DIvidends

[FIRE'd@51]

now as i always say the paying of the dividend itself is a zero sum event as the stock price by exchange rules must be adjusted downward by the same amount. what makes a dividend paying stock a good thing is when you get the dividend and the stock recovers from the drop and goes higher.

It's a zero sum game for an instant at the opening of trading on the day the stock goes ex-dividend. The specialist marks all the orders he has in his book from the previous day (buy & sell) down by the amount of the dividend to reflect the fact that the person who bought the stock the previous day gets the dividend and the one who buys on the ex-date does not.

 

[Nords]

now as i always say the paying of the dividend itself is a zero sum event as the stock price by exchange rules must be adjusted downward by the same amount.

No, it doesn't.

You've quoted some rules regarding open limit orders but you haven't found any exchange rules regarding dividend pricing. The people trading the stock generally pay less for it after the dividend, unless they think there's another reason that they should pay more or less. But the market makers don't drop the price at the open according to any "rules" other than the way their buy/sell orders are stacking up, and you haven't come up with any other authority to validate your belief.

You're correct that the Dogs of the DOW are mostly paying high dividends because their share prices suck. However a dividend investor is more likely to use a Mergent's Dividend Achievers index instead of the DOTD.

 

[mathjak107]

not to beat a dead horse but if the exchange rules drop all the offers by the amount of the dividends then all sell orders at the open will be executed at that lower level causing the price to drop.

im curious why you see this as not a price drop?

 

[FIRE'd@51]

not to beat a dead horse but if the exchange rules drop all the offers by the amount of the dividends then all sell orders at the open will be executed at that lower level causing the price to drop.

im curious why you see this as not a price drop?

It's really only reflecting the time value of money. The theoretical value of a stock is the present value of all it's future dividends. As the first dividend (and hence, the entire payment stream) comes closer, the stock price will drift up to reflect the time value of money. Once the dividend is received, the whole payment stream moves back out 91 days (if the dividend is paid quarterly). In other words, if you are buying that payment stream, you will pay a bit more if the first dividend is tomorrow, rather than 91 days out. After the dividend is received and the stock price drops reflecting the dividend, the stock begins its upward drift toward the next dividend. If the dividend is growing, the drift this time will be slightly higher reflecting it's growth. Granted this drift is largely unobservable in the short run because of fluctuations in the price of the stock due to other factors, but it is there nevertheless and would be observed in the absence of these other fluctuations. Of course, over time it's what causes the long-term upward drift we observe in stock prices.

 

[mathjak107]

i would agree with that logic . however it leads us back to square one, you had a higher price before the dividend, a lower price after the dividend hense at least at the open you are back to your origional value.

what happens next is the markets action, it could be up it could be down . its no different than say a berkshire hathaway where all quarter its accumulating interest and dividends on its own investments so the company is worth more and more. now they dont pay a dividend so at the end of the quarter that too would be reflected in its value only they retain that extra value and dont pay it out.

 

[FIRE'd@51]

i would agree with that logic . however it leads us back to square one, you had a higher price before the dividend, a lower price after the dividend hense at least at the open you are back to your origional value.

Yes, and everything else being equal, this is where you would expect to be.

what happens next is the markets action, it could be up it could be down . its no different than say a berkshire hathaway where all quarter its accumulating interest and dividends on its own investments so the company is worth more and more. now they dont pay a dividend so at the end of the quarter that too would be reflected in its value only they retain that extra value and dont pay it out.

Yes, and if you reinvested the dividend at the opening at the ex-dividend price, you would be (in the absence of tax effects) in exactly the same position from a value point-of-view as if the dividend hadn't been paid. You would own more shares at a slightly lower price, but with the same market value at that instant.

 

[mathjak107]

the thing in favor of dividend paying stocks is that in berkshire you are subject to the markets and earnings. true you may be up from all the accumulated dividends and interest that was never paid out but an earnings report that falls short may punish it severely taking away all the gains where at least you got something in a dividend pay out. if you re-invest then your in the same boat together.

 

[Zathras]

While the stock prices can take serious hits due to a bad earnings report the dividend rarely does. This is why dividends work so well. The volitility of your payment is minimal. If you have a 1000 shares of a dividend that pays $1.00 a quarter and the stock price is $100 when you buy it, you make $1000 a quarter. If the stock has a bad earnings statement, you still earn $1000 that quarter.

The stability is not due to the fact it is a dividend, but more to the fact of the type of companies. If you invest in companies with low debt, lots of cash and a good rate of dividend growth it is much more reliable than smaller companies.

The value of my MMM stock has gone down 7% ytd. The dividend has grown. As long as I don't sell, the loss means absolutely nothing to me. Granted, if the stock continued down for years I would be in trouble which is why you look for long term growth and stability.

If you do reinvest your dividends, not only does your value not take the minor hit on the ex date, but you have increased your number of shares so your dividend payment goes up automatically

 

[mathjak107]

like you said zathras the key to dividend investing is to make sure the companies actuallly raise the dividends and not just have a high yield because their price has fallen so much and the dividend hasnt risen.

dvy is one of my favorite etf's as thats what they look for

 

[JohnEyles]

When yield is quoted for a mutual funds, does it include capital-gan distributions,
or just ordinary dividends ?

Seems logical that it would include both, but everything I've seen just mentions
dividends.

 

[youbet]

When yield is quoted for a mutual funds, does it include capital-gan distributions,
or just ordinary dividends

Just dividends

 

[wabmester]

When yield is quoted for a mutual funds, does it include capital-gan distributions, or just ordinary dividends ?

Seems logical that it would include both, but everything I've seen just mentions dividends.

Good question. I believe this is regulated by the SEC, but I'm not sure that the SEC is explicit about the definition of a "dividend." For example, many CEF's report an artificially high yield by return of capital. You can find the return of capital in their SEC filings, but it still shows up as part of the reported yield.