Investment question: Why do Dividends matter?

[BlueSoxSWJ]

Funds look for steady dividend-payers because it's a sign of a stable company. If a company has a solid enough cash flow to be distributing a dividend regularly, it's probably a well run company. Remember that image in the marketplace is almost as important as actually having a good company. See, for example, the day last year when State Street (STT) dropped over 50% of its value by noon, then after a press release saying "State Street doesn't own that type of mortgage-backed security," it regained back to 80% of its initial value.

 

[Phantred]

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.

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).

wait what?

if company X pays a $.50 divident per share 4 times a year and is valued at 25.00 per share, paying the divend will not reduce the price per share to 24.50, if it was as simple as that, it would make sense for the price to go up to 25.50 instead of down.

but anyway, dividends are great and I wish more stock payed them, I'm much more interested in a revenue stream than 'cashing out'

 

[BlueSoxSWJ]

wait what?

if company X pays a $.50 divident per share 4 times a year and is valued at 25.00 per share, paying the divend will not reduce the price per share to 24.50, if it was as simple as that, it would make sense for the price to go up to 25.50 instead of down.

but anyway, dividends are great and I wish more stock payed them, I'm much more interested in a revenue stream than 'cashing out'

Actually yes, a stock does drop by the value of a dividend on ex date. Otherwise you could buy company X's stock the day before a dividend, hold it for 24 hrs to get the dividend, and sell it for the same amount, and have picked up free money.

 

[AirGibson]

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.

Dividends can dent a stock's price ... or not - USATODAY.com

^^ A better explanation of what I'm referring to.

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.

Yeah, I get that point of view. It just seems like it doesn't actually work that way, though, when the market value drops on the ex-dividend date. Based on what little I know, it sounds to me like it doesn't actually indicate anything or have any real benefits when looking at the complete picture. But like I say, maybe I'm missing something.

 

[Animo]

Yes BlueSox is correct

and no AirGibson, it doesn't really make a huge difference when you look at the big picture.

The only small exemption is see is that you don't pay commissions to recieve a dividend payment (auto re-investing is also commission free), and if you sell off stock bit by bit you will pay lots of commissions. Unless of course you have some sort of non-transaction based account. I know a few brokers still have them, you pay an annual amount which is either a percentage of the assets or a fixed amount for unlimited trading.

 

[AirGibson]

The only small exemption is see is that you don't pay commissions to recieve a dividend payment (auto re-investing is also commission free), and if you sell off stock bit by bit you will pay lots of commissions. Unless of course you have some sort of non-transaction based account.

Yeah, that is a legitimate "pro". Didn't think about that.

 

[uno]

Gibson

 

[BlueSoxSWJ]

Yes BlueSox is correct

and no AirGibson, it doesn't really make a huge difference when you look at the big picture.

The only small exemption is see is that you don't pay commissions to recieve a dividend payment (auto re-investing is also commission free), and when you sell off stock bit by bit you will pay lots of commissions.

Many companies also like to keep their stock price in a certain target range - too cheap and it looks bad for the company (and, as I said before, a bad appearance can lead to material losses on the market); too expensive and it's harder to trade shares - it's like selling milk in only 100 gallon containers.

Dividends also have fun tax rules - they're an expense, so they reduce the company's liability, but they're income for shareholders, so they actually just move the tax liability from a joint one on the company to individual liabilities on the shareholders. But, for shareholders that reinvest, it's a way of turning profits into capital investment, and thus defers the tax liability.

 

[Animo]

Oh yeah I like that tax treatment. Pretty nice way of shifting tax liability or defering it!

 

[AirGibson]

. But, for shareholders that reinvest, it's a way of turning profits into capital investment, and thus defers the tax liability.

I don't get this, though. Assuming I buy a share of stock which never pays any dividends at all and I hold onto it for 5 years before selling, my capital gains liability is deferred until I realize the profit by selling it. In both scenarios, the liability is deferred, right?

 

[anomaly]

animo is on the money

but theoretically, the price of a stock should not drop because of dividends since its an expected cost in the companys charter, and does not detract from stockholder equity

 

[AirGibson]

The dividend yield on something like a blue stock is important because it can help you gauge how well the stock withstands against inflation.


From what you've explained here, it sounds more like you're thinking of a stock split. Are you sure that you're talking about a dividend?

No, I am refering to how the stock price drops after an ex-dividend date (though that effect can often be lost during the day due to the general market swings). Again, this site explains what we're discussing a bit better: Dividends can dent a stock's price ... or not - USATODAY.com

Regarding inflation tolerances, I haven't heard that before. Any kind of explanation to that?

 

[Animo]

Gibson are you in school for finance or getting licenses? Or just want to learn about it?

 

[AirGibson]

animo is on the money

but theoretically, the price of a stock should not drop because of dividends since its an expected cost in the companys charter, and does not detract from stockholder equity

Actually, it would be kind of dumb if it didn't drop, or else you could just "get in" before the ex-dividend date and get out right after the pay out, rinse and repeat. We'd all be RICH!!!!! Someone else mentioned this a bit earlier I believe.

 

[BlueSoxSWJ]

The dividend yield on something like a blue stock is important because it can help you gauge how well the stock withstands against inflation.


From what you've explained here, it sounds more like you're thinking of a stock split. Are you sure that you're talking about a dividend?

Dividends also lower the price of a stock, just not as drastically as a stock split. Some companies keep a steady div yield, some set dividends based on how they've done that period.

I don't get this, though. Assuming I buy a share of stock which never pays any dividends at all and I hold onto it for 5 years before selling, my capital gains liability is deferred until I realize the profit by selling it. In both scenarios, the liability is deferred, right?

If a company makes a profit, it has to pay taxes on it before it increases the stock value, and then you pay taxes on it again when you cash out. If the company pays the profit as a dividend, and you reinvest, the company gains the extra value, and tax is only paid once.

Mutual funds often do the same thing. I work as a fund accountant, and each fund has a set period (usually monthly, but it varies from daily to annually) after which we have to calculate the profit for the period and distribute it as a dividend, assuming most of it will be reinvested.

 

[AirGibson]

Gibson are you in school for finance or getting licenses? Or just want to learn about it?

I'm just challenging some of these investment strategies I've read about. I tend to like to know "why" something is supposed to work. Several people preach about high dividend yield importance, but I just don't get "why".

 

[JDizzle4Rizzle]

I don't know about you guys, but I hate dividends.

 

[AirGibson]

If a company makes a profit, it has to pay taxes on it before it increases the stock value, and then you pay taxes on it again when you cash out. If the company pays the profit as a dividend, and you reinvest, the company gains the extra value, and tax is only paid once.

Ah, okay. So the tax benefit is to the company more-so than the investor, although technically what is good for them is good for us. Yeah, I can see some legitimacy there.

 

[JDizzle4Rizzle]

I guess while we're discussing stocks, does anyone know why a company would not want to split their stock? Google is expensive as shit, and it just seems that if they split it, it would be more affordable to guys that just want to dabble, day traders, and anyone else that just isn't ready for some serious commitment. Warren Buffet is a pretty extreme example too. I haven't checked it out recently, but I'd imagine it's still up over $100k per share. That's fucking nuts.

Do they refuse to split because they want to limit entry into their own little market, so to speak. Like, they don't want amateurs being able to get in and fuck shit up by recklessly buying and selling their shit on a whim? That's the best I can come up with.

Supply and demand?

 

[Animo]

Cool Gibson, yeah I would ask the same question if someone was preaching that to me. Its not a huge deal in my book, however I did buy some high yielding stocks for my IRA and they didn't do so well over the past year or two, namely Pfizer, dammit!