Tell me again, why dividends are not useful ?

[barnaby444]

Yes, I think quite a few people have said some variation of "why would I want a forced sale and have to pay taxes when I could instead choose to sell only as much as I want whenever I want?" This framing implies the (bad) assumption that the dividend-payer and non-dividend payer are otherwise identical. It also ignores that a dividend is not merely a forced sale, it is a forced sale of a specific portion of a company--that is, its cash assets, and not its return-generating assets. You cannot achieve the same thing by selling on your own.

There's a difference between preferring to invest in companies that don't issue dividends and wishing that the companies you are invested in returned the cash via another method so that you could avoid the tax drag.

Is there a difference? If one prefers other methods of returning cash (like buybacks) to dividends because of tax drag, doesn't it logically follow that they should prefer to invest in non-dividend paying companies, or at least tilt away from dividends? After all, if dividends and buybacks are equivalent in every way except taxes, then you can boost your expected after-tax return by tilting towards buyback companies.

Anyway, I don't think a lot of people trotting out the "forced sale" argument are really saying either of the two things; rather it seems to be just a generic volley against the dividend tilters. I don't think most of the dividend tilters actually believe that dividends are free money; they think dividend companies are better investments because they tend to be better managed. I don't necessarily agree with that view, but "forced sale = bad" is not an effective counter-argument against it.

[Riprap]

But right before a dividend is issued (say, ex-dividend date - 1), the book value of the cash is the same as the market value, because the dividend has already been announced, so the market knows there are no other possible alternative uses for the cash.

The market value is what it is. That's why shareholder value is destroyed when the board uses $1.00 of retained earnings to buy $1.00 the market values at $1.20 as frequently happens in buybacks. That's worse than just paying the tax on a cash dividend.

[dbr]

Anyway, I don't think a lot of people trotting out the "forced sale" argument are really saying either of the two things; rather it seems to be just a generic volley against the dividend tilters. I don't think most of the dividend tilters actually believe that dividends are free money; they think dividend companies are better investments because they tend to be better managed. I don't necessarily agree with that view, but "forced sale = bad" is not an effective counter-argument against it.

I agree. It is best to try to get past "free money" and "forced sale" and all that stuff and address whether or not there are good reasons for informed and reasonable people to make certain choices. It could be true that selecting on dividends also selects on being better investments. If that is so one should have a definition of "better" and some data to show that it is really so in terms that are helpful to the investor. One issue that tends to muddy the waters is whether or not the investor is proposing to invest in "dividend" funds or is proposing to select individual stocks.

[OverseasBH]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

If one were to argue differently, then they would have to show that expending that cash as a dividend always decreases future profitability by X for every dollar of dividend paid (and therefore the market value of the company).

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value. The former is merely a function of accounting and is relatively straight forward. The other is a function of market valuation, which if anything but straight forward.

Further, it would get into how each participant values companies. Do you value them on liquidation (essentially book) value or as a going concern, with the ability to make a continuing profit?

For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire). In other situations, the market may assign little valuation to corporate cash that is not beneficially deployable. Like that video of Buffet saying it made sense for See's Candies to pay a dividend, because it had no useful purpose to which to deploy its additional cash.

[muffins14]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

If one were to argue differently, then they would have to show that expending that cash as a dividend always decreases future profitability by X for every dollar of dividend paid (and therefore the market value of the company).

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value. The former is merely a function of accounting and is relatively straight forward. The other is a function of market valuation, which if anything but straight forward.

Further, it would get into how each participant values companies. Do you value them on liquidation (essentially book) value or as a going concern, with the ability to make a continuing profit?

For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire). In other situations, the market may assign little valuation to corporate cash that is not beneficially deployable. Like that video of Buffet saying it made sense for See's Candies to pay a dividend, because it had no useful purpose to which to deploy its additional cash.

But how could the same company with more cash be valued lower than the same company with less cash?

Like if you just erased 200B of cash from apple, your assertion is that the market might value it the same or higher than if it still had that 200B cash?

[barnaby444]

But right before a dividend is issued (say, ex-dividend date - 1), the book value of the cash is the same as the market value, because the dividend has already been announced, so the market knows there are no other possible alternative uses for the cash.

The market value is what it is. That's why shareholder value is destroyed when the board uses $1.00 of retained earnings to buy $1.00 the market values at $1.20 as frequently happens in buybacks. That's worse than just paying the tax on a cash dividend.

The market value is what it is, but it can be decomposed. Some components are hard to value, e.g. future earnings. Some are easy to value, e.g. cash already earmarked for a dividend. The total is the sum of the parts. So if the company distributes $1M of "easy to value" cash assets, then we know the total market value also fell by exactly $1M. Sure, other fluctuations might happen at almost the same time, but those can be treated as random for arbitrage purposes.

[loukycpa]

Buybacks were not illegal before 1982. Companies were just open to more litigation if they did one, before the SEC created safe harbor rules.

This is needlessly pedantic. Buybacks were universally regarded as market manipulation, and for that reason basically no companies were going to invite the regulators to knock on their door by even making an attempt, because they knew that they wouldn't get away with it.

On page 2 of this paper from S&P, you can see that there was essentially ZERO buyback/repurchasing going on prior to 1982.

Curious if you read the full article you posted? Because I would be interested in your perspective on it.

Note from the article:

"Over a long-term investment horizon, buyback portfolios generated
positive excess returns over their benchmark indices in the large-,
mid-, and small-cap segments of the U.S. market"

"In the past 20 years that ended Dec. 31, 2019, the S&P 500 Buyback Index
had outperformed the S&P 500 in 16 out of 20 years, with most significant
excess returns recorded from 2000 to 2002, 2009, and 2013 (see Exhibit
5). The S&P 500 Buyback Index only underperformed during the early
stage of the financial crisis in 2007, 2015, and 2018. For the overall period,
the S&P 500 Buyback Index outperformed the S&P 500 by 5.5% per year,
with slightly higher volatility....."

Given that you apparently view share buybacks universally as some sort of evil reprehensible swindle by insiders to steal money from shareholders, how do you reconcile this with the reality as presented by the paper you posted?

[barnaby444]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value.
[...]
For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire).

Sideline cash for future investments might have a market value != book value, but cash already earmarked for dividends (i.e. between the dividend announcement and ex date) doesn't. And cash expected to be earmarked for dividends from a company that pays a consistent dividend is also close enough to the latter case.

[OverseasBH]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

If one were to argue differently, then they would have to show that expending that cash as a dividend always decreases future profitability by X for every dollar of dividend paid (and therefore the market value of the company).

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value. The former is merely a function of accounting and is relatively straight forward. The other is a function of market valuation, which if anything but straight forward.

Further, it would get into how each participant values companies. Do you value them on liquidation (essentially book) value or as a going concern, with the ability to make a continuing profit?

For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire). In other situations, the market may assign little valuation to corporate cash that is not beneficially deployable. Like that video of Buffet saying it made sense for See's Candies to pay a dividend, because it had no useful purpose to which to deploy its additional cash.

But how could the same company with more cash be valued lower than the same company with less cash?

Like if you just erased 200B of cash from apple, your assertion is that the market might value it the same or higher than if it still had that 200B cash?

You cannot know what is in the minds of millions of market participants.

What you are asserting concerns only the direction of the movement, not that there is any fixed relationship between any certain level of cash on a company's balance sheet and its market valuation at any point in time.

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

[JackoC]

There is a common misstatement repeated in these threads. That is, that a stock’s market value will decrease by the amount of the dividend paid.

This is not necessarily, or even commonly, true. A cash dividend is a payment that reduces the retained earnings and cash balance sheet accounts of a company. In other words, there is a decrease in the company’s book value, but there is no fixed relationship to the market value of the company’s stock. How a company is valued with less cash than it previously had is up to the market to determine and that is constantly changing among many factors. Without such cash, there may not be much impact on the earnings ability of the company, so why would the market value of its stock be any less?

Other poster claimed there's no suggestion of free money in dividends on these threads, but there is it again, as frequently. If the value of the company doesn't drop by the dividend, at the instant new buyers don't get the declared div, the ex div *instant*, there must be some magic money appearing/disappearing. IOW it is *not* a misstatement to say the value decreases by the dividend at that instant but something very simple and fundamental. Re: the bolded, the price drops by the dividend because at ex-div minus 1 picosecond that cash belonged to the company (and hence to the shareholders via their shares) and at ex-div plus 1 picosecond that cash belongs to the shareholders directly as a payable in the cash section of their brokerage account and no longer belongs to the company.

This was a previously declared dividend, so the market previously evaluated what impact distributing v reinvesting (or just keeping in cash withing the company) this money would have had on future earnings. One easy way to get confused about dividends is mixing together *payment of already declared dividends* with *dividend policy*. Stated changes in *dividend policy* affect share prices in indeterminate ways according to the market's price discovery mechanism: will this company provide more or less shareholder value over time with the newly declared policy? But payout of already declared dividends from the co's cash account reduces the stock price by the dividend, period.

The other easy way to get confused is as in your example. You're taking Apple's share price movement v the index over the whole ex-dividend trading day. That's just noise obscuring something that couldn't be simpler: when the new buyer of the stock no longer gets that virtually certain cash (stock goes ex), the price drops by the amount of that cash. This would be 100% obvious 'empirically' if buyer and sellers could choose over the whole ex-date to trade the stock with or without that dividend. Neglecting tax, which we know might have an effect (since the tax cost of a high div payer subindex is either higher or the same as the whole index depending on one's tax situation but there's nobody for whom it's lower) I gtee you those simultaneous trades w/ and w/o the current div would differ in price by the current div.

[muffins14]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

If one were to argue differently, then they would have to show that expending that cash as a dividend always decreases future profitability by X for every dollar of dividend paid (and therefore the market value of the company).

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value. The former is merely a function of accounting and is relatively straight forward. The other is a function of market valuation, which if anything but straight forward.

Further, it would get into how each participant values companies. Do you value them on liquidation (essentially book) value or as a going concern, with the ability to make a continuing profit?

For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire). In other situations, the market may assign little valuation to corporate cash that is not beneficially deployable. Like that video of Buffet saying it made sense for See's Candies to pay a dividend, because it had no useful purpose to which to deploy its additional cash.

But how could the same company with more cash be valued lower than the same company with less cash?

Like if you just erased 200B of cash from apple, your assertion is that the market might value it the same or higher than if it still had that 200B cash?

You cannot know what is in the minds of millions of market participants.

What you are asserting concerns only the direction of the movement, not that there is any fixed relationship between any certain level of cash on a company's balance sheet and its market valuation at any point in time.

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

I’m asserting that you know exactly that in advance

The price should move by an amount delta P = dividend - market

You know the dividend, but market is unknown

[OverseasBH]

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value. The former is merely a function of accounting and is relatively straight forward. The other is a function of market valuation, which if anything but straight forward.

Further, it would get into how each participant values companies. Do you value them on liquidation (essentially book) value or as a going concern, with the ability to make a continuing profit?

For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire). In other situations, the market may assign little valuation to corporate cash that is not beneficially deployable. Like that video of Buffet saying it made sense for See's Candies to pay a dividend, because it had no useful purpose to which to deploy its additional cash.

But how could the same company with more cash be valued lower than the same company with less cash?

Like if you just erased 200B of cash from apple, your assertion is that the market might value it the same or higher than if it still had that 200B cash?

You cannot know what is in the minds of millions of market participants.

What you are asserting concerns only the direction of the movement, not that there is any fixed relationship between any certain level of cash on a company's balance sheet and its market valuation at any point in time.

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

I’m asserting that you know exactly that in advance

The price should move by an amount delta P = dividend - market

You know the dividend, but market is unknown

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

[seajay]

There is a common misstatement repeated in these threads. That is, that a stock’s market value will decrease by the amount of the dividend paid.

This is not necessarily, or even commonly, true. A cash dividend is a payment that reduces the retained earnings and cash balance sheet accounts of a company. In other words, there is a decrease in the company’s book value, but there is no fixed relationship to the market value of the company’s stock. How a company is valued with less cash than it previously had is up to the market to determine and that is constantly changing among many factors. Without such cash, there may not be much impact on the earnings ability of the company, so why would the market value of its stock be any less?

(Rhetorical) which stocks commonly exhibit that? As I'd like to buy cum-div (late in the prior to going ex-div trading day), sell ex-div (next day shortly after the opening) ... and rinse/repeat, collecting all of the dividends despite just holding each individual stock for just a handful of days (nights) per year to collect the entire years worth of each stocks dividends.

Where such opportunity existed then it would already have been arbitraged out.

[muffins14]

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

Let’s compare ITOT vs VTI

why did VTI drop on 6/23 when ITOT went up? They are basically identical. VTI went ex-dividend on 6/23

[barnaby444]

Without such cash, there may not be much impact on the earnings ability of the company, so why would the market value of its stock be any less?

Other poster claimed there's no suggestion of free money in dividends on these threads, but there is it again, as frequently. If the value of the company doesn't drop by the dividend, at the instant new buyers don't get the declared div, the ex div *instant*, there must be some magic money appearing/disappearing. IOW it is *not* a misstatement to say the value decreases by the dividend at that instant but something very simple and fundamental. Re: the bolded, the price drops by the dividend because at ex-div minus 1 picosecond that cash belonged to the company (and hence to the shareholders via their shares) and at ex-div plus 1 picosecond that cash belongs to the shareholders directly as a payable in the cash section of their brokerage account and no longer belongs to the company.

This was a previously declared dividend, so the market previously evaluated what impact distributing v reinvesting (or just keeping in cash withing the company) this money would have had on future earnings. One easy way to get confused about dividends is mixing together *payment of already declared dividends* with *dividend policy*. Stated changes in *dividend policy* affect share prices in indeterminate ways according to the market's price discovery mechanism: will this company provide more or less shareholder value over time with the newly declared policy? But payout of already declared dividends from the co's cash account reduces the stock price by the dividend, period.

Bold 1: I may be the poster you're referring to, but I only said "mostly"... I completely agree in this case.
Bold 2: This is all important. By the time a dividend is about to be paid, the cash cannot be valued at any amount other than face value (i.e. book value) because the market already knows what the cash will be used for: distributing to shareholders. It is nothing like Berkshire's or Apple's cash piles, which the market can go wild speculating about.

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

Actually, the closing price of the stock is mechanically adjusted by the amount of the dividend, but that is somewhat beside the point. The point is that the market value must decrease by the dividend amount, and it is simultaneously true that other factors can cause the stock price to go back up (or down further) at virtually the same time.

If you pour a cup out from a pitcher of water, then refill two cups back into it from the tap, that doesn't change the fact that you first poured out a cup. The water level is one cup lower than it would've been had you not poured out the first cup.

[Cash is King]

Anyway, I don't think a lot of people trotting out the "forced sale" argument are really saying either of the two things; rather it seems to be just a generic volley against the dividend tilters. I don't think most of the dividend tilters actually believe that dividends are free money; they think dividend companies are better investments because they tend to be better managed. I don't necessarily agree with that view, but "forced sale = bad" is not an effective counter-argument against it.

I agree. It is best to try to get past "free money" and "forced sale" and all that stuff and address whether or not there are good reasons for informed and reasonable people to make certain choices. It could be true that selecting on dividends also selects on being better investments. If that is so one should have a definition of "better" and some data to show that it is really so in terms that are helpful to the investor. One issue that tends to muddy the waters is whether or not the investor is proposing to invest in "dividend" funds or is proposing to select individual stocks.

^This. Especially the last sentence from DBR.

[JackoC]

Anyway, I don't think a lot of people trotting out the "forced sale" argument are really saying either of the two things; rather it seems to be just a generic volley against the dividend tilters. I don't think most of the dividend tilters actually believe that dividends are free money; they think dividend companies are better investments because they tend to be better managed. I don't necessarily agree with that view, but "forced sale = bad" is not an effective counter-argument against it.

I agree. It is best to try to get past "free money" and "forced sale" and all that stuff and address whether or not there are good reasons for informed and reasonable people to make certain choices. It could be true that selecting on dividends also selects on being better investments. If that is so one should have a definition of "better" and some data to show that it is really so in terms that are helpful to the investor. One issue that tends to muddy the waters is whether or not the investor is proposing to invest in "dividend" funds or is proposing to select individual stocks.

^This. Especially the last sentence from DBR.

That last sentence I agree is especially true, I also noted that previously. In a BH framework we would be comparing a high div subindex to the whole index, which like (small cap) value, growth, US only, etc rather than whole global index are recognized as discussions still within the general BH framework. Talking about how X company did better when it paid divs than when it did buybacks (or did badly with buybacks, GM was the example) seems to me to presuppose a stock picking approach. And while I doubt a simple high div yield screen as a major part of successful stock picking, I don't believe in stock picking at all (except maybe for fun with small amounts). So stock pickers will pick based on all kinds of stuff which might include div yield but in a basic approach I doubt will work anyway, and debating that point is 'upstream' of debating dividends.

But back to BH framework, a) the main argument for preferring high div payers would be formal studies showing a high div subindex achieved higher return for for risk, as a standalone factor. Or at least that would be a major part of the argument, but it's virtually absent from these threads in my observation and b) while 'most' of the dividend tilters might not consciously believe in a free money aspect it's clear IMO more than a few do, or at least effectively do though would reject the admittedly loaded phrase 'free money'. That's illustrated IMO by the continuing 'debate' whether the stock value drops by the amount of declared div *at the instant it goes ex, excluding extraneous noise* which is not a debate but one the simplest concepts in investing: yes it does.

[AnEngineer]

Yes, I think quite a few people have said some variation of "why would I want a forced sale and have to pay taxes when I could instead choose to sell only as much as I want whenever I want?" This framing implies the (bad) assumption that the dividend-payer and non-dividend payer are otherwise identical. It also ignores that a dividend is not merely a forced sale, it is a forced sale of a specific portion of a company--that is, its cash assets, and not its return-generating assets. You cannot achieve the same thing by selling on your own.

There's a difference between preferring to invest in companies that don't issue dividends and wishing that the companies you are invested in returned the cash via another method so that you could avoid the tax drag.

Is there a difference? If one prefers other methods of returning cash (like buybacks) to dividends because of tax drag, doesn't it logically follow that they should prefer to invest in non-dividend paying companies, or at least tilt away from dividends? After all, if dividends and buybacks are equivalent in every way except taxes, then you can boost your expected after-tax return by tilting towards buyback companies.

There's a difference. I know of no reason to believe that dividend paying stocks will perform any differently than others. But it would be nice to be in a world where I'm not paying tax hit on dividends (this doesn't mean share buybacks are always better). It's a difference in making decisions in the world we live in vs. considering possible alternatives that are not available.

[Riprap]

One issue that tends to muddy the waters is whether or not the investor is proposing to invest in "dividend" funds or is proposing to select individual stocks.

BHs should embrace good corporate governance. If the board at the individual stock level thinks it's in the best interest of shareholders to pay a dividend, then that's probably what should be done. The Investment Act of 1940 pretty much ties the hands of fund managers; they have to pass along dividends.

What muddies the waters are fund investors who refuse to look at the bigger picture and somehow believe the fund level and individual stock level are somehow unrelated. I have mentioned before, retail stock investors are pretty much along for ride, they should accept that.

As usual, good commentary from DBR.

[barnaby444]

Yes, I think quite a few people have said some variation of "why would I want a forced sale and have to pay taxes when I could instead choose to sell only as much as I want whenever I want?" This framing implies the (bad) assumption that the dividend-payer and non-dividend payer are otherwise identical. It also ignores that a dividend is not merely a forced sale, it is a forced sale of a specific portion of a company--that is, its cash assets, and not its return-generating assets. You cannot achieve the same thing by selling on your own.

There's a difference between preferring to invest in companies that don't issue dividends and wishing that the companies you are invested in returned the cash via another method so that you could avoid the tax drag.

Is there a difference? If one prefers other methods of returning cash (like buybacks) to dividends because of tax drag, doesn't it logically follow that they should prefer to invest in non-dividend paying companies, or at least tilt away from dividends? After all, if dividends and buybacks are equivalent in every way except taxes, then you can boost your expected after-tax return by tilting towards buyback companies.

There's a difference. I know of no reason to believe that dividend paying stocks will perform any differently than others. But it would be nice to be in a world where I'm not paying tax hit on dividends (this doesn't mean share buybacks are always better). It's a difference in making decisions in the world we live in vs. considering possible alternatives that are not available.

But if you believe that, practically, there are no better alternatives for returning capital than dividends, then you are just venting about taxes, not making an argument relevant in the dividend debate.

[randomguy]

There's a difference. I know of no reason to believe that dividend paying stocks will perform any differently than others. But it would be nice to be in a world where I'm not paying tax hit on dividends (this doesn't mean share buybacks are always better). It's a difference in making decisions in the world we live in vs. considering possible alternatives that are not available.

Dividend paying stocks tend to be larger, older companies that end up have a slight value tick compared to TSM. It isn't enough to keep me up at night. There is nothing wrong with dividends. The problem is the next step when people start suggesting that dividends make you immune to SORR and the like. Unfortunately it just doesn't work out. What makes you "immune" to SORR are those 20%+ cuts in spending as the dividends get cut/not increased. But you could do the same thing with any type of stock if you want.

[AnEngineer]

Yes, I think quite a few people have said some variation of "why would I want a forced sale and have to pay taxes when I could instead choose to sell only as much as I want whenever I want?" This framing implies the (bad) assumption that the dividend-payer and non-dividend payer are otherwise identical. It also ignores that a dividend is not merely a forced sale, it is a forced sale of a specific portion of a company--that is, its cash assets, and not its return-generating assets. You cannot achieve the same thing by selling on your own.

There's a difference between preferring to invest in companies that don't issue dividends and wishing that the companies you are invested in returned the cash via another method so that you could avoid the tax drag.

Is there a difference? If one prefers other methods of returning cash (like buybacks) to dividends because of tax drag, doesn't it logically follow that they should prefer to invest in non-dividend paying companies, or at least tilt away from dividends? After all, if dividends and buybacks are equivalent in every way except taxes, then you can boost your expected after-tax return by tilting towards buyback companies.

There's a difference. I know of no reason to believe that dividend paying stocks will perform any differently than others. But it would be nice to be in a world where I'm not paying tax hit on dividends (this doesn't mean share buybacks are always better). It's a difference in making decisions in the world we live in vs. considering possible alternatives that are not available.

But if you believe that, practically, there are no better alternatives for returning capital than dividends, then you are just venting about taxes, not making an argument relevant in the dividend debate.

It's a reason not to favor dividend stocks absent some other tangible advantage. (But absent others hyping dividend stocks, yes, it's pretty much just venting.)

[barnaby444]

There's a difference between preferring to invest in companies that don't issue dividends and wishing that the companies you are invested in returned the cash via another method so that you could avoid the tax drag.

Is there a difference? If one prefers other methods of returning cash (like buybacks) to dividends because of tax drag, doesn't it logically follow that they should prefer to invest in non-dividend paying companies, or at least tilt away from dividends? After all, if dividends and buybacks are equivalent in every way except taxes, then you can boost your expected after-tax return by tilting towards buyback companies.

There's a difference. I know of no reason to believe that dividend paying stocks will perform any differently than others. But it would be nice to be in a world where I'm not paying tax hit on dividends (this doesn't mean share buybacks are always better). It's a difference in making decisions in the world we live in vs. considering possible alternatives that are not available.

But if you believe that, practically, there are no better alternatives for returning capital than dividends, then you are just venting about taxes, not making an argument relevant in the dividend debate.

It's a reason not to favor dividend stocks absent some other tangible advantage. (But absent others hyping dividend stocks, yes, it's pretty much just venting.)

If the dividend hypers prefer dividend stocks because they think dividends are a sign of higher quality companies with better management, then "forced sales" are actually a good thing to them, which was part of my original point, now lost in the layers of quotes. All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

[rkhusky]

But how could the same company with more cash be valued lower than the same company with less cash?

Like if you just erased 200B of cash from apple, your assertion is that the market might value it the same or higher than if it still had that 200B cash?

You cannot know what is in the minds of millions of market participants.

What you are asserting concerns only the direction of the movement, not that there is any fixed relationship between any certain level of cash on a company's balance sheet and its market valuation at any point in time.

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

I’m asserting that you know exactly that in advance

The price should move by an amount delta P = dividend - market

You know the dividend, but market is unknown

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

Let’s compare ITOT vs VTI

why did VTI drop on 6/28 when ITOT went up? They are basically identical. VTI paid a dividend on 6/28

The ex-dividend for VTI was on 6/23. VTI went from 217.56 on 6/22 to 214.94 on 6/23, a drop of 1.20%. The dividend was 0.827 or about 0.39%. ITOT went from 96.22 on 6/22 to 95.36 on 6/23, or a drop of 0.89%. The difference between the price drops is the dividend amount.
You could also compare VTI and ITOT on 6/7 when ITOT provided a dividend. You will also see that the difference between the price drops (0.54% - 0.20%) is essentially the dividend amount (0.30%).

[muffins14]

You cannot know what is in the minds of millions of market participants.

What you are asserting concerns only the direction of the movement, not that there is any fixed relationship between any certain level of cash on a company's balance sheet and its market valuation at any point in time.

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

I’m asserting that you know exactly that in advance

The price should move by an amount delta P = dividend - market

You know the dividend, but market is unknown

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

Let’s compare ITOT vs VTI

why did VTI drop on 6/28 when ITOT went up? They are basically identical. VTI paid a dividend on 6/28

The ex-dividend for VTI was on 6/23. VTI went from 217.56 on 6/22 to 214.94 on 6/23, a drop of 1.20%. The dividend was 0.827 or about 0.39%. ITOT went from 96.22 on 6/22 to 95.36 on 6/23, or a drop of 0.89%. The difference between the price drops is the dividend amount.
You could also compare VTI and ITOT on 6/7 when ITOT provided a dividend. You will also see that the difference between the price drops (0.54% - 0.20%) is essentially the dividend amount (0.30%).

Exactly

[AnEngineer]

If the dividend hypers prefer dividend stocks because they think dividends are a sign of higher quality companies with better management, then "forced sales" are actually a good thing to them, which was part of my original point, now lost in the layers of quotes. All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

I don't see how the "forced sale" itself is a good thing now. Back when there were transaction costs for selling, it could be an advantage, but now its neutral or negative due to the tax drag. The dividend itself is only a method of signaling. There are other methods of signalling.

But now I'm considering the alternative implications for those invested in cap weighted index funds. Share buybacks don't increase market cap, so that means that (assuming a pro buyback perspective for simplicity) index funds would have to sell shares in order to hold the right amount (as the value of each share goes up). This means under ideal conditions share buybacks also result in a forced sale for cap weighted investors. This means no advantage or disadvantage for either of the two methods of returning cash to stockholders. Am I missing something here?

[barnaby444]

If the dividend hypers prefer dividend stocks because they think dividends are a sign of higher quality companies with better management, then "forced sales" are actually a good thing to them, which was part of my original point, now lost in the layers of quotes. All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

I don't see how the "forced sale" itself is a good thing now. Back when there were transaction costs for selling, it could be an advantage, but now its neutral or negative due to the tax drag. The dividend itself is only a method of signaling. There are other methods of signalling.

But now I'm considering the alternative implications for those invested in cap weighted index funds. Share buybacks don't increase market cap, so that means that (assuming a pro buyback perspective for simplicity) index funds would have to sell shares in order to hold the right amount (as the value of each share goes up). This means under ideal conditions share buybacks also result in a forced sale for cap weighted investors. This means no advantage or disadvantage for either of the two methods of returning cash to stockholders. Am I missing something here?

A forced sale can be considered a good thing because the company is specifically distributing cash that it decided it didn't have a better use for, an action that cannot be replicated by selling on your own as an individual investor (if you try to sell the same percentage, you'll end up selling your claim on some cash but also some non-cash, return-generating assets too). Buybacks are a viable alternative, but from a pro-dividend perspective (again, not necessarily mine), dividends are preferable because they are more transparent/lead to better management incentives/less easily abused/blah blah.

[abuss368]

Dividends = Passive Income

Very important!
Tony

[billaster]

People talk about dividends being a "forced sale" but forget that stock buybacks are a "forced buy."

If I gave you $1,000 cash today, would you choose to spend all of it to buy Boeing stock tomorrow, regardless of price. Yes or no?

But that is exactly what the CEO of Boeing is doing when they execute a stock buyback. They are deciding to take your $1,000 cash and bet it all on Boeing stock.

Buybacks are now subject to a 1% excise tax so buybacks are a net negative for non-taxable investors.

[rkhusky]

Dividends = Passive Income

Very important!
Tony

My automated share sales are passive too. I don't have to do a thing and they show up in my bank account every month.

[AnEngineer]

If the dividend hypers prefer dividend stocks because they think dividends are a sign of higher quality companies with better management, then "forced sales" are actually a good thing to them, which was part of my original point, now lost in the layers of quotes. All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

I don't see how the "forced sale" itself is a good thing now. Back when there were transaction costs for selling, it could be an advantage, but now its neutral or negative due to the tax drag. The dividend itself is only a method of signaling. There are other methods of signalling.

But now I'm considering the alternative implications for those invested in cap weighted index funds. Share buybacks don't increase market cap, so that means that (assuming a pro buyback perspective for simplicity) index funds would have to sell shares in order to hold the right amount (as the value of each share goes up). This means under ideal conditions share buybacks also result in a forced sale for cap weighted investors. This means no advantage or disadvantage for either of the two methods of returning cash to stockholders. Am I missing something here?

A forced sale can be considered a good thing because the company is specifically distributing cash that it decided it didn't have a better use for, an action that cannot be replicated by selling on your own as an individual investor (if you try to sell the same percentage, you'll end up selling your claim on some cash but also some non-cash, return-generating assets too). Buybacks are a viable alternative, but from a pro-dividend perspective (again, not necessarily mine), dividends are preferable because they are more transparent/lead to better management incentives/less easily abused/blah blah.

I'm now much more interested in the second part of my previous post.

But to a forced sale being considered a good thing, my point was that that's like saying getting punched in the face can be considered a good thing if it pushes you back and you dodge a bus. Overall it may be better than getting hit by a bus, but wouldn't it be better to accomplish the same thing another way? Getting punched in and of itself was not good, even if you prefer the overall situation to a particular alternative.

[rkhusky]

I’m asserting that you know exactly that in advance

The price should move by an amount delta P = dividend - market

You know the dividend, but market is unknown

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

Let’s compare ITOT vs VTI

why did VTI drop on 6/28 when ITOT went up? They are basically identical. VTI paid a dividend on 6/28

The ex-dividend for VTI was on 6/23. VTI went from 217.56 on 6/22 to 214.94 on 6/23, a drop of 1.20%. The dividend was 0.827 or about 0.39%. ITOT went from 96.22 on 6/22 to 95.36 on 6/23, or a drop of 0.89%. The difference between the price drops is the dividend amount.
You could also compare VTI and ITOT on 6/7 when ITOT provided a dividend. You will also see that the difference between the price drops (0.54% - 0.20%) is essentially the dividend amount (0.30%).

Exactly

A better example might be two S&P 500 funds, such as VFIAX and FXAIX. FXAIX had a 0.394% dividend on 7/7. The price of FXAIX dropped 0.664% from 7/6 to 7/7. The price of VFIAX dropped 0.270% from 7/6 to 7/7. The difference is exactly the FXAIX dividend. It might not always be that close, e.g. from 7/11 - 7/12 VFIAX rose 0.742% and FXAIX rose 0.746%, so they normally track very closely, but not to 3 sigfigs every time.

[Janus887]

Given that you apparently view share buybacks universally as some sort of evil reprehensible swindle by insiders to steal money from shareholders, how do you reconcile this with the reality as presented by the paper you posted?

Did you really just make a post in which you smugly proclaim the (shockingly obvious) fact that companies that spend shareholder money intentionally to raise their share price through buybacks saw higher share price appreciation than companies that didn't?

Waiting for your next post: "Scientists discover that water is wet!"

This sort of blatant market manipulation and fluffing the stock price so that executives can hit bonus targets is why buybacks used to be illegal. If the companies are sitting on all that cash and want to return it to shareholders, it should be paid as a dividend. There is simply no reason for buybacks to exist in the first place. If I'm the owner of the company and you're my CEO, I want you to PUT CASH IN MY POCKET! Don't take my money and buy a ton of shares and then issue a bunch of them to yourself and your cronies while pointing to the share price and saying, "Well, look, it went up because I'm such a great manager (definitely not because I manipulated the market with your money and reduced the total number of outstanding shares!), and besides, everybody else is doing it!"

[Capster1]

1) Companies cut dividends. Many companies with low payout ratios even cut their dividend during the pandemic.
How many stocks do you want to manage to diversify away from that risk? Meanwhile increasing your risk of picking a bunch of duds.

2) Bonds are great for income. With individual bonds, you know exactly how much you are going to get. With bond funds, these MAY go up in price during said events and you can sell them.

3) All of my Total Market and Value ETFs pay a dividend. Not as much as say my BTI stock, but something.

I don’t think it’s a case of not being useful. It’s more a case of if you concentrate on dividends you could be incurring more risks. People get this idea that you are insulated from large drawdowns by a dividend stock. Meanwhile, there’s MMM or VZ. Owning one of those over the last 5+ yrs rather than the market dampened your returns and long-term was rather costly.

Like many things, the “insurance” wasn’t worth what you paid to carry it.

[TN_Boy]

Given that you apparently view share buybacks universally as some sort of evil reprehensible swindle by insiders to steal money from shareholders, how do you reconcile this with the reality as presented by the paper you posted?

Did you really just make a post in which you smugly proclaim the (shockingly obvious) fact that companies that spend shareholder money intentionally to raise their share price through buybacks saw higher share price appreciation than companies that didn't?

Waiting for your next post: "Scientists discover that water is wet!"

This sort of blatant market manipulation and fluffing the stock price so that executives can hit bonus targets is why buybacks used to be illegal. If the companies are sitting on all that cash and want to return it to shareholders, it should be paid as a dividend. There is simply no reason for buybacks to exist in the first place. If I'm the owner of the company and you're my CEO, I want you to PUT CASH IN MY POCKET! Don't take my money and buy a ton of shares and then issue a bunch of them to yourself and your cronies while pointing to the share price and saying, "Well, look, it went up because I'm such a great manager (definitely not because I manipulated the market with your money and reduced the total number of outstanding shares!), and besides, everybody else is doing it!"

(Unable to resist though I'll regret it). I'm actually not a huge fan of many buybacks nor am I fond of the way that stock options are used as (IMHO excess) compensation for execs* ... but that said, you must believe the stock market is incredibly INefficient, since buybacks are well reported, along with the company financials. So you'd think that a company consistently making terrible buyback decisions would be punished by all those clever active managers. Why doesn't that happen? Or do you think it does happen, but not enough?

Though I've personally benefited from stock options, so I shouldn't complain too much ...

[HanSolo]

All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

Perhaps I'm missing something, but why is it that there needs to be a debate over whether dividend payers tend to be better investments?

A lot of people invest in a lot of different things (international stocks, REITs, bonds, gold, etc.) without "proving" that they're better investments than US total stock market. Heck, I invest in some of those, and not only have I never "proved" that any of them are "better" than US TSM, I don't even have any expectation of them outperforming US TSM in the longer term. I just consider them as having different characteristics and worth owning in their own right.

I think this debate goes on endlessly because people are trying to solve a problem that doesn't exist.

[OverseasBH]

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

Let’s compare ITOT vs VTI

why did VTI drop on 6/23 when ITOT went up? They are basically identical. VTI went ex-dividend on 6/23

Not sure why you are using a fund instead of a single stock. Also, ITOT owns 2,892 stocks while VTI owns 3,829, so there is that as well.

On the dividend declaration date, can you predict exactly what the share price will be at the start of the ex-dividend date?

[OverseasBH]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value.
[...]
For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire).

Sideline cash for future investments might have a market value != book value, but cash already earmarked for dividends (i.e. between the dividend announcement and ex date) doesn't. And cash expected to be earmarked for dividends from a company that pays a consistent dividend is also close enough to the latter case.

How can you, as a single individual among millions of market participants, assign a market value to one part of a company's balance sheet? Market participants will value it however they do and unless you are a significant player in the market, you will receive that market price, in total, made up of its various constituents, as you stated, priced by the market.

[OverseasBH]

Which brings us back to the inaccurate statement people continually make on these threads. That the market valuation of a company will decrease exactly by the amount of the dividend paid. I would hope you would agree that is impossible to know that in advance.

The point is that the market value must decrease by the dividend amount, and it is simultaneously true that other factors can cause the stock price to go back up (or down further) at virtually the same time.

By what law of nature must the market value decrease by the dividend amount?

The book value must decrease by the dividend amount, that is how financial accounting works. The market value does whatever it does.

[burritoLover]

Because the market is highly efficient. Believing it doesn’t drop by the dividend amount is like believing that you can simply listen to an earnings call and make a short-term trade based on that info and come out ahead, on average, over time. Ask yourself why doesn’t that work? Free money is free money anyway you slice it.

[OverseasBH]

The ex-dividend for VTI was on 6/23. VTI went from 217.56 on 6/22 to 214.94 on 6/23, a drop of 1.20%. The dividend was 0.827 or about 0.39%. ITOT went from 96.22 on 6/22 to 95.36 on 6/23, or a drop of 0.89%. The difference between the price drops is the dividend amount. You could also compare VTI and ITOT on 6/7 when ITOT provided a dividend. You will also see that the difference between the price drops (0.54% - 0.20%) is essentially the dividend amount (0.30%).

I wish people who would single company stocks and not funds in their examples, as funds have other factors going on that might affect their price.

Let's just say there are two market makers A and B who control the whole investing universe. Acme Corp. paid its dividend (for simplicity on the ex-dividend date) and at the start of the market the next day. Market maker A says "I am offering Acme at $100 a share." Market maker B responds "But you just paid a $1 per share dividend yesterday, so I will only offer you $99 per share." Market maker A replies "That dividend did not represent funds that we intended to use to generate our projected income from operations, the present value of whose future cash flows equate to $100 per share." Market maker B counters "I understand that, but Acme has less total assets than it did yesterday, and I value Acme on the present value of its future cash flows, inclusive of the liquidation value of its balance sheet accounts. I value that $1/share of cash used to pay the dividends at $0.20, so I will offer to pay $99.80 per share." Market maker A accepts this reasoning and the transactions is executed, valuing Acme Corp at $99.80 per share.

Excluding other market action, the market makers took into account the value of the dividend cash to the future cash flows of Acme Corp and ultimately valued it at less than its book value. The primary source of valuation of any typical larger company will come from its projected future cash flows, not its current balance sheet items. If the cash used to pay a dividend does not play a significant part in those future cash flows, then its market value will be less than its book value and the market value of Acme will not drop by the book value of the dividend but by its market value, net of any other market action. Saying that the market value drops by the amount of the dividend is merely a convenient starting point for market makers to begin their discussion but it is not by any means a hard and fast requirement for the final market price that they agree upon, just like in any other trade.

[JoMoney]

...

You don't need to contrive a story about market makers deciding how they will price after a dividend is paid.
The exchange itself will automatically re-price the stock down by the amount of the dividend on the ex-dividend date. The market forces will then further move to either push the price back towards the prior price, or not, based on whatever of the multitude of reasons the participants might have.

I have no beef or argument for or against the idea that dividends are "useful" and some people might have good reasons to favor (or disfavor them).
But arguing that the market isn't factoring them in to pricing would be silly. If they weren't, you could make a killing in options on dividend paying stocks by just managing around the dividend dates.

[loukycpa]

Given that you apparently view share buybacks universally as some sort of evil reprehensible swindle by insiders to steal money from shareholders, how do you reconcile this with the reality as presented by the paper you posted?

Did you really just make a post in which you smugly proclaim the (shockingly obvious) fact that companies that spend shareholder money intentionally to raise their share price through buybacks saw higher share price appreciation than companies that didn't?

Waiting for your next post: "Scientists discover that water is wet!"

This sort of blatant market manipulation and fluffing the stock price so that executives can hit bonus targets is why buybacks used to be illegal. If the companies are sitting on all that cash and want to return it to shareholders, it should be paid as a dividend. There is simply no reason for buybacks to exist in the first place. If I'm the owner of the company and you're my CEO, I want you to PUT CASH IN MY POCKET! Don't take my money and buy a ton of shares and then issue a bunch of them to yourself and your cronies while pointing to the share price and saying, "Well, look, it went up because I'm such a great manager (definitely not because I manipulated the market with your money and reduced the total number of outstanding shares!), and besides, everybody else is doing it!"

Buybacks are good for shareholders (improve returns) versus dividends when the stock is undervalued. Dividends are preferred way of returning capital if the stock is overvalued, because a buyback in this situation destroys value. I will skip showing you the math behind this and presume you can find it if you are interested.

There is no really no serious debate and confusion about the above, its just math. The real issue is whether we can and should trust management and the board to act in the best interest of shareholders. The concern you have (and it is a valid one) is that management, with an executive compensation structure that is driven by increases in the share price, would act in a self-interested way and prefer to boost the stock price in the immediate short-term (instead of the long-term) through a buy back, even though the stock is overvalued. This destroys value over time and results eventually in lower returns for shareholders versus companies that would choose to pay a dividend in this situation.

You posted an article thankfully that is short on bias and rhetoric, and instead just focuses on what the broad impact of buybacks has been on shareholder returns. Of course there are going to be cases where management is either wrong or choose their own interests over shareholder interests, but what the broad data shows is on balance more often than not buybacks are being executed in a way that is creating value for shareholders. Good corporate governance, transparency in financial reporting, and market forces are winning and working in the long term interest of shareholders.

Just to be crystal clear, if you were correct with your broad brush view that every buy back is a bad thing, the data would show that long term shareholder returns in companies that do buy backs would be lower versus companies that pay dividends. But read your own article. This is not what has happened.

https://www.spglobal.com/spdji/en/docum ... ndices.pdf

[burritoLover]

Dang, market maker A is making some serious bank over the stupidity of market maker B. That spread per share is huge.

[loukycpa]

I'd like to be the offspring/heir of those who don't believe your net worth is decreased anytime you make a gift of your earnings to me.

On behalf of your children, you are absolutely correct. Only your future earnings capacity really matters. Keep the cash coming.

[loukycpa]

The ex-dividend for VTI was on 6/23. VTI went from 217.56 on 6/22 to 214.94 on 6/23, a drop of 1.20%. The dividend was 0.827 or about 0.39%. ITOT went from 96.22 on 6/22 to 95.36 on 6/23, or a drop of 0.89%. The difference between the price drops is the dividend amount. You could also compare VTI and ITOT on 6/7 when ITOT provided a dividend. You will also see that the difference between the price drops (0.54% - 0.20%) is essentially the dividend amount (0.30%).

I wish people who would single company stocks and not funds in their examples, as funds have other factors going on that might affect their price.

Let's just say there are two market makers A and B who control the whole investing universe. Acme Corp. paid its dividend (for simplicity on the ex-dividend date) and at the start of the market the next day. Market maker A says "I am offering Acme at $100 a share." Market maker B responds "But you just paid a $1 per share dividend yesterday, so I will only offer you $99 per share." Market maker A replies "That dividend did not represent funds that we intended to use to generate our projected income from operations, the present value of whose future cash flows equate to $100 per share." Market maker B counters "I understand that, but Acme has less total assets than it did yesterday, and I value Acme on the present value of its future cash flows, inclusive of the liquidation value of its balance sheet accounts. I value that $1/share of cash used to pay the dividends at $0.20, so I will offer to pay $99.80 per share." Market maker A accepts this reasoning and the transactions is executed, valuing Acme Corp at $99.80 per share.

Excluding other market action, the market makers took into account the value of the dividend cash to the future cash flows of Acme Corp and ultimately valued it at less than its book value. The primary source of valuation of any typical larger company will come from its projected future cash flows, not its current balance sheet items. If the cash used to pay a dividend does not play a significant part in those future cash flows, then its market value will be less than its book value and the market value of Acme will not drop by the book value of the dividend but by its market value, net of any other market action. Saying that the market value drops by the amount of the dividend is merely a convenient starting point for market makers to begin their discussion but it is not by any means a hard and fast requirement for the final market price that they agree upon, just like in any other trade.

Set aside the above for a minute. Play this out in your mind over the long term. Imagine the cash was retained instead, not just in this one instance, but quarter after quarter for ten years. Instead of returning the money to shareholders to reinvest, in the short term the company used the funds to reduce leverage and interest expense, increasing cash flow. Then the company was successful in finding a couple of good acquisitions that increased the present value of the companies future cash flows. How do you think this would this impact the share price, versus a company that paid out dividends?

[barnaby444]

While paying a dividend may decrease the market value of the company, there is no fixed relationship between stock price and the balance sheet cash account.

So to clarify, you would argue that the exact same company with 100M cash on hand might be worth more than the exact same company with 200M cash on hand, because the market does not know how to value cash on a balance sheet?

You are confusing book value with market value.
[...]
For some companies, having a large cash account might increase its market value, because investors would perceive that cash being turned into purchasing profitable businesses (e.g. Berkshire).

Sideline cash for future investments might have a market value != book value, but cash already earmarked for dividends (i.e. between the dividend announcement and ex date) doesn't. And cash expected to be earmarked for dividends from a company that pays a consistent dividend is also close enough to the latter case.

How can you, as a single individual among millions of market participants, assign a market value to one part of a company's balance sheet? Market participants will value it however they do and unless you are a significant player in the market, you will receive that market price, in total, made up of its various constituents, as you stated, priced by the market.

You know how you can value a treasury bond, which is a series of cash flows over months or years, using a simple formula, and match the market price within a tiny variance, even though you're only one market participant among millions? Well, the same is true for company cash earmarked for a dividend, except it's even simpler than a bond, because it's only one cash flow coming in a few days. It's inconceivable that the market will value it at any amount other than face value, just like a T-bill set to mature in a few days.

Market maker A replies "That dividend did not represent funds that we intended to use to generate our projected income from operations, the present value of whose future cash flows equate to $100 per share."

This is nonsense, because even though the $1 dividend didn't reduce Acme's ability to generate future cash flows, before it paid the dividend, it was worth those future cash flows plus $1, and now it is only worth the future cash flows. If you believe that $1 payout doesn't affect the value of the company, then you believe in free money.

The primary source of valuation of any typical larger company will come from its projected future cash flows, not its current balance sheet items.

Primary, but not only. The $1 dividend drop may indeed get obscured by other factors causing larger price fluctuations at the same time. This is where you are getting confused. Just because the $1 price decline is small doesn't mean it didn't happen. Even after all other factors are priced in by the market, the company is still worth $1 less than it would be if it still had the $1 on it's balance sheet. There is simply no logical way around that.

[barnaby444]

All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

Perhaps I'm missing something, but why is it that there needs to be a debate over whether dividend payers tend to be better investments?

A lot of people invest in a lot of different things (international stocks, REITs, bonds, gold, etc.) without "proving" that they're better investments than US total stock market. Heck, I invest in some of those, and not only have I never "proved" that any of them are "better" than US TSM, I don't even have any expectation of them outperforming US TSM in the longer term. I just consider them as having different characteristics and worth owning in their own right.

I think this debate goes on endlessly because people are trying to solve a problem that doesn't exist.

No, there doesn't have to be a debate. There is one, because this is a forum of people interested in discussing and debating topics around investing. Would you go onto a political discussion forum and say "no need to debate anymore, everyone is entitled to their own political opinion and they don't need to justify it"? Bizarre.

[dbr]

All of this leads back to that original point, that the "forced sales = bad" argument has no legitimate place in the dividend debate, and we could instead focus on the legitimate debate over whether dividend payers tend to be better investments.

Perhaps I'm missing something, but why is it that there needs to be a debate over whether dividend payers tend to be better investments?

A lot of people invest in a lot of different things (international stocks, REITs, bonds, gold, etc.) without "proving" that they're better investments than US total stock market. Heck, I invest in some of those, and not only have I never "proved" that any of them are "better" than US TSM, I don't even have any expectation of them outperforming US TSM in the longer term. I just consider them as having different characteristics and worth owning in their own right.

I think this debate goes on endlessly because people are trying to solve a problem that doesn't exist.

No, there doesn't have to be a debate. There is one, because this is a forum of people interested in discussing and debating topics around investing. Would you go onto a political discussion forum and say "no need to debate anymore, everyone is entitled to their own political opinion and they don't need to justify it"? Bizarre.

It should not be a debate, which means weighing opinions and hoping to sway people to agree with you. It should be a discussion which is a quest for facts and the resolution should be a set of facts that are not disputed. If the facts remain disputed most likely it is because there is not enough information or that there are logical errors somewhere along the way. In squirrely phenomena like investing the facts may change over time and that causes a logical error that needs to be fixed by a more complicated analysis and finding more data. Another logical error regarding investing is to treat an unpredictable future as if it is predictable. And so on.

[muffins14]

You are saying you know variable A, but not variable B, yet you know variable C (=A-B).

Not sure how you see that working but let's move out of theory to a real example. Please demonstrate using an actual stock, its dividend, and its price movement what you are saying so we can follow your assertions more easily.

Let’s compare ITOT vs VTI

why did VTI drop on 6/23 when ITOT went up? They are basically identical. VTI went ex-dividend on 6/23

Not sure why you are using a fund instead of a single stock. Also, ITOT owns 2,892 stocks while VTI owns 3,829, so there is that as well.

On the dividend declaration date, can you predict exactly what the share price will be at the start of the ex-dividend date?

The example rhusky shared with the S&P500 should be even more straightforward then. The reason to use a fund is that it’s a good example of two investments that are identical except one pays a dividend at time T and the other doesn’t. So it’s a clear example of how the dividend affects the price when issued. Otherwise its hard to find two stocks that are identical.

I think the answer to your question is that if you know the dividend will be D, then the price on the morning of the ex-dividend date will be:

(Price at close of day before ex-dividend date) - D

so when you wake up on the ex-dividend date, the first price you see is whatever the market is doing plus the above