Confused about dividends/ex-dividend stock prices

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lhamo

Recycles dryer sheets
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We now have a substantial amount in our retirement accounts, so our annual dividend payments are pretty substantial as well. 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. So on one of our accounts, the dividend payout was over $4000, but the value of the stock has decreased accordingly so the overall value of the account is more or less the same pre- and post-dividend. Obviously we now have more shares, so those will benefit from increased stock values in the future, but seems a bit like we haven't really earned anything from this dividend payout.

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.
 
Does it really matter what the share value is if you are not selling it? As long as the dividend keeps coming, it is generating income. During accumulation, a DRIP will enable you to purchase more shares at the ex-dividend price, thereby growing your base.....and hopefully your dividends too. Assuming the secular trend over time is for a gradual increase in the share price, your capital should gradually increase, albeit with small steps backward coincident with dividend payouts.

At least that's the theory! It only works if the companies you invest in are continuing to generate value.
 
the paying of the dividend is no different then a mutual fund dividend, it's a zero sum event.

the gain actually happens to the the share price all along up to that point of going ex dividend.

the profits are sent out to shareholders, the share price is reset lower to offset the dividend and the process starts over.

thats why you can not buy just before a dividend is paid and get the dividend and think you will be up because of the dividend.

so as an example in its simplest form :

you buy xyz company which pays a 4% dividend for 10 bucks. its value from profits and invester sentiment bring it to 10.40 by years end. they send you a .40 cent dividend, the price is brought back to 10 bucks and it starts all over again.
 
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Mathjak has it - say on 01/01/12 you had ONE share @ $10. During the year it rose to $10.40 based on the earnings and anticipation of the upcoming annual dividend. When the div is declared, the stock goes back to around $10 (where you STARTED 01/01/12 at), but YOU now have the additional 40 cents. (b-t-w. NOT .40 cent - right Mathjak? I don't THINK you meant the he gets just under 1/2 of a penny!! LOL). If you have a DRIP, you take that 40 cents and purchase another partial share, OR without a DRIP you go buy.... what ever for 40 cents.
 
Dividends are somewhat of a pain. Especially when they are taxed at a higher rate than capital gains. On the bright side, at least some of the companies you own are doing well enough to hand out dividends. If it weren't for dividends it would be tough to make a case for investing at all. It's the main way companies return money to investors. If a company grew large, made lots of stuff, and then when bankrupt 20 years later without ever paying a dividend why would anyone want to invest in it?

Sounds like you are a natural "total return" investor. Looking at total value with dividends reinvested. That may also mean you don't mind selling a few shares when needed for income if the dividends don't provide all you need.

To my mind one of the primary benefits of dividends is that they can be more stable than stock prices. So during 2007-2010 your dividend income probably wouldn't drop as much as your portfolio value. That can be handy when you're making regular withdrawals.
 
Generally, stocks have fixed dividend value of $X.YZ per share. It could be for example $0.40 per share. This value is the value no matter what the price of a share is. You can look at a chart with dividends plotted as well. Take MO for instance: MO Chart Altria Group Inc. Stock Chart One hopes the dividend value increases (and does not decrease) over time.

So if you buy more shares with your dividends, you will get more dividends in the future even if the stock price is flat kinda like a savings account where $1 is worth $1 but your dollars keep increasing each year if interest is re-invested.

Stock mutual funds are a little bit different. And bond mutual funds that pay a monthly dividend are a little bit different as well. If you use a "growth of" chart at Morningstar.com then you will see the growth of your investment with dividends re-invested.

Yes, in a non-tax-advantaged account dividends can be a pain because you have to pay taxes on them while unrealized capital gains are not taxed.
 
animorph dividends were slashed like crazy in 2008-2009 . the 4th quarter of 2008 saw 288 companies cut payouts, in 2009 another 804 dividends were slashed .

thats a horror if you have to make up the short fall in income because you are living off dividends directly. you may have to sell a bunch of shares at a loss just to keep the same level of income.

that will generate even less income hurting you even more.

the worst mistake folks make is not looking at total return and going if im not selling it does not matter.

if your living off cut or suspended dividends it matters very much.

look at dvy the carefully screened etf of only the best dividend payers .

the darling of wall street fell more then 50% in 2008-2009 along with slashed dividends.

always think total return. it is great getting dividends but if the total return is lacking , well crappy performance is crappy performance.
 
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LOL! said:
Generally, stocks have fixed dividend value of $X.YZ per share. It could be for example $0.40 per share. This value is the value no matter what the price of a share is. You can look at a chart with dividends plotted as well. Take MO for instance: MO Chart Altria Group Inc. Stock Chart One hopes the dividend value increases (and does not decrease) over time.

So if you buy more shares with your dividends, you will get more dividends in the future even if the stock price is flat kinda like a savings account where $1 is worth $1 but your dollars keep increasing each year if interest is re-invested.

Stock mutual funds are a little bit different. And bond mutual funds that pay a monthly dividend are a little bit different as well. If you use a "growth of" chart at Morningstar.com then you will see the growth of your investment with dividends re-invested.

Yes, in a non-tax-advantaged account dividends can be a pain because you have to pay taxes on them while unrealized capital gains are not taxed.
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stock prices really can not stay flat . if they do not rise at least as much as the dividend payout then your really not seeing a full dividend in effect and may even be behind.

they may end up flat after the dividend payout and your fine as the process starts over but they have to have been up prior or your total return is down.
 
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If I may... what Mathjak is alluding to in post #8 is that your TOTAL return is the dividend PLUS any increase in stock price from time to time ***OR*** LESS any DECREASE in stock price from time to time. THAT IS, you may make MORE then the dividend payout ##OR# you may STILL lose money in spite of receiving a dividend. Divs are ONE component of earnings. Prices move for a variety of reasons - dividends being ONE. General economic news, INDUSTRY specific news, COMPANY specific news, among others.
 
mathjak107 said:
thanks teach!
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hmmmmmmm....actually I DID some accounting / finance teaching. Lots of fun. There is nothing like "seeing the light go on" when a student "gets it". You would SWEAR you are saying the same thing over and over... but perhaps ONE WORD is different or an emphasis, or word order or SOMETHING then- BAM. It is good.
 
Thanks for the explanations, everyone. I guess this makes sense. Ultimately it is the increasing # of shares that matters, along with a steadily increasing per-share value. I should have been more precise -- I am actually looking at mutual funds, not individual stocks, but the principal is still the same.

Looking back I can see that when we initially bought into this particular fund (which is a target retirement fund held in a 403b) we had roughly 20,000 shares at roughly 7.75/share (this was back in fall 2009). Now with additional investments and reinvestment of dividends/capital gains, we have over 25,000 shares at a value of roughly 10.00/share. The dividend reinvestment prices over the last four years have been:

2009: 8.84
2010: 9.16
2011: 8.82
2012: 10.07

So overall, the trend in the share price has been upward, though there was a little dip in 2011. Which allowed us to buy back more shares when we reinvested the dividends/cap gains.
 
So, a quick back of the envelope calculation shows that your investment has increased in value by ~$95K in 3 years, which is an arithmetic average of 20% return per annum. That looks pretty good to me!
 
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Meadbh said:
So, a quick back of the envelope calculation shows that your investment has increased in value by ~$95K in 3 years, which is an arithmetic average of 20% return per annum. That looks pretty good to me!
Click to expand...

Well, this is DH's 403b and includes his max contribution each year (17k + 5500 catchup), as well as a 2% employer contribution on top of that, so agood portion of the gain is from additional investments. But yes, our account balances have grown nicely during the recovery. This year has been particularly dramatic on all fronts (net worth, which was already substantial at the beginning of the year, is up roughly 20% overall).

I am actually starting to have very itchy RE feet, DH not quite there yet. A bit ironic as he is 10 years older than me. I think we should be in very comfortable RE range in another 5-10 years, which is still a very early retirement for me (I'll be in the 50-55 range). We'd probably be fine chopping off the golden handcuffs now, but both of us have decent jobs that aren't too stressful, so we'll keep them a bit longer. We only really started our professional careers a little over a decade ago, after we both finished Ph.D.s, so it isn't like we've been slogging away at work that long (grad school was pretty fun/rewarding for both of us). And I am also wary of retiring or semi-retiring until we get a sense of what health insurance costs will be under the exchanges. That is a big piece of the puzzle that is still a bit unclear.
 
lhamo said:
Thanks for the explanations, everyone. I guess this makes sense. Ultimately it is the increasing # of shares that matters, along with a steadily increasing per-share value. I should have been more precise -- I am actually looking at mutual funds, not individual stocks, but the principal is still the same.

Looking back I can see that when we initially bought into this particular fund (which is a target retirement fund held in a 403b) we had roughly 20,000 shares at roughly 7.75/share (this was back in fall 2009). Now with additional investments and reinvestment of dividends/capital gains, we have over 25,000 shares at a value of roughly 10.00/share. The dividend reinvestment prices over the last four years have been:

2009: 8.84
2010: 9.16
2011: 8.82
2012: 10.07

So overall, the trend in the share price has been upward, though there was a little dip in 2011. Which allowed us to buy back more shares when we reinvested the dividends/cap gains.
Click to expand...

Would you care to share how much in additional investments you added across that period?

22.5K per year * 4 (or maybe 5) plus the 2% employer match, I guess.
 
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It is a little complicated because we didn't get around to having this be DH's default investment until February this year -- that was when I finally managed to get him to fill out the form to change his allocation. Prior to that, both his contributions and his employer contribution were being put into two other funds. So the transactions look something like this:

August 2009: Initial exchange from the two other funds of $116,880 (this was basically the balance of what he had contributed since 1999 -- down about $80,000 from the peak in March 2008)


August 2010: Second exchange of $23,880 (= his contributions/employer contribution + any cap gains/dividends and appreciation on the other two funds in the last year, though it looks like there wasn't much...)

November 2011: Third exchange of $28,413


His contributions from February 2012 to date are $19,250. Employer contribution in the same period is $1336


Since we started investing in this fund we've had a total of $14342 reinvested in dividends and $5127 in capital gains.


I miscalculated the ex-dividend price above. 10.07 was the purchase price pre-dividend on 12/15. Ex-dividend price is only 9.76.


Sorry these figures are so messy -- glad everything is simplified and we are now just putting all the contributions into this one fund. that will make it easier to figure out in the long term.
 
lhamo said:
I should have been more precise -- I am actually looking at mutual funds, not individual stocks, but the principal is still the same.
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Not quite the same. With mutual funds, the sum of (current income -operating expense) plus net st and lt captial gains must be paid out by end of year. It is usually not decalred until sometime in December, but this is not because the fund had any real discretion, it's because of bookkeeping needs.

OTOH with stocks, the holder has no right to a given dividend, or any dividend at all, until it is declared by the BOD. The company may have had a great year, but they can decide to buy-in shares (while conveniently issuing options or bonus shares to management}, or to do whatever they think they can get away with with that cash.

Ha
 
the reason for the distribution or even if there is to be one may be different but the mechanics of the distribution stay the same .

once the distribution is made amex rule 132 and nyse rule 118 have the open limit orders lowerd by that amount and the stock goes into play at the open just like the fund at the now reduced price.

where it goes from there by the end of the next quarter is anyones guess.
 
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mathjak107 said:
the reason for the distribution or even if there is to be one may be different but the mechanics of the distribution stay the same .

once the distribution is made amex rule 118 and nyse rule 132 have the open limit orders lowerd by that amount and the stock goes into play at the open just like the fund at the now reduced price.

where it goes from there by the end of the next quarter is anyones guess.
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Well suit yourself. If you are happy, I am happy. :)

Too bad there are not fact checkers on the internet, but hey, it's believer beware, and that is after all a pretty good rule

Ha
 
lhamo said:
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.
Click to expand...
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!
 
it is not just paying dividends thats key but a history of rising dividends. that is proudly proclaim look at me, i got so much money i can give it away.

it is a vote of confidence for the companys health.

i say rising dividends because as we saw companys on the balls of their butt will not cut dividends sometimes for fear of mass selling.
 
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