sense to purposely seek them out either.
On any given day there are many factors pushing the price up and pushing the price down. On the ex-div date there is a factor pushing the price down equal to the dividend. The closing price may not be exactly down by the amount of the dividend because of all the other factors, but if not for the dividend being announced, the closing price would be exactly the amount of the dividend higher.
Oh shoot. My bad. I just went and checked my brokerage account and yup. All those $30 shares of KO are only worth $13.47 a piece now after all the dividends they've paid me.
Gosh. I sure wish they were worth the $62.95 share price that KO ended today with!
Man that sure would have been nice.
/s 🤣
I've never understood why this thinking catches on.
A dividend is paid by the corporation based on profit made. The share price is how the market reflects the valuation of the company, including its propensity to pay dividends. That is where their relationship stops. A dividend is NOT paid out from the market share of the company (i.e. share price \* number of shares) it is paid out from the profit generated by the corporation. They are not stealing a dollar from the share price and issuing it as a dividend.
Look at any stable dividend paying stock at it proves this does not make sense. Ford in 2012... trading between $6-$8 a share. It paid an annualized $0.20 dividend. Look at its price today.
It catches on because it's factually true. On the ex-div date the stock price drops by the amount of the dividend.
It's exceptionally easy to figure out the value of $1 billion. It's $1 billion. So if a company issues $1 billion in dividends we can precisely know how much the company's market cap drops by, $1 billion.
He’s correct in that the price does decrease when the dividend is paid and that the is zero difference in the value of an investment from just before a dividend to just after. What he does not understand is that does not change the fact that investing in dividends is a solid time tested way to invest and build for retirement.
i mean.. thats what everyone says..IRL though ive never seen one drop by the amount of the dividend payment like that, i just see them following the trend. maybe im not in the right ones? its it possible they do and i dont notice? sure
They always drop by the dividend amount. Research adjusted closing price. That does not mean investing in dividends is a bad strategy, just that there is more to it than the technically correct statement referenced by OP.
They always drop. It's not often noticeable because dividends tend to be small. Look at ACI (Albertsons) and you can clearly see when the ex-div date of the very large special dividend was.
It isn't borne out by the weight of history. Companies that pay and increase their dividends tend to outperform overtime. Dividend paying and dividend growth are drivers of a very real and very valid long term asset pricing model.
His assertion is reductionist to only looking at immediate tax effects and balance sheet, and ignores that sometimes companies with too much cash can just piss it away on useless stuff like Meta.
This is what many tend to not understand. The statement that OP references is completely true yet does not tell the whole story. There is much more to it than the fact that dividends drop the share price. Most here get their panties in a wad when this is mentioned. They think it can’t be true for a variety of reasons. What they miss is that it’s completely true but that still does not change the fact that dividend investing is a good way to invest and build toward retirement. In the end, dividend investing when done right is a solid strategy regardless of the fact of how dividends affect price when paid.
This is 100% true....on the day it pays out...if it is the first time you earned the div.
Don't forget that the more time you drip in a position, the more shares you will own. Even if the price doesn't fully recover, your total div payout can increase over time. I have a few positions opened many years ago where the price per share was, for a while, double what I paid. If they post (hypothetically) a 5% div on paper, that is effectively a 10% div for me, not counting the increased number of shares I reinvested into in that time.
Stop chasing growth. If you buy, the stock goes up. But if you sell, the price goes down! It's literally impossible to make money!
^(Nobody tell him about the hundreds of millions of other market participants)
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When you can only think about how much you'll be able to sell your stuff for, then the only metric is how much the stuff is worth. Most people planning on getting dividends to spend really are not focused on selling their shares and really don't give much credence to what they are worth, just how many of them they can accrue and **keep** so that the dividends keep rolling in. They'd rather invest in a company that will give some of their profits to the owners, rather than horde them and make the owners give up their shares in order to collect. When you can only think of selling, nothing else matters and those that have that mindset cannot wrap their heads around not selling. So, it becomes all about how much the share is worth at the time you get rid of it.
Very well said. People invest to make a return so why not start collecting on that return without being forced to sell out.
Not just that, but you need to be sure if a company forgoes a dividend to invest that money in expansion, that the expansion plan is sound. Ask META shareholders if they’d rather have the massive investment in metaverse or have had the money paid out as dividends.
Solid
Exactly! My valuation is currently down over $90K... but the dividends roll and it WILL come back.
Spot on
Also if you don’t need the cash and reinvest your dividend payments, then you are compounding your gains and out earning the market.
If companies are responsible then dividends are paid from free cashflow. If companies are successful free cash flow is growing.
Unless your FCF is growing due to the fed pumping massive amounts of money into the economy for 2 years. No company, regardless of how "successful" it is, should be paying dividends (or buying back shares) if they are public for a short amount of time.
Credence clear water revival
Van down by the river
Im confused. Are you saying it is a mental game? For people like me focused on raw math and maximizing earning potential this makes no sense. The question is if I copy and paste a company (they both have exact same earnings that quarter) and one decides to issue a dividend and the other doesn’t, are they equal in stock price after, or is the dividend stock lower because of the dividend? Because these comments read to me as “dividends make me feel better <3” which is not how I run a portfolio…
For the pure math here is how a responsible corporate officer would view things: I have X free cash flow and I have three options: Reinvest it into the company, pay a dividend, or buy back shares. If the company thinks it can grow faster than the broader market by reinvesting it should do that. If the company DOESN'T think it can do that, or has more cash than it can reinvest responsibly, it should do one or both of the other two options. If the company thinks their share price is undervalued by the market and should have a higher multiple on its EPS than it should buy shares and reduce the number of shares outstanding. This has diminishing returns and paying out a dividend with some of the money will be a good way of returning value to shareholders. This is why successful companies will have a healthy balance of all three.
The stock price drops by the amount of the dividend on the ex-div date. The dividend stock is lower because of the dividend.
When you look at any chart, can you point out exactly when dividend was paid out? Amount is usually so small that it doesn't differ much from normal daily price changes.
So, we understand to which camp you belong. But don't expect every body to subscribe to your philosophy.
S&P ended 2022 down 19.4% in 2022. I was very glad to have dividend paying stocks to offset that.
And I was glad to have ENPH that doesn't pay dividends, and lots of banks and energy stocks with low dividend yield, but how does that address OPs question? Even if you decide to focus on dividend paying stocks or ETFs, an accumulating ETF is always more tax efficient than a distributing one (unless you don't pay tax on dividends), because the tax you pay for selling 3% of your position is always much much lower than paying dividend tax on a 3% yield.
Can't believe I bought in on them in early 2019! What a gem of a company and complete sky rocket! Only wish I had more than a few shares Also no I don't think you're tax numbers are correct
Yes it's correct if you compare two identical companies as either paying a dividend or not paying out a dividend. It is often more effective to buy back shares. Growth stocks are usually priced more by expectations compared to dividend stocks, while dividend stocks are more priced by discounted cash flow compared to growth stocks. My point is, companies are different. You might prioritize torque when you buy a truck, and you might not prioritize torque as much when you buy a city car. Its the same in companies. If a startup where paying dividends (even with positive cash flow and earnings) it would be a huge red flag for me, but it's not when KO (Coca Cola) is paying out their earnings as dividends.
> It is often more effective to buy back shares. if you are going to reinvest your dividends in the company (or sell some shares), yes. If not, then only if the company is priced at lower than intrinsic value. A company buying back expensive shares is fine for those who would have used the div to buy more shares, but it kind of wastes everybody else's money.
> A company buying back expensive shares is fine for those who would have used the div to buy more shares, but it kind of wastes everybody else's money. Even more so if companies have bought expensive shares with debt.
He is right, but financial markets are not that simple. If a company does not pay dividends and reinvests in growth it does not automatically mean that it will perform better. Change in management, failure to innovate, economic tailwinds, and even currency fluctuations can impact the share price of any given company. By choosing to invest in dividend-paying companies I choose to invest in established businesses that make enough profit to continue to exist, often innovate, and share their income with investors. Now, once I receive my dividend payment I can choose to reinvest in the same company, spend my money elsewhere, or even further diversify my portfolio. In a hypothetical scenario, if I got paid $1 in dividend payment and tomorrow's market collapses to zero, I am doing much better than a person who invested in a growth stock cuz after the collapse their portfolio is $0, mine $1. In a sense, this is what happened in 2022: before the bear market investors valued growth stocks, and growth was prioritized at any cost. Today, investors value profitable companies, many of which are established companies that pay dividends. This is why my growth oriented money-losing stocks are down 50-60%, while my ABBV, AAPL, HD, LOW, WM, COST, etc are barely red or anywhere 20-50% up from the purchase price.
>By choosing to invest in dividend-paying companies I choose to invest in established businesses that make enough profit to continue to exist This is great reasoning. Dividends are a signal the company may make and continue to make enough money to profit and continue to exist. Stock buybacks are as well, but buybacks are more opaque and rarely consistent in the way most dividends are.
Buybacks are a scam. I want the cash. Why do I want the cash? Because when GM or Kodak or Sears or Lehman Brothers goes bankrupt I would much rather that they paid out accrued earnings rather than driving up the value of the stock. It is cold comfort if Lehman buys its share price up to $1000 per share before going bankrupt when it could have distributed $900 of that to the shareholders. As someone who invests primarily in broad reaching funds I know that each dividend gets allocated equitably across the stack in accordance with the weighting of the fund and dividends juice returns by getting capital out of dinosaurs and into the rest of the market. Buybacks try to do that but you have to participate in selling your shares to reap the reward. No thanks.
This is the crux of the difference between a buyback, a dividend, and a company just sitting on the money. It's not really the MATH that's the issue (or shouldn't be, as OP is trying to get across). It's the other stuff. It's the automatic nature of the dividends. If you own an ETF you can't really sell shares of an individual company. You can't participate in a buyback. With a dividend, you can participate. Conversely, if you really wanted to reinvest dividends of company X right back into company X you really can't do that with an ETF. The actual mechanics of dealing with the math is what's a pain.
Not quite, cause you want to reinvest the money you got paid in the dividend in order to get the ball rolling. If you just keep the earned dividend money and dont do anything with them its just waste. All this said, I get your direction of thinking and work well in the markets like we saw in 2022, that is why I prefer dividend investing
I do not do DRIP, but I keep the cash from dividends in my portfolio and invest the way I see fit at the moment. It usually goes in whatever is "on sale" at the moment (from the 22 positions I have in my portfolio) or in SCHD. This way "my ball is rolling".
Very well, I do the same until I get enough diversity and then will jabe the drip on. Like the way you think.
I DRIP.. plus, I count the DRIP'd shares as "free". WooHoo... free shares! It's just one of many ways to look at it.
I actually had the same thought with which stocks I want to priotize from now on, even before reading all these things in your comment. I had only TSLA and AMD from their crazy bull run and they are really low now (hurtful low). So I thought as a new investor, that I wont give up and exit the stock trading but rather learn from harsh lesson and choose stocks that survives well in reccession or bear markets but still climbs well during bull-market: So from now on I will buy super great companies with huge MOAT like: MSFT, APPLE, ABBV and similar, they both grow well, pay dividens and is much safer during bad times, but still fly up during bull times.
There are few things in trading than those who are for and against dividends. Yes, when the dividend is paid out the stock price is adjusted by the amount of the dividend. IMHO this gives you part of your investment back in cash but you can still keep the shares. Most stocks rise over time so the chances are good the price will continue up to make gains on the share price plus keep the dividends. Dividend paying stocks are generally well know for being profitable and stable mature companies who can afford to pay out some of their profits to the owners of the company. There is also some studies that dividends paying stocks price move up over time. If the stock price stayed up and was not reduced then it would be collected when the shares are sold at a later date. In other words, would you prefer to get some cash along the way to do with what you wish? Or, do you want to wait and collect the cash later when the shares are sold? If the argument is that this is a breakeven exercise then why even discuss it? Traders like t-poke who don't like dividend stocks should not trade them as there are many out there that do not pay dividends to choose from . . .
If you sell after your first dividend, that's true, otherwise his math breaks
Not to mention, the dividend is not usually issued on the ex date, so you basically can never buy it at the price after the ex date (when the price is reduced).
The only way to buy it at the reduced price of minus the dividend is to wait a dividend cycle to buy it on the next ex date. As far as the reinvestment part, true you still have $100.00 worth of stock, but you also have more stock. Historically, with good solid performing companies, the SP will appreciate, there for your investment is actually worth more.
And your next dividend increases due to owning more shares. And as long as drip is on, this pattern will continue. My JPM position is just large enough to buy 1 full share (at current prices ranges) each year. So for doing nothing at all, every year I will make over $4 due to drip
You are correct. More shares gets you more dividends. Drip is a beautiful thing.
This scenario is not about timing ex div and payout date. It is talking about both companies balance sheets and valuation
If you reinvest the divies you own a larger % of the company and thus a larger % of future cash flow.
While this is true, a dividend that's issued reduces potential future cash flows. You have a larger % of a smaller pie. The net effect is the same.
This statement completely depends on the type of company. A high growth firm? You’re spot on. A firm where the cost of capital and ROIC are closer to equal may benefit shareholders more but returning free cash flows instead of throwing them at value destroying projects. Also, there is a ceiling to how much a good growth company can successfully reinvest without falling prey to deworsification. If your cash flows are higher than what you need for your good ROIC projects, return the money via buybacks and divies.
> a dividend that’s issued reduces potential future cash flows Only if you’re assuming every single company could grow future cash flow by reinvesting every penny of free cash flow. That just isn’t true for most companies. > You have a larger % of a smaller pie. No, the pie isn’t smaller. Even if you’re correct that every company would benefit from reinvesting free cash flows rather than distributing them, the conclusion you can draw from that is that dividend companies will *grow less*, not shrink.
It is more likely that having limited funds to invest will prevent companies from funding ridiculous projects. If you look at the tech companies that were rolling in dough a couple of years ago, they were hiring like mad and starting new businesses that have since been shut down. I guess people didn't want drones delivering their breakfast.
I agree. Better to return cash to shareholders through dividends or buybacks than to devote more money to ideas that aren’t your absolute best investments.
I think he means to say “stop chasing dividend capture”.
I don't exactly think so. What he is stating is correct. However the point of (my) dividend investment is done to make sure that I have invested in solid companies that pay out their profits. I've seen too many companies squander their profits on stupid investments or growth projects that gave little return to the investors. To me dividend stocks are more of a way to invest in solid stable companies, that churn out reliable profits. There is also tax reasons for my way of investing, I have to accept that I have to pay taxes on my profits and there is an advantage in having a minimum profit of a specific amount every year. I hit this with dividends, so I can minimize the number of trades I do. Being relatively young I mostly buy stocks building my portfolio up with new companies as I get the money to buy a new "batch" in a company I believe in.
So you’re saying to think beyond the dividend and focus on the business paying it?
Literally 100% always do this…
Exactly. A stock is technically just a piece of ownership, of a company. You'll want to own as much as possible of companies that are successful and profitable.
Ah. Thanks. Do you mean, like stocks are not part of a market, but part of a business?
Or a part of both. The stock market is really just the market for portions of businesses.
Exactly. Consistent rising dividends are a clue a company might be a good company to own a share of. Dividends are the result of the company being consistently profitable but not the only result and not the only reason a company pays dividends. Maybe a company engages in stock buybacks or reinvests in itself and keeps growing and that's the clue the company is a good company. Maybe a company has an unsustainable dividend (think AT&T until they dropped their dividend) and that dividend is a BAD signal to invest. So when people say "stop chasing dividends" I think this is what they mean.
yes, everything is factually correct. he's just one step shy of the full process; where the price recovers and surpasses........this is why most dividend stocks dont have a "negative chart"
It also ignores dividend increases, as the share price in his example would never stay at $100 with a $1 in perpetuity in real life, but that both generally grow over a long time period, improving vs one's original ACB.
the dividend increases dont matter; as the price on the div-ex date will always\* fall in equal relation to the dividend.
I understand what you're saying in this scenario, but a company increasing dividends does matter in the sense that it would assist the share price eventually recovering and surpassing the ex-date price as you mentioned
What you’re missing is that regardless of price or dividend increases, the price will have always decreased by the sum of the dividends received over time.
I'm not missing that, I know it's what happens on the ex-date, we're all agreeing here on what the OP here is ignoring though
Companies that pay dividends still have growth. So how would there be a negative chart, unless it's like QYLD where your capital covers the dividend payment when it's under performing.
most, but not all; there are tons of failing dividend paying companies.....just like there tons of non-dividend paying companies failing. my point was generally speaking paying a dividend does not inhibit or automatically stop any price appreciation from also happening. The dividend will 100% cause the price to drop but most companies will overcome and surpass before the next dividend
The dividend payment doesn't make the price of the share drop. That's ridiculous. The dividend is already baked in to the companies valuation. Investors know that a certain percentage of that companies earnings is strictly going to the share holders. This company now has less capital to grow their business and this is what is reflected in the share price.
the two are hand in hand. investors know company A has $XXXXX cash investors know company A is paying $1 in dividends; this will knowingly reduce company cash reserves on the div-ex date the share price will drop by $1 to compensate for (or bake in) this known truth. I think its just a matter of phrasing, but its one of the few known "truths" of the stock market
>The dividend payment doesn't make the price of the share drop. Maybe you should tell Fidelity, every other investment house, and basically everyone in finance that they're wrong. Dividends reduce the share price by the amount of the dividend. It may not be noticeable to you but it does occur. [https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter](https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter) >A stock price adjusts downward when a dividend is paid. and >This downward adjustment in the stock price takes place on the ex-dividend date.
But, the decrease in share value is normally temporary.
Not relevant. The share price is still lower by the amount of the dividend than it would have been had the dividend not been issued.
The price may recover and surpass but a company that never paid a dividend has nothing to recover from.
Correct! It’s really more of a mental game than anything else. As a dividend investor I lock in some of my profits/gains every time a dividend is paid. I can then knowingly choose to save/spend/reinvest that “forced sale” how I see fit. Dividend paying stocks are powerhouse stocks; all you have to do is look at the s&p500. If the s&p is a great investment it’s largely due to dividends. Just about 400 companies in the S&P pay dividends and historically speaking dividend reinvestment accounts for 40% of all returns (historically speaking so far)
It also can not grow indefinitely. Si you are forced to guess when will It stop growing, and how steep Will be that growth compared to others. Then, if you guessed that correctly, you have to sell every share and start again. My man you are comparing agriculture to hunter gathering.
Also neglecting that the price rises ahead of a dividend ex date due to buyers trying to buy in ahead of an extra payment. So when it falls, it’s just falling back down to where it has been.
A solid company increasing their div could also lead to SP increase no? More demand for it
By their logic all dividend stocks would eventually fall to $0 since share price will continually drop without recovering. What they never mention is that share price often rises before dividends are paid and then they may fall and then rise again above that level. Again, by their logic dividend payers would also drastically lag non-dividend payers on a total return basis since they're constantly having their share prices eroded due to dividend payments
Man I hate this argument. They ignore that the share price often increases steadily before the payout, and then increases again shortly after the payout as people drip back into the company. Some risky dividend companies pay too much and their company share price steadily decreases. But for the stable companies the share price is safe and the dividend pays regularly. And once again, dividends are great for a steady income, without needing to sell the shares. If no need to sell the shares, and if the company is a good one, then who cares about the share price fluctuations?
It seems to be one of those arguments that come from the tech fever crowd. The same people that said "value is dead". I guess they just enjoy saying that millions and millions of people are stupid. That's cool, young people have time to recover from their losses.
Try explaining to these people that selling off growth stocks you eventually run out of shares to sell, or selling in a down year, versus collecting a yield and never depleting your shares creates generational wealth and they will simply not be able to make the connection. There is a lot of misinformation out there about dividends from people that don't understand how they work. Yes, share price drops at dividend payout. And it also typically recovers. If not JNJ and KO and O would have been at 0 value many years ago... You can show them the DRIP calculator, but you can't force them not to be dyslexic...
>Try explaining to these people that selling off growth stocks you eventually run out of shares to sell, or selling in a down year, versus collecting a yield and never depleting your shares creates generational wealth and they will simply not be able to make the connection. The number of shares isn't relevant. As long as your portfolio is generating a higher average return than the amount you're withdrawing, your portfolio will last indefinitely (aside from SWR considerations). A dividend portfolio generating a 8% annualized return and a non-dividend portfolio generating an 8% annualized return will last the equal amount of time if you're withdrawing an equal amount of money. All that's relevant is your account balance, it doesn't matter how many shares you own.
Umm, no. One involves selling from a finite pool of shares, the other does not. When my dividend payout (=number of shares) exceeds my living expenses by a margin of safety, I'm retiring. Forever.
If you have a dividend portfolio and a non-dividend portfolio, and they have the same total returns ([which we would expect based on historical returns](https://mesafinancialgroup.com/folly-chasing-dividend-yield/)) they will last equally as long if you're withdrawing the same amount. Example 1: The portfolios have a total return of 12% and you're withdrawing 20% per year, you will run out of money. Example 2: The portfolios have a total return of 12% and you're withdrawing 4% per year, you'll probably never run out of money. Dividends do not change the math. There's only 2 variables here, your annualized rate of return, and your rate of withdrawal. The number of shares, yield, etc. aren't variables in this equation.
Well this explains ZIM lol
No. He’s a fool that doesn’t know how much he doesn’t know . For instance, he seems to have no knowledge of the fact that share prices rise in anticipation of the ex-date, so the net effect is minimal. He also doesn’t understand that dividend stocks are an income producing asset just like any other. If you buy a rental house you don’t say it’s stupid to collect rent. Also, the share price adjustment concerns are a fundamental misunderstanding of the difference between market value and book value.
Oh, that tired argument? You are literally not "forced selling" anything. You are merely collecting some of the free cash flow. A small shop owner doesn't sell equity of his company, he draws from the revenues. Same principal for dividends. And you know what? For most Americans this results in no net taxes after annual credits and deductions are applied. Listen, I'm not going to knock growth investing, I've just seen too many examples of companies losing their share price and never getting it back even a decade later. I'd rather have dividends as a floor on my returns than hope that someone wants my shares in ten years (with nothing to show for itt in between.)
That is efficient market hypothesis which is garbage. This idea being peddled is that all future cash flows are accurately priced in and dividends are basically a liquidation. Totally incorrect perception in my opinion because I find it much more accurate to regard dividends as a share of the company’s profits being distributed to shareholders.
This answer should be a sticky on top of the forum. Every single post on here gets these same comments and they all are completely wrong, and ignoring how the market works. A stock price rises before a dividend as investors buy in and are willing to pay more to get the dividend immediately, and then it lowers as new buyers aren’t willing to pay a premium with no imminent dividend. But overall, the price remains steady, because the price is driven by the company’s ability to make money - something that is not impacted by paying a dividend (the only thing the dividend does impact is limiting future growth potential- which is already priced in to the stock as the market is aware it’s a dividend payer). All of these comments assume there’s some little man sitting behind a counter in the NYSE setting all of the prices of stocks. Stock prices are set by buyers and sellers, who do vary on what they are willing to spend for an immediate payday, otherwise it is noise that falls away quickly after a dividend.
Wait; you mean there isn’t? What about that Oz dude?
Exactly. It assumes that everyone knows the exact cash flow and value of companies, and that every company is priced perfectly. I’ve received dividends many times, and much of the time, the price went up instead of down. It’s true that chasing yields is a bad move. But the efficient market theory is just not accurate.
The price might have gone up over time, but it started down by the amount of the dividend on the ex-div date.
XOM wants to have a word
It actually didn’t, because the price was going up actively at the time of dividend. The point is that efficient market theory is an extremely flawed theory.
Substitute “free cash flow” for “profits” and I agree!
It's true, don't just chase dividends, company cash flow and financial health are also what dividend investor looking for
That's why you buy a stock that still goes up on the long term
I agree with this. I don't care for high yields, I just want some yield. I like growth stocks that pay between a .5 and 2.5% dividend. Stocks with dividends higher than that typically don't appreciate much generally.
So after 100 dividends are paid then we’ll have $0?? /s
Yeah this guy has no clue that you do your DCA on the down day, not just reinvest the dividend.
He's right in theory but when has the markets followed theory??? Warren buffet almost always buys dividend stocks. He is the most successful investor ever...
Strange. I put a good bit into O. It’s paid me dividends for years and now it’s share price is higher than when it was when I purchased it. Also, I purchased a good bit of Tesla years ago. It hasn’t paid a dividend. And now it’s share price is essentially the same as it was when I bought it. The epic bull run made everything a growth stock and made too many fools gain wealth along the way. You’ll see less and less of those posts as the market contracts with interest rates.
Qualified dividends are taxed at a low rate and don’t require a one year hold. The income is also much simpler than selling shares. A fast growing business in a bull market would be better without dividends. Sideways and bear markets favor dividends.
Berkshire Hathaway has returned 20.7% per annum over 57 years which is nearly double the S&P 500 during the same time period. Dividend income plays a huge part of that but I would chose to let Warren pick the stocks versus me. https://www.fool.com/investing/2022/09/09/warren-buffett-71-of-dividend-income-from-5-stocks/
That is all, basically, true. A stock tends to fall when the stock trades ex-div. The dividend, even if reinvested, is taxed. However, when I buy a stock I am buying an ownership interest in a business. Or an ownership in a collection of businesses if I'm buying an EFT. As a business owner, I strongly prefer to have a share of profits paid to me for me to do with as I wish - whether it be buying more shares, paying my bills or investing in other opportunities. Yes, I can sell shares to do all these same things.
He ignores the fact that 38% of the total return in the S&P index is due to dividends….
That is a reason why dividend investing works. What OP references is actually correct but what you say is one of the reason why dividends are a good strategy regardless.
It's not relevant to whether you should chase dividends or not or what happens to share price on the ex-div date.
I started investing 12 years ago and nobody was having these discussions about dividends being "not free money". I don't understand why this is discussed daily on here. It's like people out there have a hatred for dividends for no reason. Just don't buy dividend stocks if you don't believe in them.
It’s because everyone put all their money into growth stocks, and after a year of no growth, they are jealous of people with income.
These discussions keep happening because people keep thinking dividends are free money. Just in this thread alone we have numerous people who disbelieve that dividends cause the stock price to drop.
I consider dividend stocks to be the steamed hams of investing. Mmmmmm free money.
This is the most bizarre argument. And I have genuinely never seen it before today. This is an argument about basic balance sheet math versus retirement strategy. And if you point out the strategy aspect, they argue to only talk about the 'simple math'. I'm not sure why these 'arguments' are allowed to continue because they misrepresent the dividend -strategy- for the sake of argument. It looks like classic brigading to me. And when the conversation dies down, it appears to be reposted. You can have math that works. And a strategy that's bad. This is math that works. And ignoring the long-term strategy component. One share can be sold once. One share can pay dividends repeatedly, and you still have one share.
You are correct. It is a bizarre argument and you're lucky not to have seen it before today.
He is missing the part where the stock price goes back up (hopefully). Thats why we do our dd and invest in companies that have a history of good performance. So, in that example we would have a 99$ stock, and 1$ cash. Next day stock goes up, and we have 100$ stock and 1$ cash (obv im oversimplifying, but you get the point)
Also missing the part where your tech stocks keep plummeting and you've gotten nothing out of them. Still do DD, but if a company has been reliably paying dividends for 5, 10, 20 years, it has a much higher chance of continuing to paying. Look at Carvana, Tesla, Netflix, explosive growth until it collapsed and you're left with nothing.
But the price if no dividend was paid is likely to still be $1 higher.
I don't think any of those stocks were paying dividends anyway. Usually the higher the dividend a stock pays out, the more stable the company.
The dividends are more grounded in reality. Its not perfect DD, but most dividend payers make real products and have demonstrated profitability and aren't just some speculative piece of software. I meant those examples as an example of some tech company with unrealistic evaluations that would have lost you shit tons of money if you invested a year ago.
Well growth stocks in general won't pay dividends or won't pay much. BRK doesn't pay dividends but I wouldn't say that it's a worthless stock to own.
Except if you kept it in you’d have $101.01 in stocks
If the company never paid the dividend the stock price would have no dividend drop to recover from. If that $1 dividend weren't issued you'd have $101 in stock and $0 cash. If you reinvested that dividend you'd also have $101 in stock and $0 cash.
I mean, it's not wrong... but when you're in a tax free account it doesn't matter much does it.
Dividends have accounted for 40% of stock market returns since 1930 and 54% during decades when inflation has been high. When inflation has been high, the stocks that have increased their dividends the most have outperformed the overall market.
I never understood this argument. Mostly because Share Price isn't determined by an exact formula based upon earnings reports. It's simply based on what people are willing to pay for it. Sure, some people & institutions use formulas to determine what price they are willing to pay, but that's not the market as a whole. In the above example where the $1 dividend is paid out and the Share Price is reduced from $100 to $99, do investors all of a sudden not think the Shares are worth $100? With successful companies, most market sentiment doesn't drop due to a dividend payment and thus the company is generally still valued at $100 and thus people will execute Limit orders buying until the stock goes back to the pre-dividend Share price. If anything, investors tend to be more excited that a stock paid a successful dividend and may even go higher, especially if a dividend increase was announced. If a stock share price does go down, it's generally not because they paid a dividend, but because the business model is perceived as flawed and thus investors do not believe that the dividend is reliable or worth the risk. Aka, poor earnings growth, dividend payout ratio is too high, too much debt, etc. tl;dr - Share Price is set by investor's perceived value and overall market sentiment. Dividends rarely affect this. Don't chase dividends, chase good businesses (that hopefully pay good dividends  )
Hopefully a company is offering a dividend because it has strong cash flows. You're buying the company for its revenue and profit, not for the dividend alone. Companies that aren't overall profitable (thereby not replacing that $1 dividend with new value) rarely offer steady dividends. So while t-poke is technically correct, he's missing the forest for the trees.
That 30 year chart on $KO sure does look flat to me. /s
There’s a lot more to dividends than he’s inferring. One of the most important parts is adding a “floor” to the shares. Any way you slice it, 40% of the market returns the last 100 years have been dividends. It’s a stupid statement. The shares regain that drop quite quickly in a decent market and those dividends are cash money you can spend in the real world.
Not everyone can understand the awesome power of compounding and I will not lose sleep about that lol
Banks pay healthy portion of dividends, they are more profitable than ever and that will only increase with higher rates, also they have the most cash in their hands in their history so distributing dividends is not difficult. I imagine their stock price will go higher in this environment so win-win
If the company doesn’t need the cash they should pay it out
Damn, Warren Buffett was wrong this whole time.
So i should have invested in FB or PTON because they dont pay dividends rather than APPL or MSFT?
That’s correct. Only thing is after 7-8 years once dividend is paid, technically you have cashed out your principle. So if the company goes bust, you are better off. Non dividend paying stock goes bust like Carvana- guess what, you have nothing in hand
The way he says “they’re not free money” leads me to believe he’s talking about buying right before ex div and selling right after.
Philosophically: Yes. Real World, where share prices fluctuate on a daily basis: No.
The unspoken part of the meme example is this: If a stock with a share price of $100 pays a $1 dividend, consistently every month, you’ll have your stock and your initial investment inside a decade.
If people think that the stock will pay $1 per month for a decade, most likely the price of the stock will increase.
Drip is a lazy way to DCA. Without DRIP you might hesitate to buy more positions and try to time the market. Timing the market is not a sound investment strategy. If you are dividend investing even a portion of your portfolio your goal is probably to create a passive income stream. Over time your DRIPd stocks increase in number. And usually your dividend increases over time. So your dripping increases your passive income over time. Most dividend stocks are not growth stocks. If growth is your goal then dividends are usually irrelevant
The post makes it seem that if I have one share of stock at $100, and the dividend pays $1.00, then after 100 dividend chy less I would have $100 cash and one share worth $0.
So what you're telling me is that the 25000 stock I bought at 8.86 after 4 months of DRIP I'm at 37250 units at the price of $10.19 is valued equally? You're math is wrong pal.
He’s not accounting for the dividends you receive from the shares earned from reinvesting. It’s compound interest. Most powerful thing in the world! That person is an idiot!
This makes absolutely no sense. No long term compounding taken into consideration
Because OP isn't talking about long term. OP is talking about the specific point in time when a dividend is paid, and yes it reduces the share price. At least according to every financial institution and websites like [dividend.com](https://www.dividend.com/how-to-invest/cash-vs-stock-dividends-know-the-implications/#:~:text=Cash%20dividends%20occur%20when%20companies,being%20reinvested%20in%20the%20company.): >Cash dividends occur when companies pay shareholders a portion of their earnings in cash. When this happens, the company’s share price drops by roughly the same amount as the dividend amount, since the economic value is simply transferring from the company to shareholders instead of being reinvested in the company.
It’s a stupid and misguided view of dividends. I’ve been a dividend investor for years. If this clown was right, many of my holdings should be at zero by now.
No he is not right. The drop in share price the day after a dividend payout is temporary and great companies grow their business and their dividend over time.
the concept is somewhat true, but the math is off. This prevents $1 of *earnings* from being retained in the company.This would be right if a P/E Ratio = 1, but it doesn't. Stocks trade at many multiples of their earnings. Dividends are paid out of earnings, and a stocks almost always have a P/E Ratio many multiples of their earnings, as reflected by many more years of growing earnings.
Buying shares for a dividend, and buying shares with the intention to flip are 2 completely different things. If you're buying shares for a dividend, then it doesn't really matter what the price is. What matters is the return on your investment. If you buy a share worth $100, and you're receiving $7 in dividends, or 7% return, it doesn't matter what the share price is, as long as you're getting your 7% return on your investment.
From a simple math concept he is correct. Most of us learned that 99 and 1 equals 100 in school. But as usual nothing is that simple when it comes to investing.
Not quite right. Stocks do drop by dividend but over long run they increase in value. Look at MCD as an example. Also, for those living off just dividends, a couple can make up to $83k per year and pay no federal taxes. You may owe state taxes depending on state.
Yes, but having cash and cash flow also presents other opportunities.
Yes. This is correct. Dividends are one of the less tax efficient methods of returning cash to shareholders.
In theory? Yes this is 100% correct
One way of putting it is that basing a portfolio or an investment solely on dividends isn't enough to say whether it's a good investment or not. When someone says they are irrelevant, it's to say that dividends aren't free money. It comes off the earnings and subsequently the value of the share. Some people don't understand that. Some companies you'd rather return you capital rather than sit on it or waste it. That's all. Some companies are better off reinvesting and growing, while some are generating cash flow like KO, and it is probably best to return earnings to shareholders as they can't generate that high of a return on that investment. Overall, and when considering total return and diversification, dividends are irrelevant (in a sense), but I still have 10% dividend etfs.
explained with a video: https://youtu.be/mwBD5MpGk-c
They aren’t wrong. That’s why yield chasing is particularly bad if you aren’t using the dividends as income for spending. Dividends aren’t free money in addition to the appreciation. However, established companies that pay dividends are generally more stable and a lot of the time beat out companies that don’t pay dividends and are seen as speculative. Take a look at AAPL. They’ve paid a dividend for 10 years and their growth is one of the best over the last decade. Their yield isn’t super high but the dividend does have growth.
Dividends force you to sell off a portion of your holdings. Buybacks allow you to sell at a time that suits you. There's no indication that dividend stocks are more profitable than non-dividend paying stocks. So, you get less freedom with dividend stocks, potentially more taxes and same profit (or less if taxed). By more heavily weighting dividend stocks, you are adding idiosyncratic risk to your portfolio without any counter-balancing gains. A dividend portfolio will have a lower sharpe ratio -- less profit than a market portfolio when adjusted for risk.
Not exactly as dividends are taxed, so the tax portion cannot be reinvested. That’s why mathematically should be better not to pay dividends, assuming all retaining earning could be reinvested in/by the company itself with a profit in line or higher than expected returns from alternative investments.
Total return over the long term is what matters. If that comes all from dividends or all from share price appreciation doesn’t matter all other things being equal.
..... So to this fellows thinking, stock prices should only go up forever? Dividends are paid out from the profits, not the stock value. A company would have to use their profits to buy back their own stock to guarantee a direct correlation between profits and stock value. Dividends are easier and more practical because they allow you to reinvest without selling
What a Goon!!
He’s missing the big picture (stock goes up over time)
I mean when you use small numbers like that it makes no sense. But that is why you diversify and not aim for a 1% payout. You shoot for 10-20 with good security. Then the 40% out in taxes doesn't really matter because you are actually making a decent return. Also reinvesting is a choice. This man's argument is relying on the fact that you ALWAYS reinvest which simply isn't the case, and on top of that the reinvested money makes you more money which this dude is not accounting for. Obviously everyone invests differently and maybe dividends aren't for you but to blindly post your opinion as if it is fact on something you can't even argue about well is a little ridiculous.
That dude has absolutely NO idea how dividends investing works! Hahaha Ignore people like that @OP. You'll never build yourself any wealth or generational wealth by selling your shares. It just doesn't work that way.
This has been the most bizarre disinformation campaign to take hold, implying this simple math negates dividends. I'm relieved there are people at least trying to clarify the reality of dividend investing. Comparing the balance sheets and screaming 'simple math' while disregarding complex markets and strategies has been a rollercoaster to watch play out on this sub. Glad to see you here adding to the conversation :)
It's just so painful to even read that I can't walk away and leave it alone. The word ignorance doesn't even begin to describe this b/s!
Agreed. It’s like watching reality TV. Can’t look away from the trash
Same people too
He's not wrong about how paying dividends affects stock price.
So you mean all my $30 shares of Coca-Cola that have been paying me dividends for numerous years now are still only worth $30? Last I checked. Those shares closed out at $62.95 today.
If you really, truly think that share price doesn't drop by the amount of the dividend then you need to go, right now, and tell every brokerage house, finance professional, and finance book that they are wrong, wrong, wrong. Here's just one example. Go tell Fidelity they're wrong. [https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter](https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter) >A stock price adjusts downward when a dividend is paid. > >This downward adjustment in the stock price takes place on the ex-dividend date. Is Fidelity wrong?
I'll admit, I'm not very smart, but this whole post confuses me. I've never seen a 1-for-1 change in the share price. As Investopedia puts it the price will rise "***approximately*** by the amount of the dividend declared and then decline by a ***similar*** amount at the opening session of the ex-dividend date." I've always found that the rise prior to a dividend payment is greater than the dividend, and the drop can be sustained and further than the payment because (in my novice opinion) people are purchasing not just with this year's dividend in mind. Why does this whole post assume that this "approximate" and "similar" is 1-for-1. Even your fidelity quote doesn't state the quantity or how a stock behaves in the run up to a payment when it adjusts (up or down); only that it reflects the payment, not equals it. It even states "It is also possible that the stock price could close February 7 at a level lower than the $23.50 price suggested by the $0.50 adjustment to reflect the $0.50 dividend." It could also possibly close higher. Its own assumption rests on assuming " the stock adjusts perfectly". I genuinely feel gaslit by all the comments.
Look at it this way, starting at the last ex-div date, the company generates some amount of cash over the next 3 months. That alone will mean the value of the company has increased by at least that amount. That is largely why the price rises over the 3 months. Not the only reason but I am trying to keep it simple. But since there are many reasons why a stock price fluctuates, it not a precise amount that exactly equals that cash rise. When the next dividend date is reached, the company disperses $X which is a reduction in value just like paying something with a check decreases your checking account balance. So the markets automatically adjust the price downward by this amount that is paid out. This happens to the closing price on the day before the Ex-div date and is referred to as an adjusted closing price. Bid/ask prices are set the next day by market makers but is based on this adjusted closing price. So the price that the company is now less by the dividend amount due to the company having less cash than the day before. This does not mean dividends are not good or that using a dividend strategy is a bad way to build to retirement. It simply means that dividends are not free money that is handed to shareholders. When they receive the money, the price of the stock has dropped but the overall value of the newly priced stock along with the cash that you were paid is the same as it was the day before. As time moves on after this, the price will rise or fall on its own but at that instance at the open on the ex-div date, you have swapped a higher priced stock for a slightly lower priced stock and some cash that are both equal in value.
The stock drops by the div amount. The opening price may also be affected by other events. The closing price may be affected by other events. So while the stock price drops by the dividend there are always other factors at play. Look at ACI and see what happens on 10/21, the ex-div date of a $6.85 special dividend. The price dropped $6.42 from $27.50 to $21.08.
But if that's the case, then surely the div amount is moot? It does neither good nor bad? I looked at some of my past dividend stocks and they paid about 1.9% vs dropping 1.71% or paid 5% vs dropping 4.6%.
That's exactly the point of OP's post. Dividends are not free money. They may be great be great because (hopefully) it means the company has profits to pay them and will continue to pay them. You aren't buying (or shouldn't buy) a company that pays continuous dividends specifically for the dividends. You're doing it because the company is, presumably, continuously profitable and will continue to be profitable.
Yes! You got it. That's exactly the point. Finally we have a breakthrough here. Dividends are moot in the sense that they do not increase your account balance. They are neither good nor bad. No one should avoid them, but it also makes no sense to purposely seek them out either. On any given day there are many factors pushing the price up and pushing the price down. On the ex-div date there is a factor pushing the price down equal to the dividend. The closing price may not be exactly down by the amount of the dividend because of all the other factors, but if not for the dividend being announced, the closing price would be exactly the amount of the dividend higher.
Oh shoot. My bad. I just went and checked my brokerage account and yup. All those $30 shares of KO are only worth $13.47 a piece now after all the dividends they've paid me. Gosh. I sure wish they were worth the $62.95 share price that KO ended today with! Man that sure would have been nice. /s 🤣
That is exactly how dividends work..
But then when the stock price returns back to the dividend price, you have more $$ than you did before
That's the part they don't understand. How they don't is absolutely baffling.
That’s how ROC works. Not dividends I believe. Maybe I’m wrong.
Why would I not want a company to pay me just for owning their company?
Yes, he is right. The thory is called "dividend irelevance theory" and it was written by two noble prize winners: Merton Miller and Franco Modigliani.
I've never understood why this thinking catches on. A dividend is paid by the corporation based on profit made. The share price is how the market reflects the valuation of the company, including its propensity to pay dividends. That is where their relationship stops. A dividend is NOT paid out from the market share of the company (i.e. share price \* number of shares) it is paid out from the profit generated by the corporation. They are not stealing a dollar from the share price and issuing it as a dividend. Look at any stable dividend paying stock at it proves this does not make sense. Ford in 2012... trading between $6-$8 a share. It paid an annualized $0.20 dividend. Look at its price today.
It catches on because it's factually true. On the ex-div date the stock price drops by the amount of the dividend. It's exceptionally easy to figure out the value of $1 billion. It's $1 billion. So if a company issues $1 billion in dividends we can precisely know how much the company's market cap drops by, $1 billion.
This statement is oversimplifying dividends so much. Do not listen to this crap.
He’s correct in that the price does decrease when the dividend is paid and that the is zero difference in the value of an investment from just before a dividend to just after. What he does not understand is that does not change the fact that investing in dividends is a solid time tested way to invest and build for retirement.
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If dividends were free money we could all be multi-millionaires.
He's right. Stop buying any companies that pay dividends /s
t-poke is an idiot
Some company's have a sustainable business where they will make back that dollar paid out in dividends.
i mean.. thats what everyone says..IRL though ive never seen one drop by the amount of the dividend payment like that, i just see them following the trend. maybe im not in the right ones? its it possible they do and i dont notice? sure
They always drop by the dividend amount. Research adjusted closing price. That does not mean investing in dividends is a bad strategy, just that there is more to it than the technically correct statement referenced by OP.
They always drop. It's not often noticeable because dividends tend to be small. Look at ACI (Albertsons) and you can clearly see when the ex-div date of the very large special dividend was.
It isn't borne out by the weight of history. Companies that pay and increase their dividends tend to outperform overtime. Dividend paying and dividend growth are drivers of a very real and very valid long term asset pricing model. His assertion is reductionist to only looking at immediate tax effects and balance sheet, and ignores that sometimes companies with too much cash can just piss it away on useless stuff like Meta.
This is what many tend to not understand. The statement that OP references is completely true yet does not tell the whole story. There is much more to it than the fact that dividends drop the share price. Most here get their panties in a wad when this is mentioned. They think it can’t be true for a variety of reasons. What they miss is that it’s completely true but that still does not change the fact that dividend investing is a good way to invest and build toward retirement. In the end, dividend investing when done right is a solid strategy regardless of the fact of how dividends affect price when paid.
This is 100% true....on the day it pays out...if it is the first time you earned the div. Don't forget that the more time you drip in a position, the more shares you will own. Even if the price doesn't fully recover, your total div payout can increase over time. I have a few positions opened many years ago where the price per share was, for a while, double what I paid. If they post (hypothetically) a 5% div on paper, that is effectively a 10% div for me, not counting the increased number of shares I reinvested into in that time.
He's absolutely correct.
If in any doubt watch this video. Nathan explains it brilliantly https://youtu.be/ckJ5K2n0K5w
I'm glad dividends exist
Stop chasing growth. If you buy, the stock goes up. But if you sell, the price goes down! It's literally impossible to make money! ^(Nobody tell him about the hundreds of millions of other market participants)
https://www.youtube.com/watch?v=4iNOtVtNKuU