Investment question: Why do Dividends matter?

A

AirGibson

Veteran X
As you well know, TW is the central location for the world's best investors. So I have a question for you:

I've read a variety of strategies that seem hell-bent on finding quality stocks / funds that pay high dividends, but I don't really understand why I should care about the dividend. As I understand things, when a div. is paid out, the stock's price adjusts an equivalent amount to reflect the fact that the div. has been paid (nobody wants to pay the same price for the stock since they won't be getting that div.). In my mind, this means that the dividend and stock price are "a wash" and speaking in raw dollars, there is no difference in your position.

So why, then, do dividends matter to some people as a stock selection criteria?
 
some people are not in the stock to make fast cash, some people want to buy and hold until they die and would like to just live off the dividends

and the gains on the price are just extra (if there are any) but not entirely expected

its really what buying stock was originally all about, buying a large chunk of a company and owning that company

now people buy such tiny chunks of a company that dividends dont really matter
 
dividends do not equal profit at all

the company could be losing money every year and still pay a dividend

the company could also be making tons of profit every year and not pay a dividend

they are just payments to the owners of the company
 
Animo said:
some people are not in the stock to make fast cash, some people want to buy and hold until they die and would like to just live off the dividends
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Regarding "living of the dividend", couldn't I likewise just sell shares as needed?

And regarding long-term investing, dividends are taxed on the year that they're paid out (excluding tax sheltered accounts like 401ks, IRAs, etc...) right? So no dividends or re-invested dividends at the least would be more in-line with that goal, wouldn't it? But I may be missing something here.
 
Animo said:
dividends do not equal profit at all

they are just payments to the owners of the company
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Is the shareholder getting additional money?


Yeah, that's profit. Maybe not for the company...but for f*cking sure the shareholder is getting a profit.
 
people have different investing objectives

some might desire a constant return

yes the dividends are taken into account when determining the price, any elementary finance textbook will cover this p = d0/(r-g) blah blah blah ok bye
 
FngrBANG said:
Is the shareholder getting additional money?


Yeah, that's profit. Maybe not for the company...but for f*cking sure the shareholder is getting a profit.
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But your share price will drop by an equivalent amount, meaning it is a wash in the big picture of your portfolio.

Hence my original question.

Animo said:
dividends do not equal profit at all

the company could be losing money every year and still pay a dividend

the company could also be making tons of profit every year and not pay a dividend

they are just payments to the owners of the company
Click to expand...
Agreed here. And for this reason, I don't quite get why it is such an integral part of so many investment strategies (especially long term ones).
 
AirGibson said:
Regarding "living of the dividend", couldn't I likewise just sell shares as needed?

And regarding long-term investing, dividends are taxed on the year that they're paid out (excluding tax sheltered accounts like 401ks, IRAs, etc...) right? So no dividends or re-invested dividends at the least would be more in-line with that goal, wouldn't it? But I may be missing something here.
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Certainly you could sell shares to live off of, and certainly you could select an automatic re-investment. Dividends change constantly, and if the company has a large cash savings they can declare extra dividends anytime.

Typically "Value" companies are companies that are giving off large dividends and not growing as much or at all.

"Growth" companies typically do not give out big dividends and show investment gains within the price of the stock.

It really does not make any difference, and it is a wash as you say.
 
AirGibson said:
But your share price will drop by an equivalent amount, meaning it is a wash in the big picture of your portfolio.

Hence my original question.
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Yours is the question of eternal pussiness...


Should I stay or should I sell?


Meaning, if you have to rely on the opinions of others then you shouldn't have invested so much in the 1st place.
 
im pretty sure dividends dont affect stock price directly as you explained in the OP.

as a dumb business minor, im pretty sure that dividends dont detract from stockholders equity

edit: also, dividends are valuable from the investors point of view since you are paid for owning the stock, meaning long term you are going to be receiving income based on your holdings without selling them.
 
AirGibson said:
Agreed here. And for this reason, I don't quite get why it is such an integral part of so many investment strategies (especially long term ones).
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The only reason they play a factor in a long term investment strategy is because it is a good indication of where the company's priorities lay... it either wants to use its profits to grow the company or it wants to give the profit money back to the owners.
 
anomaly said:
im pretty sure dividends dont affect stock price directly as you explained in the OP.

as a dumb business minor, im pretty sure that dividends dont detract from stockholders equity

edit: also, dividends are valuable from the investors point of view since you are paid for owning the stock, meaning long term you are going to be receiving income based on your holdings without selling them.
Click to expand...


The stock price goes down when the dividend is paid out in direct proportion to the amount of the dividend, that is what he is referring to. You still have the same amount of money, but now you either get back cash or have it re-invested back into the company.
 
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