How do dividends work?

[mathjak107]

I agree with you that dividends put the job of doing the right thing on the investor ... the investor has to decide whether to put that money right back in to the same company as a reinvestment or look for better opportunity elsewhere

[mathjak107]

Originally Posted by GeorgiaTransplant

What you just described-appreciation just replacing or slightly surpassing dividend yield-was clearly what BMI meant by 'stay flat'. I seriously doubt anyone looks for a company which is paying dividends into oblivion, rather one whose growth and free cash flow is sufficient to cover the planned dividends plus leave 'enough' to continue growing the company. It's at least part of what I look for, because all other things being equal, some investors prefer to extract total return as both dividend and growth.



Part of my hangup on this is that my time in the government, I saw what happens to yearly budgets and projects when there is no perceived accountability by managers. Lip service is paid to 'conserving money', and almost nobody does it. Instead, they 'fight for their budget' (even if a lower budget is enough), and 'create initiatives' (even if everything is just fine and an initiative only confuses the situation). I think it's likely to be exactly the same in a corporate environment. Dividends put the control on the investors, not on the corporation to intelligently use retained earnings.

Unfortunately companies do pay dividends in to oblivion whether there are profits to justify it or not ... the failed blue chip graveyard is filled with stocks who paid dividends right up to the point of financial difficulty trying to keep the company from taking a bigger hit by adjusting or eliminating the dividend ....payouts have nothing to do with profits or not .. they are just an amount of investor capital returned that is agreed on by the board whether they made money or not.

Many blue chips should have cut or suspended payouts in retrospect way before they failed and it was a poor decion not to

[BMI]

Originally Posted by mathjak107

Nope I never said I only like growth .. I have no preference ...if total return is good ,it’s good ...if it pays dividends and total return is poor it’s bad.. I own both..

The stock can never pay out a nice juicy dividend and stay flat without appreciation just by design .. .. the price must appreciate at least the amount of the dividend for the total return to equal the dividend . That would make the share price gain back the reset amount so it appears flat .

So a stock that pays a 7% dividend has the share price reduced by that amount of dollars ... to recover back to where it was takes appreciation of equal amount . Then you see a 7% total return and the stock goes back to the price it was..

If the stock saw no appreciation it’s total return would be zero , you would have a 7% dividend and a share price reduced by equal amount equaling zero return..

A growth stock that goes up 7% and has those dollars drawn out is the same as a dividend stock that appreciates 7% and has the dividend kept

Yes, a mix is best. Which is what I have.

High paying dividend stocks.

Growth stocks with no dividends.

ETFs

Mutual Funds

Term deposits...just collapsed most of my ETFs and placed the cash into GICs (same as CDs in the US)
I’m getting 3% for one year...which is not too bad....with zero risk...of course I preferred the old days
of 6% plus ...and the real old days of 10%

[mathjak107]

Had I planned better I would not have used as many dividend paying funds as I did going in to retirement .. the lack of control I had over the payouts cost me a lot of money in aca subsidies from 62 to 65 .. poor planning and lack of foresight on my part as I learned to late tax wise to make changes .

With aca plans running as much as 1400 per month per person having unwanted distributions forced on you can be quite hurtful ... live and learn..

One of the posters in the forum had a great plan ... they controlled the fund distributions carefully and used a heloc to support them until Medicare ..

They had 90% or so of the 1400 a month aca costs subsidized while paying a fraction of that in interest ... a very smart move ..... once they are Medicare age they will pay off the heloc ..... nice

[mathjak107]

Originally Posted by BMI

Yes, a mix is best. Which is what I have.

High paying dividend stocks.

Growth stocks with no dividends.

ETFs

Mutual Funds

Term deposits...just collapsed most of my ETFs and placed the cash into GICs (same as CDs in the US)
I’m getting 3% for one year...which is not too bad....with zero risk...of course I preferred the old days
of 6% plus ...and the real old days of 10%

Those days of old at 10% were at negative real returns and you were behind every year as inflation went higher ..no thanks .. it was only a bet rates would fall while the cds were still in effect.. for many that just did not happen as the cds bought less and less.

We are better off with lower rates and positive real returns