How do Dividends Benefit an Investor?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
bck63
Posts: 1081
Joined: Fri Sep 28, 2018 4:59 pm
Location: Somewhere in the Multiverse

How do Dividends Benefit an Investor?

Post by bck63 » Mon Jan 27, 2020 7:09 am

I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.

User avatar
whodidntante
Posts: 8041
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: How do Dividends Benefit an Investor?

Post by whodidntante » Mon Jan 27, 2020 7:38 am

It's a way of returning capital to shareholders if the business cannot make good investments in new projects, factories, executive bonuses, or AI overlords. For the investor it robs you of the ability to defer taxes, and you shouldn't be happy about that. Also, dividends are not a factor and there is not enough evidence to conclude that stocks with higher dividend yields have outperformed the market.

User avatar
danielc
Posts: 1068
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: How do Dividends Benefit an Investor?

Post by danielc » Mon Jan 27, 2020 7:40 am

bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
I'll give you two answers, from two very different points of view:

1) In principle, if a business makes a profit and management can't find a productive way to invest that profit, it is better for them to just give the money to the shareholders rather than just put it in a metaphorical mattress. In general, when a business is small and growing, profits are reinvested into growing the business so no dividends are distributed. If all goes well, the company grows and becomes large, but at some point it becomes difficult for it to grow a lot more. So as a very general rule, small growing companies don't usually give out a lot of dividends, and large ones that are profitable but have nowhere to grow tend to give more dividends.

2) For you as an investor, dividends (whether you get them now, or expect to get them some day in the future) are the only reason why a company share is worth anything. If you knew for fact that a stock will never pay a dividend, that stock would just be a piece of paper and there's no reason anybody would want it. The only reason that any investment has inherent value is because it pays money either now or in the future. The fair market value of any investment is the present value of all future cashflows. This is why bonds have value, this is why stocks have value, and so on. So in that sense, dividends are needed. A company that currently pays no dividend only has value if investors expect that one day it will pay dividends.


EDIT: As a matter of practice, for tax reasons price increases work better for you than dividends. So if you could pick between getting richer by stock price increase, or by receiving dividends, you should prefer the price increase.

RAchip
Posts: 400
Joined: Sat May 07, 2016 7:31 pm

Re: How do Dividends Benefit an Investor?

Post by RAchip » Mon Jan 27, 2020 7:52 am

The belief that the price of stock decreases permanently by the amount of a dividend is simply wrong. How the “market” values stock is not a mathematically calculated fact. Buyers consider many factors but ultimately price is determined by simple supply and demand. The willingness of a company to consistently distribute a portion of profits and increase the distribution annually usually increases demand and drives up the stock price. Normally a market “specialist” working for a public exchange will adjust the opening bid-ask by the amount of a dividend on ex-dividend morning but there may be no trades at that adjusted price. The price quickly moves to wherever supply and demand sets it. Some people say that cash held in a company increases the value of the company by the amount of that cash which may be true as an academic valuation matter but that is just not true in real life. A company that holds a pile of cash that they never intend to distribute is viewed by many investors as worthless. The biggest factor that most buyers focus on in determining what they are willing to pay for stock is earnings. Assets (cash) are usually a minor factor. Paying out excess cash has no impact on earnings. So paying out that excess cash increases (not decreases) the value of stock. Many of the best performing stocks in history pay a consistently growing dividend (MO, MCD, MSFT, JNJ, etc etc etc). They do that BECAUSE PAYING A DIVIDEND INCREASES DEMAND AND THEREFORE DRIVES UP STOCK PRICE.

User avatar
firebirdparts
Posts: 1410
Joined: Thu Jun 13, 2019 4:21 pm

Re: How do Dividends Benefit an Investor?

Post by firebirdparts » Mon Jan 27, 2020 9:35 am

RAchip wrote:
Mon Jan 27, 2020 7:52 am
The belief that the price of stock decreases permanently by the amount of a dividend is simply wrong.
This is the answer. Human beings set the price of stocks. Every 90 days, the nature of human beings causes them to arbitrage the price of stock before and after the ex dividend date. Human nature demands it.

I will warn you(OP) now, you can't argue with crazy people, and attempting to do so will get your thread locked..
A fool and your money are soon partners

bugleheadd
Posts: 251
Joined: Fri Nov 29, 2019 11:25 am

Re: How do Dividends Benefit an Investor?

Post by bugleheadd » Mon Jan 27, 2020 9:38 am

are there any index funds that track total stock market/sp500 that does not pay out any dividends? i'd rather have that in my taxable account

UpperNwGuy
Posts: 3540
Joined: Sun Oct 08, 2017 7:16 pm

Re: How do Dividends Benefit an Investor?

Post by UpperNwGuy » Mon Jan 27, 2020 9:41 am

Dividends don't benefit the investor in the accumulation phase. They just don't.

User avatar
bertilak
Posts: 7379
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: How do Dividends Benefit an Investor?

Post by bertilak » Mon Jan 27, 2020 9:54 am

UpperNwGuy wrote:
Mon Jan 27, 2020 9:41 am
Dividends don't benefit the investor in the accumulation phase. They just don't.
Not directly nor immediately.

But, as mentioned above dividends CAN make a company's stock more desirable. It at least gives some confidence that management is smart enough not to sit on a pile of unneeded/unused cash, nor to waste it on unjustified speculation by buying into questionable activities. If JNJ doesn't need a new toilet paper factory, please give me the money instead. Don't invest it in a Nevada silver mine!
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

increment
Posts: 287
Joined: Tue May 15, 2018 2:20 pm

Re: How do Dividends Benefit an Investor?

Post by increment » Mon Jan 27, 2020 10:44 am

bugleheadd wrote:
Mon Jan 27, 2020 9:38 am
are there any index funds that track total stock market/sp500 that does not pay out any dividends? i'd rather have that in my taxable account
If you owned the underlying portfolio directly, you would receive the dividends that the companies pay out. The rules that govern mutual funds require that the fund investors take the tax consequences of those dividends, whether they feel like they want them or not.

retiredjg
Posts: 40456
Joined: Thu Jan 10, 2008 12:56 pm

Re: How do Dividends Benefit an Investor?

Post by retiredjg » Mon Jan 27, 2020 10:51 am

bugleheadd wrote:
Mon Jan 27, 2020 9:38 am
are there any index funds that track total stock market/sp500 that does not pay out any dividends? i'd rather have that in my taxable account
Since the total stock market and the S&P 500 must contain the market weight of dividend paying stocks, they are always going to have some dividends if the stocks have dividends.

Of the mutual funds available, the Vanguard brand is the most tax-efficient because of Vanguard's unique structure (mutual fund and ETF being different share classes of the same fund).

When it comes to comparing ETFs, I'm not sure there is much of a difference from brand to brand.

All total stock and 500 index funds should be very tax-efficient. Trying to avoid a little bit of dividends is not a great way to build a good portfolio.

User avatar
Schlabba
Posts: 478
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

Re: How do Dividends Benefit an Investor?

Post by Schlabba » Mon Jan 27, 2020 10:54 am

danielc wrote:
Mon Jan 27, 2020 7:40 am
2) For you as an investor, dividends (whether you get them now, or expect to get them some day in the future) are the only reason why a company share is worth anything.
When you own a share, you own a piece of the company. It comes with voting rights and in case of a hostile takeover, the money has to be handed to the owners of the company.

Stocks wouldn’t be useless without dividends.
Secretly a dividend investor. Feel free to ask why.

alex_686
Posts: 6192
Joined: Mon Feb 09, 2015 2:39 pm

Re: How do Dividends Benefit an Investor?

Post by alex_686 » Mon Jan 27, 2020 10:58 am

A stock’s value is based on future Free Cash Flow to Equality (FCFE). In theory it does not matter if it is in nice stable dividends or a massive distant one time payout.

The reason why current dividends don’t matter is that they are current. They are water under the bridge, or close enough. If you look at stock analysis most of the effort is spent on predicting future dividend growth and the risks around that.

User avatar
Watty
Posts: 19335
Joined: Wed Oct 10, 2007 3:55 pm

Re: How do Dividends Benefit an Investor?

Post by Watty » Mon Jan 27, 2020 11:02 am

A few ways;

1) Many companies are overly creative with their accounting so there is a risk that the numbers are not as good as they look. There is a saying, "Dividends don't lie." which means that it is a lot harder, but not impossible, for companies to fudge the numbers behind the dividends they pay since that is real money that they are paying out.

2) When there is a choice between paying a dividend or doing a stock buyback to boost the share price management has a huge incentive to favor doing stock buybacks. The reason is that they likely have stock options and using the money to post the share price directly makes there options more valuable. Eventually they use those options and make a lot of money that could otherwise have benefited the shareholders. Some companies will even take on debt to do share buybacks to boost the share price. That is great for the managers who have lots of options but not so good for long term shareholders.

Boglegrappler
Posts: 1252
Joined: Wed Aug 01, 2012 9:24 am

Re: How do Dividends Benefit an Investor?

Post by Boglegrappler » Mon Jan 27, 2020 11:26 am

I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
It's not surprising that you are missing something, given the discussions surrounding dividends.

What you're missing is that a company isn't simply some static reservoir of value that dissipates itself over time by draining that value out to shareholders in the form of dividends. A company is a dynamic, active business that actually earns money regularly----usually in excess of the dividends that it pays out.

We can dissect the minutia of this till the cows come home, but companies grow in value as their earnings grow, and their assets grow. The reasons that companies pay any dividends at all usually boil down to having cash on hand in excess of their available attractive investment (expansion) opportunities.

You'll note that the companies with the greatest growth in sales and earnings often pay no dividend because they can invest their cash in expanding their own business at rates of return that are better than shareholders can find elsewhere.

GrowthSeeker
Posts: 845
Joined: Tue May 15, 2018 10:14 pm

Re: How do Dividends Benefit an Investor?

Post by GrowthSeeker » Mon Jan 27, 2020 11:31 am

bugleheadd wrote:
Mon Jan 27, 2020 9:38 am
are there any index funds that track total stock market/sp500 that does not pay out any dividends? i'd rather have that in my taxable account
I don't think there are. Apparently the number of stocks in the S&P 500 that pay no dividends is small.

To the OP:
- some retired folks like the idea of never selling a share and just living off the dividends. It is as if the dividends simulate a paycheck, so it is a comfortable idea, a kind of mental accounting; a way of simplifying. To be comforted by this requires that the person ignore or be unaware of the risk that the share price may go down more than the dividends that are paid out. e.g. not thinking about a stocks share price going the way of GE. Or that the other stocks will make up for it.

- and there is the belief that many people have, though not so much at this website, that because a company pays dividends (and then add a filter of choice, such as increasing dividends, or consistent dividends, or high dividends, or good earnings etc), ... then ... investors will be attracted to this stock and buy thus supporting the share price. So if conditions are just right, there will be a bit of a free lunch. I don't believe this, but some do.

- and some are just poorly informed and think that the dividend is free money and don't realize that the share price goes down when the dividend is paid.

Now for an individual stock it doesn't necessarily go down the exact amount of the dividend. An interesting big data study would be to back-test hundreds of dividend paying stocks, see how the closing price change around the ex-dividend date compared to the amount of the dividend over several years. I've never seen such a study but someone surely must have done it.
I suspect there are some who make arbitrage trades around the ex-div date attempting to exploit any market inefficiency that might be there.
Just because you're paranoid doesn't mean they're NOT out to get you.

User avatar
ThereAreNoGurus
Posts: 513
Joined: Fri Jan 24, 2014 11:41 pm

Re: How do Dividends Benefit an Investor?

Post by ThereAreNoGurus » Mon Jan 27, 2020 11:39 am

GrowthSeeker wrote:
Mon Jan 27, 2020 11:31 am
- and some are just poorly informed and think that the dividend is free money and don't realize that the share price goes down when the dividend is paid.

Now for an individual stock it doesn't necessarily go down the exact amount of the dividend.
The overwhelming majority of the time a stock OPENS with its price adjusted exactly by the amount of its dividend distribution. What it does by the closing, well, it can go up or down from there, of course.

Too many people confuse well-performing dividend stocks with stocks that have a history of increased earnings per share growth.

Edited to add:
[T]he historical evidence supports this theory—stocks with the same exposure to common factors (such as size, value, momentum and profitability/quality) have the same returns whether they pay a dividend or not. Yet many investors ignore this information and express a preference for dividend-paying stocks.

https://www.etf.com/sections/index-inve ... nopaging=1
Trade the news and you will lose.

rinzewind
Posts: 4
Joined: Thu Jan 17, 2019 10:35 am

Re: How do Dividends Benefit an Investor?

Post by rinzewind » Mon Jan 27, 2020 12:28 pm

I was very convinced by this video by Ben Felix: https://www.youtube.com/watch?v=f5j9v9dfinQ

UpperNwGuy
Posts: 3540
Joined: Sun Oct 08, 2017 7:16 pm

Re: How do Dividends Benefit an Investor?

Post by UpperNwGuy » Mon Jan 27, 2020 12:31 pm

bertilak wrote:
Mon Jan 27, 2020 9:54 am
dividends CAN make a company's stock more desirable. It at least gives some confidence that management is smart enough not to sit on a pile of unneeded/unused cash, nor to waste it on unjustified speculation by buying into questionable activities. If JNJ doesn't need a new toilet paper factory, please give me the money instead.
I would prefer that company did stock buyback than pay out dividends.

User avatar
CyclingDuo
Posts: 3140
Joined: Fri Jan 06, 2017 9:07 am

Re: How do Dividends Benefit an Investor?

Post by CyclingDuo » Mon Jan 27, 2020 12:53 pm

bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
As said upthread, a dividend is return of your capital. What you do with that return of capital is your choice. Whether one owns index funds or individual stocks - we all have to deal with the dividends.

You can do the following with a dividend - whether or not you want to call it a benefit:

A) Reinvest the dividend in purchasing more shares of the same stock/fund/ETF/bond/bond fund/REIT/MLP, etc...

B) Reinvest the dividend in purchasing shares of a different stock/fund/ETF/bond/bond fund/REIT/MLP/CD

C) Leave the dividend in cash for future deployment or future use

D) Spend the dividend

In terms of total return, share price appreciation and dividend growth are both important elements of the return. You can also create your own "dividend" by selling shares whenever you choose.

40 Things Every Dividend Investor Should Know About Dividend Investing
https://www.dividend.com/dividend-educa ... ould-know/

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

User avatar
abuss368
Posts: 19690
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: How do Dividends Benefit an Investor?

Post by abuss368 » Mon Jan 27, 2020 12:54 pm

It's a mental accounting "thing". Feels good receiving a dividend check!
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

Topic Author
bck63
Posts: 1081
Joined: Fri Sep 28, 2018 4:59 pm
Location: Somewhere in the Multiverse

Re: How do Dividends Benefit an Investor?

Post by bck63 » Mon Jan 27, 2020 1:21 pm

CyclingDuo wrote:
Mon Jan 27, 2020 12:53 pm
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
As said upthread, a dividend is return of your capital. What you do with that return of capital is your choice. Whether one owns index funds or individual stocks - we all have to deal with the dividends.

You can do the following with a dividend - whether or not you want to call it a benefit:

A) Reinvest the dividend in purchasing more shares of the same stock/fund/ETF/bond/bond fund/REIT/MLP, etc...

B) Reinvest the dividend in purchasing shares of a different stock/fund/ETF/bond/bond fund/REIT/MLP/CD

C) Leave the dividend in cash for future deployment or future use

D) Spend the dividend

In terms of total return, share price appreciation and dividend growth are both important elements of the return. You can also create your own "dividend" by selling shares whenever you choose.

40 Things Every Dividend Investor Should Know About Dividend Investing
https://www.dividend.com/dividend-educa ... ould-know/

CyclingDuo
This is really helpful. Thank you very much. Follow-up question, if I may: What about bond funds or ETFs? Are dividends paid the same way? Is there an ex-dividend date where the price of the fund or ETF share drops by the same amount as the dividend? Or with bond funds and ETFs is it more like interest?

I'm a longtime investor (really a saver, but I do invest in stocks and bonds) and am embarrassed to say that I still don't have a real handle on this. Thanks again.

Ferdinand2014
Posts: 1428
Joined: Mon Dec 17, 2018 6:49 pm

Re: How do Dividends Benefit an Investor?

Post by Ferdinand2014 » Mon Jan 27, 2020 1:41 pm

bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
It is simply one way a shareholder receives value. The other is unrealized capital gains/growth. One advantage of a dividend is it tends to be much less volatile than the overall market, therefore can be used as a stream of income in a drawdown phase. In addition, it gives the shareholder the power to decide what to do with a portion of the company earnings in a very direct way when they are not in a drawdown phase.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

User avatar
lock.that.stock
Posts: 136
Joined: Sun Apr 28, 2019 2:01 pm

Re: How do Dividends Benefit an Investor?

Post by lock.that.stock » Mon Jan 27, 2020 2:02 pm

bugleheadd wrote:
Mon Jan 27, 2020 9:38 am
are there any index funds that track total stock market/sp500 that does not pay out any dividends? i'd rather have that in my taxable account

Why not just buy Berkshire. They match the description of what you’re looking for.

User avatar
Schlabba
Posts: 478
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

Re: How do Dividends Benefit an Investor?

Post by Schlabba » Mon Jan 27, 2020 2:04 pm

Ferdinand2014 wrote:
Mon Jan 27, 2020 1:41 pm
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
It is simply one way a shareholder receives value. The other is unrealized capital gains/growth. One advantage of a dividend is it tends to be much less volatile than the overall market, therefore can be used as a stream of income in a drawdown phase. In addition, it gives the shareholder the power to decide what to do with a portion of the company earnings in a very direct way when they are not in a drawdown phase.
Interesting, with lower volatility, would an index of dividend stocks support a higher safe withdrawal rate?
Secretly a dividend investor. Feel free to ask why.

User avatar
bertilak
Posts: 7379
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: How do Dividends Benefit an Investor?

Post by bertilak » Mon Jan 27, 2020 2:21 pm

Schlabba wrote:
Mon Jan 27, 2020 2:04 pm
Ferdinand2014 wrote:
Mon Jan 27, 2020 1:41 pm
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
It is simply one way a shareholder receives value. The other is unrealized capital gains/growth. One advantage of a dividend is it tends to be much less volatile than the overall market, therefore can be used as a stream of income in a drawdown phase. In addition, it gives the shareholder the power to decide what to do with a portion of the company earnings in a very direct way when they are not in a drawdown phase.
Interesting, with lower volatility, would an index of dividend stocks support a higher safe withdrawal rate?
That is something I have posted about here before, hypothesizing: to the extent one gets one's earnings out of dividends, one's risk is lowered, improving risk-adjusted returns.

Another aspect I mentioned. Dividends are decided by those who have inside information on the company's prospects so one can keep one's risks in line by accepting dividends as a safe withdrawal rate.

I was politely laughed out of the room by the make-your-own-dividend-by-selling-shares crowd! (But I still think my points are valid!)
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

Admiral
Posts: 2852
Joined: Mon Oct 27, 2014 12:35 pm

Re: How do Dividends Benefit an Investor?

Post by Admiral » Mon Jan 27, 2020 2:25 pm

danielc wrote:
Mon Jan 27, 2020 7:40 am
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
I'll give you two answers, from two very different points of view:

1) In principle, if a business makes a profit and management can't find a productive way to invest that profit, it is better for them to just give the money to the shareholders rather than just put it in a metaphorical mattress. In general, when a business is small and growing, profits are reinvested into growing the business so no dividends are distributed. If all goes well, the company grows and becomes large, but at some point it becomes difficult for it to grow a lot more. So as a very general rule, small growing companies don't usually give out a lot of dividends, and large ones that are profitable but have nowhere to grow tend to give more dividends.

2) For you as an investor, dividends (whether you get them now, or expect to get them some day in the future) are the only reason why a company share is worth anything. If you knew for fact that a stock will never pay a dividend, that stock would just be a piece of paper and there's no reason anybody would want it. The only reason that any investment has inherent value is because it pays money either now or in the future. The fair market value of any investment is the present value of all future cashflows. This is why bonds have value, this is why stocks have value, and so on. So in that sense, dividends are needed. A company that currently pays no dividend only has value if investors expect that one day it will pay dividends.


EDIT: As a matter of practice, for tax reasons price increases work better for you than dividends. So if you could pick between getting richer by stock price increase, or by receiving dividends, you should prefer the price increase.
I really don't think this is true. There are many, many companies that sell shares and people snatch them up ONLY for the anticipated price gain in the shares. Dividends are irrelevant, and may be irrelevant for years or decades. Capital appreciation is what these investors seek. I do not hold TSM because the companies do (or might) pay dividends. They are irrelevant to me.

User avatar
Teriyaki
Posts: 58
Joined: Sat Feb 23, 2019 9:08 am
Location: Finland

Re: How do Dividends Benefit an Investor?

Post by Teriyaki » Mon Jan 27, 2020 2:36 pm

Admiral wrote:
Mon Jan 27, 2020 2:25 pm
danielc wrote:
Mon Jan 27, 2020 7:40 am
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
I'll give you two answers, from two very different points of view:

1) In principle, if a business makes a profit and management can't find a productive way to invest that profit, it is better for them to just give the money to the shareholders rather than just put it in a metaphorical mattress. In general, when a business is small and growing, profits are reinvested into growing the business so no dividends are distributed. If all goes well, the company grows and becomes large, but at some point it becomes difficult for it to grow a lot more. So as a very general rule, small growing companies don't usually give out a lot of dividends, and large ones that are profitable but have nowhere to grow tend to give more dividends.

2) For you as an investor, dividends (whether you get them now, or expect to get them some day in the future) are the only reason why a company share is worth anything. If you knew for fact that a stock will never pay a dividend, that stock would just be a piece of paper and there's no reason anybody would want it. The only reason that any investment has inherent value is because it pays money either now or in the future. The fair market value of any investment is the present value of all future cashflows. This is why bonds have value, this is why stocks have value, and so on. So in that sense, dividends are needed. A company that currently pays no dividend only has value if investors expect that one day it will pay dividends.


EDIT: As a matter of practice, for tax reasons price increases work better for you than dividends. So if you could pick between getting richer by stock price increase, or by receiving dividends, you should prefer the price increase.
I really don't think this is true. There are many, many companies that sell shares and people snatch them up ONLY for the anticipated price gain in the shares. Dividends are irrelevant, and may be irrelevant for years or decades. Capital appreciation is what these investors seek. I do not hold TSM because the companies do (or might) pay dividends. They are irrelevant to me.
While this may be true for an individual investor, danielc's point is certainly valid: the value of shares is in the future dividends. If no company ever paid any dividends and everyone knew that, shares wouldn't be worth anything.

(Okay, sure, I guess technically the company could just buy back its shares in that kind of a world, but that is analogous to a dividend... although how the price of buybacks would be determined is an interesting mental excercise...)

Admiral
Posts: 2852
Joined: Mon Oct 27, 2014 12:35 pm

Re: How do Dividends Benefit an Investor?

Post by Admiral » Mon Jan 27, 2020 2:59 pm

Teriyaki wrote:
Mon Jan 27, 2020 2:36 pm
Admiral wrote:
Mon Jan 27, 2020 2:25 pm
danielc wrote:
Mon Jan 27, 2020 7:40 am
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
I'll give you two answers, from two very different points of view:

1) In principle, if a business makes a profit and management can't find a productive way to invest that profit, it is better for them to just give the money to the shareholders rather than just put it in a metaphorical mattress. In general, when a business is small and growing, profits are reinvested into growing the business so no dividends are distributed. If all goes well, the company grows and becomes large, but at some point it becomes difficult for it to grow a lot more. So as a very general rule, small growing companies don't usually give out a lot of dividends, and large ones that are profitable but have nowhere to grow tend to give more dividends.

2) For you as an investor, dividends (whether you get them now, or expect to get them some day in the future) are the only reason why a company share is worth anything. If you knew for fact that a stock will never pay a dividend, that stock would just be a piece of paper and there's no reason anybody would want it. The only reason that any investment has inherent value is because it pays money either now or in the future. The fair market value of any investment is the present value of all future cashflows. This is why bonds have value, this is why stocks have value, and so on. So in that sense, dividends are needed. A company that currently pays no dividend only has value if investors expect that one day it will pay dividends.


EDIT: As a matter of practice, for tax reasons price increases work better for you than dividends. So if you could pick between getting richer by stock price increase, or by receiving dividends, you should prefer the price increase.
I really don't think this is true. There are many, many companies that sell shares and people snatch them up ONLY for the anticipated price gain in the shares. Dividends are irrelevant, and may be irrelevant for years or decades. Capital appreciation is what these investors seek. I do not hold TSM because the companies do (or might) pay dividends. They are irrelevant to me.
While this may be true for an individual investor, danielc's point is certainly valid: the value of shares is in the future dividends. If no company ever paid any dividends and everyone knew that, shares wouldn't be worth anything.

(Okay, sure, I guess technically the company could just buy back its shares in that kind of a world, but that is analogous to a dividend... although how the price of buybacks would be determined is an interesting mental excercise...)
Companies with no dividends get bought and investors make money all the time. The profit is in share price appreciation.

My point is simply that there are other reasons to invest in a company, not just dividends or expected dividends.

increment
Posts: 287
Joined: Tue May 15, 2018 2:20 pm

Re: How do Dividends Benefit an Investor?

Post by increment » Mon Jan 27, 2020 3:03 pm

bck63 wrote:
Mon Jan 27, 2020 1:21 pm
Follow-up question, if I may: What about bond funds or ETFs? Are dividends paid the same way? Is there an ex-dividend date where the price of the fund or ETF share drops by the same amount as the dividend? Or with bond funds and ETFs is it more like interest?
What do you mean by "more like interest"? I will guess and make some comments.

With some bond funds and most (all?) money market funds, interest is accrued daily. The right to receive interest accrued in the past doesn't get sold when the fund shares change hands. In other cases, the right to receive the next interest payment (which gets called a "dividend" for technical reasons) is sold along with the shares, up until the ex-dividend date.

Let's say you want to buy a particular $1000 CD on the secondary market, along with the right to receive the next annual interest payment of $20 that happens to be expected shortly. You can't argue that someone should sell it to you for face value, even if interest rates have not changed since it was issued; you will have to offer an extra $20 or so for it. then, after the interest payment is made, the value of the CD in the marketplace will have dropped by around $20, since no $20 interest payment is imminent. The fact that the value of the CD dropped has to do with the nature of what was traded and not with the name of the payment ("interest").

S_Track
Posts: 339
Joined: Sat Feb 18, 2017 12:33 pm

Re: How do Dividends Benefit an Investor?

Post by S_Track » Mon Jan 27, 2020 3:20 pm

rinzewind wrote:
Mon Jan 27, 2020 12:28 pm
I was very convinced by this video by Ben Felix: https://www.youtube.com/watch?v=f5j9v9dfinQ
+1, Great video and channel.
Last edited by S_Track on Mon Jan 27, 2020 9:18 pm, edited 1 time in total.

S_Track
Posts: 339
Joined: Sat Feb 18, 2017 12:33 pm

Re: How do Dividends Benefit an Investor?

Post by S_Track » Mon Jan 27, 2020 3:26 pm

RAchip wrote:
Mon Jan 27, 2020 7:52 am
The belief that the price of stock decreases permanently by the amount of a dividend is simply wrong. How the “market” values stock is not a mathematically calculated fact. Buyers consider many factors but ultimately price is determined by simple supply and demand. The willingness of a company to consistently distribute a portion of profits and increase the distribution annually usually increases demand and drives up the stock price. Normally a market “specialist” working for a public exchange will adjust the opening bid-ask by the amount of a dividend on ex-dividend morning but there may be no trades at that adjusted price. The price quickly moves to wherever supply and demand sets it. Some people say that cash held in a company increases the value of the company by the amount of that cash which may be true as an academic valuation matter but that is just not true in real life. A company that holds a pile of cash that they never intend to distribute is viewed by many investors as worthless. The biggest factor that most buyers focus on in determining what they are willing to pay for stock is earnings. Assets (cash) are usually a minor factor. Paying out excess cash has no impact on earnings. So paying out that excess cash increases (not decreases) the value of stock. Many of the best performing stocks in history pay a consistently growing dividend (MO, MCD, MSFT, JNJ, etc etc etc). They do that BECAUSE PAYING A DIVIDEND INCREASES DEMAND AND THEREFORE DRIVES UP STOCK PRICE.
Nice explanation of the pro dividend side. Thanks for putting that together.

Ferdinand2014
Posts: 1428
Joined: Mon Dec 17, 2018 6:49 pm

Re: How do Dividends Benefit an Investor?

Post by Ferdinand2014 » Mon Jan 27, 2020 3:30 pm

Schlabba wrote:
Mon Jan 27, 2020 2:04 pm
Ferdinand2014 wrote:
Mon Jan 27, 2020 1:41 pm
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
It is simply one way a shareholder receives value. The other is unrealized capital gains/growth. One advantage of a dividend is it tends to be much less volatile than the overall market, therefore can be used as a stream of income in a drawdown phase. In addition, it gives the shareholder the power to decide what to do with a portion of the company earnings in a very direct way when they are not in a drawdown phase.
Interesting, with lower volatility, would an index of dividend stocks support a higher safe withdrawal rate?
I do not think so. Lower volatility does not mean higher returns. A safe withdrawal rate takes into account total returns.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

User avatar
Teriyaki
Posts: 58
Joined: Sat Feb 23, 2019 9:08 am
Location: Finland

Re: How do Dividends Benefit an Investor?

Post by Teriyaki » Mon Jan 27, 2020 3:32 pm

Admiral wrote:
Mon Jan 27, 2020 2:59 pm
Teriyaki wrote:
Mon Jan 27, 2020 2:36 pm
Admiral wrote:
Mon Jan 27, 2020 2:25 pm
danielc wrote:
Mon Jan 27, 2020 7:40 am
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
I'll give you two answers, from two very different points of view:

1) In principle, if a business makes a profit and management can't find a productive way to invest that profit, it is better for them to just give the money to the shareholders rather than just put it in a metaphorical mattress. In general, when a business is small and growing, profits are reinvested into growing the business so no dividends are distributed. If all goes well, the company grows and becomes large, but at some point it becomes difficult for it to grow a lot more. So as a very general rule, small growing companies don't usually give out a lot of dividends, and large ones that are profitable but have nowhere to grow tend to give more dividends.

2) For you as an investor, dividends (whether you get them now, or expect to get them some day in the future) are the only reason why a company share is worth anything. If you knew for fact that a stock will never pay a dividend, that stock would just be a piece of paper and there's no reason anybody would want it. The only reason that any investment has inherent value is because it pays money either now or in the future. The fair market value of any investment is the present value of all future cashflows. This is why bonds have value, this is why stocks have value, and so on. So in that sense, dividends are needed. A company that currently pays no dividend only has value if investors expect that one day it will pay dividends.


EDIT: As a matter of practice, for tax reasons price increases work better for you than dividends. So if you could pick between getting richer by stock price increase, or by receiving dividends, you should prefer the price increase.
I really don't think this is true. There are many, many companies that sell shares and people snatch them up ONLY for the anticipated price gain in the shares. Dividends are irrelevant, and may be irrelevant for years or decades. Capital appreciation is what these investors seek. I do not hold TSM because the companies do (or might) pay dividends. They are irrelevant to me.
While this may be true for an individual investor, danielc's point is certainly valid: the value of shares is in the future dividends. If no company ever paid any dividends and everyone knew that, shares wouldn't be worth anything.

(Okay, sure, I guess technically the company could just buy back its shares in that kind of a world, but that is analogous to a dividend... although how the price of buybacks would be determined is an interesting mental excercise...)
Companies with no dividends get bought and investors make money all the time. The profit is in share price appreciation.

My point is simply that there are other reasons to invest in a company, not just dividends or expected dividends.
I suppose we are talking on two different levels here. My point is that the only reason that shares have a price is that there is an expectation that in the future the company is going to distribute some of its earnings to shareholders. When a company with no dividends gets bought up, the end goal is still to bolster future earnings so that capital can be eventually distributed to shareholders.

User avatar
Schlabba
Posts: 478
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

Re: How do Dividends Benefit an Investor?

Post by Schlabba » Mon Jan 27, 2020 3:55 pm

Ferdinand2014 wrote:
Mon Jan 27, 2020 3:30 pm
Schlabba wrote:
Mon Jan 27, 2020 2:04 pm
Ferdinand2014 wrote:
Mon Jan 27, 2020 1:41 pm
bck63 wrote:
Mon Jan 27, 2020 7:09 am
I am asking this question because I still cannot get my head around the issue of dividends. If the price of a security is decreased by the amount of a dividend issued, how does earning a dividend benefit the investor? The net amount owned is the same after the dividend is issued.

I thought I had a grasp on this, but I still don't. Any help would be appreciated.
It is simply one way a shareholder receives value. The other is unrealized capital gains/growth. One advantage of a dividend is it tends to be much less volatile than the overall market, therefore can be used as a stream of income in a drawdown phase. In addition, it gives the shareholder the power to decide what to do with a portion of the company earnings in a very direct way when they are not in a drawdown phase.
Interesting, with lower volatility, would an index of dividend stocks support a higher safe withdrawal rate?
I do not think so. Lower volatility does not mean higher returns. A safe withdrawal rate takes into account total returns.
Retirement portfolio’s fail because of the sequence of return risk. If there was no volatility and a guaranteed 7% real return, your safe withdrawal rate would be 7%.

So a lower total return strategy might still have a higher safe withdrawal rate if it performs better during recessions. Hence my question :happy
Secretly a dividend investor. Feel free to ask why.

sycamore
Posts: 449
Joined: Tue May 08, 2018 12:06 pm

Re: How do Dividends Benefit an Investor?

Post by sycamore » Mon Jan 27, 2020 4:10 pm

bck63 wrote:
Mon Jan 27, 2020 1:21 pm
...
Follow-up question, if I may: What about bond funds or ETFs? Are dividends paid the same way? Is there an ex-dividend date where the price of the fund or ETF share drops by the same amount as the dividend? Or with bond funds and ETFs is it more like interest?
...
It depends on the fund. Takes a bit of work but you'll need to look at the prospectus. Usually under "Fund Distributions" section.

For BND (Vanguard Total Bond ETF), it's in https://personal.vanguard.com/pub/Pdf/p ... 2210142886:
For holders of the Funds’ ETF Shares, income dividends generally are declared and distributed monthly
For VBTLX (Vanguard Total Bond mutual fund), it's in https://personal.vanguard.com/pub/Pdf/p ... 2210158508:
Income dividends generally are declared daily and distributed monthly
If it's declared daily (like VBTLX), you earn/accrue the dividends each day you hold the fund during the month. For funds that declare monthly (or even quarterly), you only get the dividends if you hold it on the record date.

For more info, see this wiki article or this other post.

JonnyB
Posts: 507
Joined: Sun Jan 19, 2020 5:28 pm

Re: How do Dividends Benefit an Investor?

Post by JonnyB » Mon Jan 27, 2020 5:48 pm

UpperNwGuy wrote:
Mon Jan 27, 2020 9:41 am
Dividends don't benefit the investor in the accumulation phase. They just don't.
Seriously? My Total Stock Market Fund gives me valuable dividends each quarter which I reinvest. Can I have yours too? Surely you won't miss them since they don't benefit you.

grog
Posts: 567
Joined: Sat Jul 20, 2013 1:09 pm

Re: How do Dividends Benefit an Investor?

Post by grog » Mon Jan 27, 2020 5:54 pm

ThereAreNoGurus wrote:
Mon Jan 27, 2020 11:39 am
GrowthSeeker wrote:
Mon Jan 27, 2020 11:31 am
- and some are just poorly informed and think that the dividend is free money and don't realize that the share price goes down when the dividend is paid.

Now for an individual stock it doesn't necessarily go down the exact amount of the dividend.
The overwhelming majority of the time a stock OPENS with its price adjusted exactly by the amount of its dividend distribution. What it does by the closing, well, it can go up or down from there, of course.

Too many people confuse well-performing dividend stocks with stocks that have a history of increased earnings per share growth.

Edited to add:
[T]he historical evidence supports this theory—stocks with the same exposure to common factors (such as size, value, momentum and profitability/quality) have the same returns whether they pay a dividend or not. Yet many investors ignore this information and express a preference for dividend-paying stocks.

https://www.etf.com/sections/index-inve ... nopaging=1
The exposures aren't the same though.

Topic Author
bck63
Posts: 1081
Joined: Fri Sep 28, 2018 4:59 pm
Location: Somewhere in the Multiverse

Re: How do Dividends Benefit an Investor?

Post by bck63 » Mon Jan 27, 2020 6:05 pm

JonnyB wrote:
Mon Jan 27, 2020 5:48 pm
UpperNwGuy wrote:
Mon Jan 27, 2020 9:41 am
Dividends don't benefit the investor in the accumulation phase. They just don't.
Seriously? My Total Stock Market Fund gives me valuable dividends each quarter which I reinvest. Can I have yours too? Surely you won't miss them since they don't benefit you.
But this is what still confuses me. The share price of the fund is decreased by the amount of the dividend. So I end up with a taxable event (in my taxable account) with no more value to my portfolio. So I think UpperNwGuy is right.

I still don't get it. I'm not making an argument either way. I just can't seem to understand it. Glad I'm in healthcare and not finance! :oops:

UpperNwGuy
Posts: 3540
Joined: Sun Oct 08, 2017 7:16 pm

Re: How do Dividends Benefit an Investor?

Post by UpperNwGuy » Mon Jan 27, 2020 6:05 pm

JonnyB wrote:
Mon Jan 27, 2020 5:48 pm
UpperNwGuy wrote:
Mon Jan 27, 2020 9:41 am
Dividends don't benefit the investor in the accumulation phase. They just don't.
Seriously? My Total Stock Market Fund gives me valuable dividends each quarter which I reinvest. Can I have yours too? Surely you won't miss them since they don't benefit you.
Mine are in a taxable account, which is why I would prefer the money stay in the companies rather than increasing my taxes by taking a round-trip from payment to reinvestment. Sounds like your dividends might be in a tax-advantaged account.

boomer_techie
Posts: 337
Joined: Fri Jan 18, 2019 6:47 am

Re: How do Dividends Benefit an Investor?

Post by boomer_techie » Mon Jan 27, 2020 6:48 pm

bck63 wrote:
Mon Jan 27, 2020 6:05 pm
But this is what still confuses me. The share price of the fund is decreased by the amount of the dividend. So I end up with a taxable event (in my taxable account) with no more value to my portfolio.
Over the next dividend interval, the share price can be expected to "recover". **

An equity (with earnings) that pays a dividend can be expected to have its share price fluctuate in a stable band while kicking off a stream of divided payments. An equity (with earnings) that does not pay a dividend can be expected to have its share price consistently increase - to realize income you'd need to sell some shares.

** An exception would be a gold mine that is almost tapped out. As it sells off the remaining gold and pays out the proceeds as dividends, its value will drop to zero.

alex_686
Posts: 6192
Joined: Mon Feb 09, 2015 2:39 pm

Re: How do Dividends Benefit an Investor?

Post by alex_686 » Mon Jan 27, 2020 7:18 pm

Teriyaki wrote:
Mon Jan 27, 2020 2:36 pm
(Okay, sure, I guess technically the company could just buy back its shares in that kind of a world, but that is analogous to a dividend... although how the price of buybacks would be determined is an interesting mental excercise...)
It is actually not that interesting a exercise. Which model do you use to value a company today? Just swap out the dividend cash-flows (or dividend yield) for the buy back cash flows (or Yield). Dividends might be more intuitive, but in theory - and I will admit at a higher level of abstraction - buy backs work the same.

A common model is Gordon's Dividend Discount Model, where you need the dividend, growth rate, and discount rate (the required risk adjusted return.) High taxes on dividends verse buy-backs? Adjust the dividend to reflect the taxes. Worried that managers will ill spend your earnings instead of returning them to you? Adjust the discount rate.

bugleheadd
Posts: 251
Joined: Fri Nov 29, 2019 11:25 am

Re: How do Dividends Benefit an Investor?

Post by bugleheadd » Mon Jan 27, 2020 7:23 pm

lock.that.stock wrote:
Mon Jan 27, 2020 2:02 pm
bugleheadd wrote:
Mon Jan 27, 2020 9:38 am
are there any index funds that track total stock market/sp500 that does not pay out any dividends? i'd rather have that in my taxable account

Why not just buy Berkshire. They match the description of what you’re looking for.
what is the stock ticker?

alex_686
Posts: 6192
Joined: Mon Feb 09, 2015 2:39 pm

Re: How do Dividends Benefit an Investor?

Post by alex_686 » Mon Jan 27, 2020 7:30 pm

bck63 wrote:
Mon Jan 27, 2020 6:05 pm
But this is what still confuses me. The share price of the fund is decreased by the amount of the dividend. So I end up with a taxable event (in my taxable account) with no more value to my portfolio. So I think UpperNwGuy is right.

I still don't get it. I'm not making an argument either way. I just can't seem to understand it. Glad I'm in healthcare and not finance! :oops:
So let me give you a simplified example.

Investment 1: Apartment REITs. You invest in a company that buys a apartment building, manages and repairs it, and passes along the rent to you. Nice steady dividends.

Investment 2a: Development REIT. You invest in a company that buys raw land and builds a apartment building. For the first 5 years they will collect no rents. After 5 years they will sell the developed occupied building and send you a big check.

Investment 2b: Same as 2a, expect after 5 year they don't sell, but instead start giving you steady quarterly dividends.

Investment 2c: Same as 2a, expect after 5 years they roll all of the monies into phase 2 - another 5 year build out.

Now, they all have the same risk-adjusted return. Obviously example #1 is the simplest to model and is more intuitive one to understand. And probably has the lowest risk. But that is fine - we are looking at risk-adjusted returns. If example #2 has higher risks then it should have higher returns.

While example #1 has simple cash flows to model, example 2 also has cash flows that can be modeled. And this is the critical bit to my FCFE post above.

junior
Posts: 1048
Joined: Wed Sep 10, 2008 6:14 pm
Contact:

Re: How do Dividends Benefit an Investor?

Post by junior » Mon Jan 27, 2020 8:03 pm

In theory the only reason to own a stock is the management of the company will give you a share of the company's profits in the form of dividends. Without this the stock is a worthless piece of paper.

In practice the price of the stock is set by supply and demand whether or not the company actually pays dividends. People buy stock that doesn't pay dividends because that's what everyone else is doing and the stock accumulates without dividend payments because of social psychology or some sort of expectation that dividends will come in the future even if there's no sign of this happening in the foreseeable future.

So, if this psychological phenomenon continues then perhaps there's no point to dividends. But this psychological phenomenon is not guaranteed to continue and seemingly has no rational basis.

alex_686
Posts: 6192
Joined: Mon Feb 09, 2015 2:39 pm

Re: How do Dividends Benefit an Investor?

Post by alex_686 » Mon Jan 27, 2020 8:10 pm

alex_686 wrote:
Mon Jan 27, 2020 7:30 pm
So let me give you a simplified example.

Investment 1: Apartment REITs. You invest in a company that buys a apartment building, manages and repairs it, and passes along the rent to you. Nice steady dividends.
Let me revise my example so it might be more intuitive. Consider

Investment 1b: Same as Investment 1 but profits are used to accelerate the pay-down of the mortgage. No dividends today, but bigger dividends (and lower risk) in the future.

Investment 1c: Same as Investment 1, but profits are used for stock buy-backs. No dividends today, but bigger dividends tomorrow.

FCFE is the same in all 3 cases. The timing is not.

alex_686
Posts: 6192
Joined: Mon Feb 09, 2015 2:39 pm

Re: How do Dividends Benefit an Investor?

Post by alex_686 » Mon Jan 27, 2020 8:13 pm

junior wrote:
Mon Jan 27, 2020 8:03 pm
In theory the only reason to own a stock is the management of the company will give you a share of the company's profits in the form of dividends. Without this the stock is a worthless piece of paper.
Really? Why is a $1 of dividends returned tot he shareholder so important, but a $1 of buy-backs not? Why is a yearly $1 dividend important, but a lump-sum payout of $6 in 5 years not? Modigliani-Miller Theorem (M&M) of Capital Structure has been a bedrock theory in investing since the 1950s.

User avatar
yangtui
Posts: 475
Joined: Sun Mar 30, 2014 1:32 pm
Contact:

Re: How do Dividends Benefit an Investor?

Post by yangtui » Mon Jan 27, 2020 8:15 pm

You need to have a decent understanding of corporate finance to understand what a dividend is and what it means to have an equity interest in a company. If you do not have this foundational understanding you will end up thinking all kinds of strange things.

dcop
Posts: 160
Joined: Fri Sep 08, 2017 6:06 pm

Re: How do Dividends Benefit an Investor?

Post by dcop » Mon Jan 27, 2020 8:48 pm

I've been invested for 35 years and keep very detailed electronic records on all my investments (going all the way back to the Commodore and for the last 26 years Excel) and for all my mutual funds and equities my dividend investments have the best total return on a percentage bases. This is not taking into account taxes but I've used very good tax strategies and most of my investment are in tax deferred accounts.

junior
Posts: 1048
Joined: Wed Sep 10, 2008 6:14 pm
Contact:

Re: How do Dividends Benefit an Investor?

Post by junior » Mon Jan 27, 2020 9:01 pm

alex_686 wrote:
Mon Jan 27, 2020 8:13 pm
junior wrote:
Mon Jan 27, 2020 8:03 pm
In theory the only reason to own a stock is the management of the company will give you a share of the company's profits in the form of dividends. Without this the stock is a worthless piece of paper.
Really? Why is a $1 of dividends returned tot he shareholder so important, but a $1 of buy-backs not? Why is a yearly $1 dividend important, but a lump-sum payout of $6 in 5 years not? Modigliani-Miller Theorem (M&M) of Capital Structure has been a bedrock theory in investing since the 1950s.
While I don't claim to be an expert on this, this is my understanding:

Buybacks are not money returned to the shareholder. You might say that they are equivalent to someone returning value to the shareholder but this only occurs if intermediaries doing price discovery decide that the shares of stock should sell at a higher price due to a buyback. They have no obligation to decide this.

If the market participants who do price discovery believe in the Modigliani-Miller Theorem (if this is the correct underlying theory) then your return on investment in your index fund will increase accordingly when security analysts and others who perform price discovery value a share higher due to a buyback. If they don't believe in Modigliani-Miller Theorem, the value of the dividend-less stock in your portfolio can plumet to nothing. This is why I said it's an exercise in social psychology.

You can't pay your mortgage and put food on the table with a buyback unless the individuals engaged in price discovery believe that buybacks are equivalent to a dividend. But a Dividend can put food on the table regardless of what a security analyst believes.

If you think there's something wrong with my thinking I invite you to offer your take on it.

JonnyB
Posts: 507
Joined: Sun Jan 19, 2020 5:28 pm

Re: How do Dividends Benefit an Investor?

Post by JonnyB » Mon Jan 27, 2020 9:15 pm

bck63 wrote:
Mon Jan 27, 2020 6:05 pm
But this is what still confuses me. The share price of the fund is decreased by the amount of the dividend. So I end up with a taxable event (in my taxable account) with no more value to my portfolio.
Here is the most important key to understanding. The share price decrease is only temporary. That is the whole answer.

Let me give you a very simple example. Assume you have one share worth $100 and that the company has $1 per share of cash to pay out as dividends.

The company pays you $1 and the share price the next day is $99. You have $1 + $99 = $100.

But the share price doesn't stay at $99 for long. Over the next quarter the company again accumulates $1 of cash to pay out in dividends.

So now, with the cash the company is again worth $100. So you have $1 cash from the last dividend and $100 of stock for $101.

The company again pays $1 dividend and the share price the next day is $99. You have $2 cash + $99 stock = $101.

The next quarter you have $2 cash and $100 of stock.

The next quarter you have $3 cash and $100 of stock.

If you do this for 10 consecutive quarters you will have $10 cash and $100 of stock for $110. The dividends have increased your total portfolio value by 10%.

You can either spend your cash or reinvest it in the stock market for compound growth.

Post Reply