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A group of us were sitting around the Senior Center and the conversation turned to money.
Everyone was talking about their high dividend stocks and how great it was to get that extra income every quarter. I tried to tell them that the dividend was basically an accounting gimmick and it's benefit was more psychological than real.
Everyone around the table told me I was wrong. They said that a stock dividend was basically the same as interest on money in the bank, but generally paid quarterly vs monthly. How they saw it was the dividend per share was extra income paid by the company to the shareholders. A return of the company profits to shareholders.
I told them that that was only partially right. But it was not real additional income like interest on a bank account. I told them if they had $1000 in the bank and if the interest was 2% their bank balance would be $1020.00 after the interest was paid. But if they got a two percent dividend, the value of the stock would drop 2% the day of the dividend. The cost per share would go from-for example- from $1000 a share to $980.00 a share. If the dividend is reinvested in the stock, you now have more shares but each share is worth 2% less in this example, so at the end you have exactly the same amount of money. Unlike your bank account where you actually have two percent more due to the interest payment.
I did tell them a dividend stock may have advantages because many people think it is like interest and having a dividend may show the company is doing well.
No matter how hard I tried to explain it, no one would believe me and I gave up. Included in this group, were men who had been investing in the stock market for years and years!
Last edited by Curious Investor; 01-09-2017 at 08:57 AM..
A group of us were sitting around the Senior Center and the conversation turned to money.
Everyone was talking about their high dividend stocks and how great it was to get that extra income every quarter. I tried to tell them that the dividend was basically an accounting gimmick and it's benefit was more psychological than real.
Everyone around the table told me I was wrong. They said that a stock dividend was basically the same as interest on money in the bank, but generally paid quarterly vs monthly. How they saw it was the dividend per share was extra income paid by the company to the shareholders. A return of the company profits to shareholders.
I told them that that was only partially right. But it was not real additional income like interest on a bank account. I told them if they had $1000 in the bank and if the interest was 2% their bank balance would be $1002.00 after the interest was paid. But if they got a two percent dividend, the value of the stock would drop 2% the day of the dividend. The cost per share would go from-for example- from $1000 a share to $998.00 a share. If the dividend is reinvested in the stock, you now have more shares but each share is worth 2% less in this example, so at the end you have exactly the same amount of money. Unlike your bank account where you actually have two percent more due to the interest payment.
I did tell them a dividend stock may have advantages because many people think it is like interest and having a dividend may show the company is doing well.
No matter how hard I tried to explain it, no one would believe me and I gave up. Included in this group, were men who had been investing in the stock market for years and years!
For one thing...... 2% of $1000 is $20...............not $2
I suspect that it is a waste of energy to try to explain anything related to finance to ordinary run-if-the-mill people. You have to care enough to learn how it works and few people are interested enough to put in the time and effort.
Most likely, your group at the senior center turned their funds over to a broker and they don't follow what is going on; they just clip their coupons.
I'll be honest, I'm guilty of this kind of thinking. While I know what you talking about in theory, in realty for me even thought the stock price falls, it also recovers. Currently the stock price is slightly higher than what I paid for it and I have cash dividends that I've also collected all this time. I suppose I could invest in a stock with no dividends and sell some when it's high, but then I have to pay brokerage fees that eat into any money I would have made (and I've only got a few thousand in individual stocks paying dividends... and yes, I did that instead of a lower interest bank account as a long term investment).
I own a mutual fund that matches the Total Stock Market. One day in December I noticed the price of the mutual fund had dropped close to two percent on a day the stock market was basically unchanged. I looked into it and found it was the day the large end of the year annual dividend was paid.
I suspect that it is a waste of energy to try to explain anything related to finance to ordinary run-if-the-mill people. You have to care enough to learn how it works and few people are interested enough to put in the time and effort.
Most likely, your group at the senior center turned their funds over to a broker and they don't follow what is going on; they just clip their coupons.
Yes, this. Most people are financially ignorant and you can't tell them a thing.
Even Money Magazine and Kiplingers call dividends "income." So I can see why my friends at the Senior Center were confused and refused to believe me.
To me, a dividend is a forced sale of percentage of your stock, you may end up paying taxes on and is not "income." (Maybe it is down from when you bought it- how can that be called income?)
It is understandable. I did not realize it until several years into investing and I have some very smart friends who think dividends are some sort of free money.
If your friends do not really care about their net assets, then effectively it is the same as interest payments since they get a check every month (or quarter). In fact it is better - a bank account (and a bond, or CD) will have a fixed principal amount which of course erodes in real value due to inflation. But a dividend paying stock the NAV of the stock is not fixed and will grow over time. Of course its growth is limited because money is being bled off to pay those dividends, but the NAV of dividend funds do grow and usually at or above the inflation level.
As a retired person, the main thing I like about dividends is it allows me to get cash out of my ETF portfolio on a scheduled basis without selling an unvestment at a loss in a bear market.
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