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you own 1000 shares of xyz at 100 a share so you have 100k for markets to compound on . if we go up 50 % with no div paid you will have 150k .
xyz pays a 10% dividend ..
lets not reinvest just yet
it goes ex div and you have 100k invested .
the div is 10k , so now you have 10k in pocket and over night the value of your investment is reduced per finra rules to 90k and the stock is now 90 dollars a share ....
the stock opens and your stock soars up 50% from the opening price so your invested dollars have grown to 135k invested and 10k in pocket .
now lets have reinvested .
so the 10k dividend buys 111.11 shares at the 90 a share .
you have 1111.11 shares now which have a value of 1111.11 x 90.00 = 100k at the ring of the bell . markets soar and your stock goes up 50% ... guess what my friend , you have the same 150k you had , had the stock not even have gone ex div
Last edited by mathjak107; 12-22-2018 at 01:47 PM..
Both of you let me know if I understand you guys correctly...
Math is saying you’re wrong because when you get a 5% dividend the stock goes down by 5%, so you didn’t technically make anything from that 5% dividend?
Teak or whoever it was is saying you do get the dividend because it always goes back to the pre-dividend price?
it is no different than taking the 5% out of a portfolio of non div payers . you pull out 5% . your balance is reduced . the market opens and your stock goes up 50% . it is up 50% on the portfolio with 5% less .... if i reinvest at the opening price i have my full portfolio value back , nothing gained nothing lost , then the 50% increase from market action is on the full portfolio value before i took money out .
of course it recovered from the 5% you took out but that 50% compounding markets did acted on 5% less money if i did not invest or on the same dollars if i did ..
the div is no different . the investment in that stock is reduced by the payout , you whole investment is reduced . and the compounding on that money is on the opening balance after the reduction . if markets go up 50% it is on 5% less dollars if you did not reinvest and on the same dollars if you did . .
if you reinvest you will open with more shares worth less equaling your original dollars before it went ex div.
this stuff ain't rocket science . it is simple math yet few understand there is nothing gained by reinvesting a dividend , it only reinstates what you had in dollars prior to the ex div . but what changed is you now start out with more shares at a lower price making up those dollars . market compounding works on dollars invested not the number of shares you have , like a stock split .
to gain an advantage you need to introduce more money and then buy more shares . then you increased your invested dollars . all you did with the div is change the make up of those same dollars you had pre ex div. it is no different then the effect of a stock split .
just think of a fund distribution . it is the same thing . your fund is reduced in price , if you reinvest , it increases by the equivalent shares and you have the same dollars invested at the open the next day for markets to work on . if you pocket the distribution then you have less dollars invested the next day .
Last edited by mathjak107; 12-22-2018 at 01:56 PM..
there is no assumption . it must be reduced by the exchange , it is mandatory before the markets opens , all orders are automatically reduced from where they were lower your starting value . . if you had a 100k the night before , you open with 95k and 5k in pocket if it was a 5% div.
when that market opens and market action pulls it up say 10% that day it is 10% on 95k not 100k . if you reinvested your 5k then it is the same 100k going up 10%
FINRA MANUAL :
5330. Adjustment of Orders
(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01)
it sure does happen absolutely ... the stock can't trade until it has had its value reduced . read the rules the exchanges must follow . it is not money growing out of thin air . it is money being distributed right off the share price .
your dollars the market will act upon must be reduced before the market can act on them . if you pocket the div you have that much less for markets to act on .
think of a mutual fund , it is the same thing .
the funds price must drop by an equal amount . if you reinvest you get more shares , a lower share price and the next morning you have the same dollars , just rearranged . if you don't reinvest the distribution you have less dollars invested as your opening balance is less . if you reinvested then you have exactly the same dollars you had.
funds are no different in how they have to operate .
Both of you let me know if I understand you guys correctly...
Math is saying you’re wrong because when you get a 5% dividend the stock goes down by 5%, so you didn’t technically make anything from that 5% dividend?
Teak or whoever it was is saying you do get the dividend because it always goes back to the pre-dividend price?
Mathjak is correct in that the price of a stock gets adjusted down overnight after the dividend is paid.
I was directing my comments at the poster would said "If the market is flat" or "If the price is flat". "Flat" to me means the price does not change. If you go into the year at a price of $70/share, and you end up the year at $70/share, then the price (market) is flat. Mathjak says that you do not appreciate in value if that is the case; I disagree. If you were reinvesting dividends in that case, then the value would go up even if the price stayed the same.
After a dividend is paid out, the price drops overnight. It does not always go back to the pre-dividend price right away. It could go up, it could go down, it could stay the same. However, the price swings depend upon what people value the company at, not the fact that a dividend was paid at some time in the past.
, you would nope ... you are missing a key point .
it can not be a flat market if the stock price is staying constant and paying a dividend .
without a market that appreciates at least 5% after paying a 5% dividend in the example , you would see the share price fall with each set back less and less . so you need at least a 5% appreciation to offset the price roll back . THAT IS NOT A FLAT MARKET
a portfolio of non div payers would hypothetically be up 5% in share price to match the paying of a dividend and a CONSTANT share price .
Then please demonstrate an example of a stock declining the exact amount of the dividend with no outside factors involved.
I'll wait.
The price does actually decrease overnight after the dividend is paid. I have seen it; however, as soon as the market opens the next day, the price swings begin again due to buying and selling.
Mathjak thinks that compounding works only on the current value of someone's investment, which swings up-and-down daily. Compounding also works on the number of shares.
He is retired and has to withdraw around 3-4% annually; thus he cares about the absolute value at any given time. I understand.
I am not yet retired. I want to grow my number of shares. If the price goes down, that works for me because my dividend reinvestment buys me more shares. However, once I retire, I will probably want the price to go up so that my 3-4% annual sales gets me more.
We talk past each other because we have different goals at this time.
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