Question about dividends, part 2.

[David1961]

First of all, thanks for all the replies to my previous question about dividends. Maybe I need to take a class or read a good book on how the stock market works, because it seems the more I study the market and think I understand it, the less I actually do. Here's my question. The way I understand it, most stocks only have a specific number of shares outstanding. So if I want to buy 100 shares of XYZ, an existing shareholder must be willing to sell his/her shares to me. And if I want to sell 100 shares, someone must be willing to buy them. The price per share is dependent on supply and demand – if more people want to buy the stock, the price goes up. If more people want to sell the stock, the price goes down. When companies distribute dividends that are reinvested, isn’t this the same as the existing shareholders buying the additional shares? (which would normally make the share price go up since all these folks are buying more shares at once?) Who is selling these shares, or are the additional shares just created? If a company has, say, a million shares outstanding before they declare dividends, do they still have that many shares afterwards? Or are additional shares created to accommodate for the lower share price after the dividend distribution?

[kaneohe]

just a guess...........they come from shares the company owns. If the company doesn't have enough, the company will have to buy them from existing shareholders. You sometimes hear about a company buying back stock because they don't have a better use for their cash .........that tends to make earnings/share higher since there fewer shares in the denominator.

[braumeister]

Your confusion seems to stem from the perfectly reasonable assumption that all the shares in a company are owned by outside shareholders. In fact, the company usually owns a hefty percentage of them itself, which are what those reinvested dividends are buying.

[kaneohe]

Here's my confusion........does the company also pay themselves dividends on their treasury stock? If so, I guess I understand why they buy back stock if they can gt a better return than on their core business but if so, wouldn't EPS be calculated on the same number of shares? If not, then I can see how EPS would increase but I then don't see how the company benefits by buying back shares unless they think they can drive up share prices and the value of their treasury stock.

[Texas Proud]

Quote:

Originally Posted by kaneohe Here's my confusion........does the company also pay themselves dividends on their treasury stock? If so, I guess I understand why they buy back stock if they can gt a better return than on their core business but if so, wouldn't EPS be calculated on the same number of shares? If not, then I can see how EPS would increase but I then don't see how the company benefits by buying back shares unless they think they can drive up share prices and the value of their treasury stock.

No, a company does not pay itself on treasury stock... in fact, treasury stock is not considered outstanding stock....

[Texas Proud]

Quote:

Originally Posted by David1961 First of all, thanks for all the replies to my previous question about dividends. Maybe I need to take a class or read a good book on how the stock market works, because it seems the more I study the market and think I understand it, the less I actually do. Here's my question. The way I understand it, most stocks only have a specific number of shares outstanding. So if I want to buy 100 shares of XYZ, an existing shareholder must be willing to sell his/her shares to me. And if I want to sell 100 shares, someone must be willing to buy them. The price per share is dependent on supply and demand – if more people want to buy the stock, the price goes up. If more people want to sell the stock, the price goes down. When companies distribute dividends that are reinvested, isn’t this the same as the existing shareholders buying the additional shares? (which would normally make the share price go up since all these folks are buying more shares at once?) Who is selling these shares, or are the additional shares just created? If a company has, say, a million shares outstanding before they declare dividends, do they still have that many shares afterwards? Or are additional shares created to accommodate for the lower share price after the dividend distribution?

I think you are getting bad info... when dividends are paid, they are paid to all outstanding shares.... MOST shares do not have reinvestment options... so the actual number of shares bought by reinvested dividends are pretty small...

Most big companies have a LOT of shares trading every day.... Let's use CSCO as an example since they just raised their dividend.... their average number of shares sold per day is 41,759,200.... multiply that by their price of 19.24 and you get over $800 million being exchanged every day...

They pay a dividend of 14 cents per qtr... say 20% (which is probably VERY high) reinvest... that is about $150 mill to be reinvested... yes, this can have a small effect on the price... but not as much as you think....

And if the amount reinvested is close to 5% (more likely), that is only $38 mill... much less effect...

[Animorph]

I don't think most companies provide any reinvestment of dividends. Normally they pay cash and you reinvest that cash yourself. It's not like a mutual fund that that can create new shares at the NAV in order to reinvest distributions.

Here's a good explanation of how a DRIP works:

What effect does a company's dividend reinvestment plan have on its stock price?

"With a company-operated DRIP, the shares are issued from the company's own reserve of shares. When investors want to sell any shares purchased through a DRIP, they can only sell them back to the company. For this reason, a DRIP that is operated by the company itself does not affect the stock price of the shares in the market."

If it's just your broker reinvesting the stock dividend then shares are purchased on the open market.

[sunnysideup]

Quote:

Originally Posted by Texas Proud I think you are getting bad info... when dividends are paid, they are paid to all outstanding shares.... ...

I am not sure this is absolute. When I work at 2 MegaPharma Corps and we were given stock in our 401ks, I could never see that we were receiving dividends.... If in fact we weren't getting dividends, the companies were saving lots of money...

I could be wrong, but I am not sure to this day.

[MichaelB]

Quote:

Originally Posted by 2moreyears I am not sure this is absolute. When I work at 2 MegaPharma Corps and we were given stock in our 401ks, I could never see that we were receiving dividends.... If in fact we weren't getting dividends, the companies were saving lots of money... I could be wrong, but I am not sure to this day.

If it is outstanding stock it gets the same dividend all other stock gets. Maybe the company contribution was not real stock but a stock equivalent.

[Animorph]

Quote:

Originally Posted by 2moreyears I am not sure this is absolute. When I work at 2 MegaPharma Corps and we were given stock in our 401ks, I could never see that we were receiving dividends.... If in fact we weren't getting dividends, the companies were saving lots of money... I could be wrong, but I am not sure to this day.

Yeah, that was the same with DW's company stock in her 401k. They held it in "units", but gave a share equivalence. I did track the value with the stock price and dividend distributions and it was all there. One easy clue is that on the ex-dividend date the fund value doesn't drop by the amount of the dividends (given the stock price change that day doesn't swamp out that effect), and the number of equivalent shares goes up. If you track it closely (I used Quicken and held it there as actual stock shares), you can also see the expenses they are charging you. You might see something like 0.002 share drain out of your account each paycheck.

[rbmrtn]

I still have a 401k with former employer. The company stock pays a dividend and I actually receive it in cash via the dividend pass thru option. This one of the reason I left the 401k where it was. I think the dividend pass thru is a result of changes made to 401ks for the Enron blow up.

[LOL!]

When a stock pays dividends, they are paid in cash. It is up to your broker or you to re-invest that cash in shares of the same stock if that is what you want to do. Brokers like Fidelity know what their customers have chosen to do and know the exact amount of the dividend. So Fidelity goes out and buys shares on the open market for its clients that have auto-dividend re-invest going. There are no segregated special shares that the company bleeds on to the market to account for re-investing of dividends. Someone has to sell those shares to Fidelity (but Fidelity could buy those shares at various times).

Look it up.