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So let me get this straight. I get paid 4x a year for just owning a share of a stock?
What are the advantages owning a stock just for the dividends? Disadvantages?
Some other questions. Been reading a little bit on this.
1. Say I buy $1000 worth of stock X and I get paid 4x a year totalling $50. So now I have $950 worth of stock X? How is that even a payout if you lose it on the front side? Am I reading this wrong?
2. You get paid per share right? Doesn't matter if I buy stock X at $100 and it drops to $50 if I own 2 shares and the dividend is .25 cents a share I get .50 cents regardless?
I'm just not sure if I'm understanding this correctly.
you get paid 4x a year but it does not mean you made any money.
imagine you buy xyz company at 10.00 bucks a share and they pay a 10% dividend. the dividend is an amount paid per share.
for 3 months the profits of the company and investor sentiment keep accumulationg and by the end of the quarter the stock rises to 11.00 ...
they send you 1 dollar as a dividend. the exchanges reset the price as per exchange rules back to the price less the dividend and you start the next quarter at 10 bucks again.
in a nut shell that is how it works.
now let us say same scenerio only the stock price fell the next quarter instead of going up. so you end the quarter at 9.00 dollars a share and you get the same dollar dividend.
in this case you actually are flat and made nothing. you got 1 dollar in dividends but you lost a dollar in share price.
same scenerio but at the end of the quarter the stock is 12 bucks. you get 1 dollar divided and still have an 11 dollar share price after payment of that dividend and your actually up now the dollar dividend and the dollar in share price for a 2.00 dollar gain.
the combination of the 2 is called total return.
my opinion is investing is all about total return , period.
that is why you simply can not buy a stock the day before the dividend is declared and make money.
the actual paying of the dividend is a wash, it is only confirming what already happened so if you did not profit from the rise of the stock all along you will not profit from the paying out of the dividend.
the only difference the dividend makes is the company is proudly displaying the fact they have so much money they don't even need they can give the profits away.
it is just a vote of confidence and because of it they tend to perform better but they can be every bit as nasty or sometimes worse in a down market. especially if they have to cut or suspend that dividend. .
of course we have seen companies on the balls of their ass still paying dividends so really what you want is a history of rising dividends. that can be a real show of health.
the list of blue chip dividend payers that went down the toilet is long and distinguished.
you need to do all your due diligence just as you would buying any investment whether it pays a dividend or not.
Last edited by mathjak107; 01-15-2013 at 03:49 AM..
So let me get this straight. I get paid 4x a year for just owning a share of a stock?
What are the advantages owning a stock just for the dividends? Disadvantages?
Some other questions. Been reading a little bit on this.
1. Say I buy $1000 worth of stock X and I get paid 4x a year totalling $50. So now I have $950 worth of stock X? How is that even a payout if you lose it on the front side? Am I reading this wrong?
2. You get paid per share right? Doesn't matter if I buy stock X at $100 and it drops to $50 if I own 2 shares and the dividend is .25 cents a share I get .50 cents regardless?
I'm just not sure if I'm understanding this correctly.
Let's say you buy $1000 of stock X for $10 a share (ignore commission for now), so you own 100 shares. If the annual dividend is $0.50 per share, you will get $50 paid to you, and you will still own 100 shares. The price per share will go up and down, but you will still own 100 shares. You wealth has not decreased by any amount because you now own 100 shares plus that $50 dividend. Don't listen to people who tell you that a dividend is a wash: it isn't. They confuse stocks with mutual fund shares which are derivatives.
Companies create wealth by buying raw materials (including labor), adding value, and then selling for a higher price. The excess of sales income over expenses is profit. They will pay some of that profit out to you as a dividend and re-invest the rest into the company to make it grow more. It really is a good deal for investors, because we get to own a part of businesses that create wealth through their on-going activities.
you get paid 4x a year but it does not mean you made any money.
Once again you show your confusion by mixing up the fundamentals of mutual fund shares with company shares.
When a mutual fund company pays out the dividends that it has received, the net asset value (NAV) is reduced by the value of the payout. That is because mutual fund company shares are derivatives of the underlying stocks. The price of the mutual fund company share IS the NAV, unless it is a closed-end fund.
A company's shares are priced by the expectations of investors for the future growth prospects of that company. Thus, share prices can JUMP after a company pays out a dividend. That dividend was NEW money brought into the company by its business activities. How can NEW money be a loss to you? Since you consider NEW money to be a loss, why don't you send it to me? I'd be glad to take that loss off your hands.
Wrong,wrong and wrong. You argue this all the time, it is ad nausium already
you are mixing up two different issues.
there is a reduction in value at the opening each quarter by the amount paid out. that is fact , there is no disputing the drop in share value it is mandatory by finra and exchange rules..
when the issue opens the next morning it is reduced by what was paid out just like a fund would be.. after the open the markets take the stock on a roller coaster ride all quarter and where it ends at the end of the quarter is anyones guess. the share price may be lower then the beginning of the quarter or it may be higher
next quarter the dividend is paid out , the price adjusted downward and markets take it back on the ride for next quarter.
the mechanics of a fund and the stock are both the same. the morning after the dividend is paid and and the stock opens for trading you are not richer or poorer after the payout. your total value in that issue is exactley equal with the close prior to the payout.
Believe what you want but here are the rules in writing from finra.
Dividends are distributions of cash (mostly) that companies pay out because they have nothing better to do with it, they can change it at will, they can raise it, lower it, stop it or give a one time distribution such as many did at the end of 2012.
If you own a hundred shares of AA (Alcoa) and they issue a $1 dividend you get $100 every year, they can distribute it once per year or once per month, or anywhere in between.
You will pay taxes on that money, it can be reinvested if you wish through your broker or you can get paid out on it.
One of the disadvantages is that many dividend stocks tend to be older companies that do not rise in value as much as some others.
Many dividend chasing people/companies/funds, choose companies such as Altria because of their rock solid business model. Others choose REITS which can have as big as a 15% yield, however these days REITS can have big swings.
You are going to come across the yield when you look into dividends, these are the percentages of dividend to stock price, as the price goes up the yield goes down, and the other way around.
If you are looking for quick money dividend plays are not the way to go, if you have a few million and your looking for income dividend plays are the way to go in many cases.
That dividend was NEW money brought into the company by its business activities. How can NEW money be a loss to you?
The new money isn't a loss. If a company makes $100,000 during a quarter, the company is now worth $100,000 more, and that extra money should be reflected in the share price by the time the ex-date rolls around. Then the company pays that money out as a dividend, the exchanges reduce the share price by the amount of the dividend, but you've still benefited from the new money. Of course, if the company HADN'T paid out the new money as a cash dividend, your benefit would have been the same--it's just that your gain would have come from the increase in share price instead.
Therefore, as Mathjak 100% correctly said, the dividend itself is a wash. It's a company's EARNINGS that make you money. Whether those earnings are paid to you in cash or left in the stock price is immaterial.
BTW, many people think that there is no ex-date dividend adjustment because they don't SEE the stock drop by the exact amount of the dividend. You often WON'T see that. Reason: If, for example, XYZ ends the trading day Wednesday at $10, then there's a $1 adjustment down to $9 after the close, then during the night market sentiment drives the price back up $1, XYZ will open on Thursday (the ex-date) right back at $10--the same price it closed at the day before. It looks to the uninformed like there was no adjustment, but there clearly was. If the adjustment HADN'T taken place, the stock would have opened at $11 instead of $10.
And if you still don't believe that the share price is adjusted down on the ex-date (despite every reputable source on the 'Net telling you they ARE), check your broker's order entry page and you may find (if your particular broker offers it) a DNR (Do Not Reduce) option on your limit orders. Why do you think this exists?
The new money isn't a loss. If a company makes $100,000 during a quarter, the company is now worth $100,000 more, and that extra money should be reflected in the share price by the time the ex-date rolls around. Then the company pays that money out as a dividend, the exchanges reduce the share price by the amount of the dividend, but you've still benefited from the new money. Of course, if the company HADN'T paid out the new money as a cash dividend, your benefit would have been the same--it's just that your gain would have come from the increase in share price instead.
Therefore, as Mathjak 100% correctly said, the dividend itself is a wash. It's a company's EARNINGS that make you money. Whether those earnings are paid to you in cash or left in the stock price is immaterial.
BTW, many people think that there is no ex-date dividend adjustment because they don't SEE the stock drop by the exact amount of the dividend. You often WON'T see that. Reason: If, for example, XYZ ends the trading day Wednesday at $10, then there's a $1 adjustment down to $9 after the close, then during the night market sentiment drives the price back up $1, XYZ will open on Thursday (the ex-date) right back at $10--the same price it closed at the day before. It looks to the uninformed like there was no adjustment, but there clearly was. If the adjustment HADN'T taken place, the stock would have opened at $11 instead of $10.
And if you still don't believe that the share price is adjusted down on the ex-date (despite every reputable source on the 'Net telling you they ARE), check your broker's order entry page and you may find (if your particular broker offers it) a DNR (Do Not Reduce) option on your limit orders. Why do you think this exists?
The key point is that ordinary investors never see the drop in price since stocks are traded continuously whereas mutual funds are priced only at closing and so it is easy to see the drop in price due to a payout. I think that it only confuses potential dividend investors when they are told that the dividend is a loss to them. Dividends are a part of earnings which is new money.
According to finance theory, stocks are priced by taking the expected dividend stream and discounting that back to the net present value by an appropriate discount rate. So, in theory, a stock needs a dividend stream to determine its value whereas non-dividend payers are priced purely on sentiment. "Show me the money!" is the proof. I see people slamming dividend-payers all the time, but there are companies out there that have been consistent over decades and I trust them more than I do a dot.com company that is mostly hype.
The game is not over in either case in that one day whether a stock or a fund.
the pointer is set back each quarter and the bar lowered. From that point the stock or fund goes on the roller coaster ride the rest of the quarter. That will ultimatly determine your total return at the end of the quarter whether a fund or stock.
In both cases your gains are already reflected in the share price right up until the dividend is payed.
Once its paid your net worth has not changed 1 penny.
That is why you simply can not buy a stock the moment before it pays the dividend and profit once it is paid.
That part is a zero sum game. Where markets take it for the quarter after the pointer is reset is anyones guess.
No one is questioning the fact that a dividend payer may be a healthier company.
It is only the mechanics of what and how the dividend works.
many of the financially ignorant out there think a dividend is like bank interest and the day it is paid you are up by that amount over the night before.
You are not. You are at the same worth you just had and that is important to understand.
I will bet the op thought he had the closing share price plus the dividend each quarter for a whopper of a deal. But alas you don't get both.
What you get is cash in hand and a share price reduced by the same amount.
Last edited by mathjak107; 01-21-2013 at 07:00 PM..
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