Originally Posted by lhamo
But I'm having a hard time understanding how they really benefit us, given that the price of the shares adjust immediately to reflect the dividend.
Also having trouble understanding how a dividend-oriented investing strategy actually works given this situation.
Appreciate any enlightenment anyone can offer about how this all works.
While we're watching that pig-wrestling contest about how stock prices are valued ex-dividend, let me mention the value of the asset class.
The theory is that a company's dividends represent a measure of accounting truth. You can do all sorts of legitimate tricks with GAAP to dress up your income and your expenses, and there are plenty of fraudulent tricks to make it even better, but if you're going to pay a dividend then it's very difficult to lie about it.
Companies paying dividends are also acknowledging that they have no clue how to put the money to better use. That's refreshingly honest, because most companies with excess cash tend to go on acquisition sprees or to buy back their stock at high prices. A company paying a dividend is claiming that they've already allocated all of the cash they need and they're giving the rest back to their valued shareholders.
Finally there are lots of companies who put their credibility into paying dividends. There are all sorts of superlatives to describe their accomplishments, but basically if a company has a long history of paying dividends (and raises them at least at the rate of inflation) then they're considered good long-term investments... right up until the microsecond they cut their dividend.
I wouldn't put all of my asset allocation in dividend-paying stocks. (Berkshire Hathaway owns plenty of dividend-paying stocks, yet has not paid a dividend in over 40 years.) However even if dividends are taxed at higher rates, they're still a good measuring tool for identifying stocks that should demonstrate a measure of stable future value.
We let our dividends pile up in a money-market account until a buying opportunity comes along-- usually rebalancing. Or we spend them!