Up 30....Down 30

[Hamlet]

You're assuming that the market is efficient in-between, and that the management of the company will be able to re-invest the money well.

Say I owned Microsoft stock at the beginning of 2008 at $36/share, and an equivalent company that didn't pay a dividend.

For all of 2008/2009, I was receiving dividends from Microsoft that I could buy Microsoft shares with at a huge discount. At least some of them would have been re-invested at about $18/share during the first quarter of 2009. Those dividends essentially doubled their value compared to the company holding onto them.

The Microsoft equivalent company that didn't pay a dividend would have just added that money to their already extensive cash pile. Remember, as a group, the S&P500 (and Microsoft specifically) slashed stock repurchases during this time. An investor in a non-dividend-paying company did not benefit from the downturn's buying opportunity.

The opportunity to dollar cost average with a dividend helps take advantage of irrational market fluctuations and targeting companies with dividends helps avoid the very common tendency of corporate management to squander earnings.

I agree that in theory all of this can be done without a dividend by good management. However, in practice it rarely is.

just think in terms of a fund distribution and reinvesting the distribution . you are no better or worse for it regardless of what kind of market it is done in , up or down it happens. you are just even steven with what was except now you have more shares at a reduced price.

down the road when prices go back up you are no further head if the distribution happened and you reinvested the shares vs 5the distribution never happening and the prices were never reduced with your origonal shares.

 

[mathjak107]

it is just math. the same dollar value always equals the same results with the same return.

just think of a fund dividend , you reinvesting at lower prices and getting a share price reduction leaves you dollar wise even steven. you have more shares at a cheaper value but it is still worth the same thing.

it is the value in dollars you own that eventually rise in an up market , not the number of shares.

if you had 10k in stocks and got a 10% dividend you are starting out the quarter with 9k in share price and 1k in reinvested dividends. it is still 10k but you have more shares and a lower price equaling the same 10k. if markets soar 100% you still only have the same 20k as if there never was a dividend re-invested

 

[eta2020]

a company can fake its health very well , kodak ,gm ,citi bank ,washington mutual ,jc penny ,barnes and noble ,etc all payed dividends right up until the end looking like they were far healthier then they were.

I looked at JCP. It could not reliably raise dividend since 1990. Compare this to KO. It raises dividends every April with reliability of Swiss watch.

 

[mathjak107]

you are missing the point. it does not matter how many shares you have when markets recover. all that matters is how much did you have invested in value and how much did it go up.

having more shares after a payout because the dividend was reinvested leaves you no better than the day before it was payed out.

you had less shares and a higher price the night before it was adjusted and after you had more shares at a lower price.

your starting point for the quarter is the same exact worth in dollars regardles . if markets double you are no better or worse than not getting the dividend and not reinvesting it when markets were down. you are still just doubling the 10k value no matter if it is 10k or 9k and a 1k dividend reinvested..try the math yourself.

markets compound off each previous year. the value of your investment does not care each year how it is arrived at, it can be less shares higher price or more shares lower price. only the dollar value counts. .

 

[eta2020]

you are missing the point. it does not matter how many shares you have when markets recover. all that matters is how much did you have invested in value and how much did it go up.

having more shares after a payout because the dividend was reinvested leaves you no better than the day before it was payed out.

you had less shares and a higher price the night before it was adjusted and after you had more shares at a lower price.

your starting point is the same net worth regardles . if markets double you are no better or worse than not gwetting the dividend and not reinvesting it when markets were down..trythe math yourself.

I agree.

This is how ETFs work. Dividend growth matters for individual stocks.

I like ETFs with quality tilt holding quality wide moat companies with growing dividends. It will make no difference if ETF pays dividend or not.

But getting dividend from ETF is nice because I don't need to think when to sell something and this dividend serves as income stream. I like my income stream to grow.......

 

[mathjak107]

nope, it is the exact same thing for individual stocks. all growth is based on the dollar value you start with not number of shares.

for simplicity yes dividends are nice ,you have to sell nothing. but what i am trying to convey to those who are confused here is that there is zero advantage to reinvesting dividends when markets are down as opposed to a non dividend payer,

that is a concept few can understand for some reason. many think dividends are like bank interest and they are just added to your balance the night before. but they are not. the fact that your dollar value goes down as your shares go up and equal the same value makes it very different from interest added on with no reduction in value.

lets supppose you own 10k of a non dividend payer, when the markets open next trading day you have 10k starting out..

lets suppose you also own 10k of a stock that just split , the price drops by 50% and gives you 2x the shares the next day at 1/2 the price but still worth 10k

lets have 10k in a dividend payer, and tonight it pays out the dividend so tomorrow at the open we have a reinvested 5% dividend and a share price worth 5% less, but with more shares . still all worth 10k at the start of the new quarter..

in all cases you have the same dollar value you were at the night before.

in all 3 cases ,the stock split ,the div payout with reinvestment or the stock that neither split or payed a dividend and was just worth 10k ,are all starting out at the same 10k

wherever markets take you are the same. the same gains acting on all 3 yield the same returns. if stocks soar 100% or 200% or 300% over time all 3 will always track each other mathamatically if returns are the same..

if stocks rose 100%then next year all start at 20k and assuming similiar gains all 3 get the same results again. only difference is the non dividend payer will not hit you with a tax bill for the dividend you reinvested if in a taxable account. .

increasing dividends mean bigger offsetting drops in stock price at the open so again what dollars you start with will not change from the night before.

if you had 10k in value to start before the payout ,after the payout you start out with the same 10k for the new quarter.

for somereason investors think in terms of number of shares increasing and not in terms of the fact the dollar value each time they start out a quarter is the same as it was and it is dollar value we make our profits on , not number of shares .


it seems counter intuitive that we are reinvesting dividends at lower prices and not getting any benefit but that is because in reality it is no different
than reinvesting dividends after a stock split. you are still dealing with contstant dollars and there is no effect on your net worth from it which means you may have more shares but the same dollar value which is what compounding gains act on over time. .


to see a difference you would need to introduce new money and increase allocations dollar wise to that stock at those reduced prices from the down turn.

 

[dallas27]

Why Dividends Matter

You can fake growth but you can't fake dividends.

Since a lot of dividends are paid with borrowed funds, i think your point could be argued.


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[marko]

it is just math. the same dollar value always equals the same results with the same return.

just think of a fund dividend , you reinvesting at lower prices and getting a share price reduction leaves you dollar wise even steven. you have more shares at a cheaper value but it is still worth the same thing.

it is the value in dollars you own that eventually rise in an up market , not the number of shares.

if you had 10k in stocks and got a 10% dividend you are starting out the quarter with 9k in share price and 1k in reinvested dividends. it is still 10k but you have more shares and a lower price equaling the same 10k. if markets soar 100% you still only have the same 20k as if there never was a dividend re-invested

Mathjak: I understand your point completely, but then, why should anyone get excited about getting a dividend? The price dropping by the dividend amount does make the stock 'cheaper' and thus, more likely to attract buyers (and grow in price again) but is that it?

 

[mathjak107]

sorry to say yep that is it. '

it used to be a show of financial health. a fast growing company that was compounding investor money well also had so much in profits it had money to give away.


it was a huge show of financial shape.

but today those companys are old and stodgy and while they still give money away the compounding of investor returns has fallen off.

the mechanics of the dividend payment itself is no different really than a stock split.

whatever your worth the day before is the same amount you have at the start of the new quarter. the percentage gain is based on dollars not shares.

people think of thiese payments as if they were bank interest which they are not.. a 6% vtotal return made up of 2% dividends and 4% appreciation is no different than any other stock that returned the same 6% providing you reinvested the dividend.

 

[mathjak107]

Since a lot of dividends are paid with borrowed funds, i think your point could be argued.


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apple reits did just that. they used money they borrowed and money they were supposed to use to buy more properties to prop up the dividend when the core business fell off.

 

[eta2020]

Since a lot of dividends are paid with borrowed funds, i think your point could be argued.


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Even some great companies loaded with cash borrow money to pay dividend. This is because money are parked in for example Ireland and bringing it to US would result in huge tax bill for a company.

It is hard to fake GROWING dividend.

 

[mathjak107]

apple reits did it all to easily. took quite a while for layman to understand the creative accounting of just where the dividend was being payed from

 

[eta2020]

sorry to say yep that is it. '

but today those companys are old and stodgy and while they still give money away the compounding of investor returns has fallen off.

Bunch of crap.... Look at 30-50 year charts of CL or PEP or KO classics of dividend growth.....

 

[mathjak107]

i said today ,not 50 years ago.

and for that matter apple and microsoft never paid dividends until well after their success so check their charts too as long as we are comparing.. not sure what your point has to do with the mechanics of a dividend payment .it is what it is despite any examples you care to dig up.

 

[eta2020]

i said today ,not 50 years ago.

and for that matter apple and microsoft never paid dividends until well after their success. not sure what your point has to do with the mechanivcs of a dividend payment .

“Always invest for the long term.”

“We don’t get paid for activity, just for being right. As to how long we will wait, we’ll wait indefinitely.”

Warren Buffett

BTW I said look at what happened OVER last 50 years NOT 50 years ago

 

[mathjak107]

it is never timing the markets it is time in the markets.

the markets are very efficient at taking the money from the impatiant and giving it to the patiant.

but it still has nothing to do with the mechanics of a dividend payout

 

[eta2020]

Don't sidetrack from GROWING dividends discussion....

Old and stodgy boring like: CL PEP KO PG made and most of them will continue making ton of money.

The accounting of all of it is not interesting.

 

[mathjak107]

And you know this prediction because you and harry dent use the same crystal ball?

One thing decades of investing has taught me is don't predict .

No one knows whether or not anything will continue to make plenty of money.

 

[eta2020]

Over a long time probably having a plan and sticking with it is more more important then anything else.

One could do well enough with simplicity of S&P 500 buy and hold Warren Buffett style....

 

[mathjak107]

it is all about the plan ,in fact any plan can work as long as there is discipline .

gold peaked in 1980 and if you had bought equal amounts of gold ,cash,an s&p fund and cash and were the worst timer in the world and bought that gold that moment it had peaked you would have actually beaten the s&p 500 return before golds fall a few years ago,. just by rebalancing once a year all those decades even gold would have been a winner .

as amazing as it sounds the two averaged out a little over 9% with gold taking the lead in that simple portfolio . now the s&p is ahead but not by much.

it shows you as long as an asset cycles ,it may take a while but any strategy can work if you stick to the plan.

personally i have always not been a buy and die investor but rather a buy and manage one.

i nudge my portfolio like steering a big ship and keeping it on course as i adjust it periodically to fit the big picture better as the world around me changes.

as an example the last 6 months i got rid of all high yield bonds which in terms of value are at an equal to dow 25,000 .

i shortened up the interest rate sensitive stuff and i up graded the portfolio to only very high investment grade bonds.

i eliminated small caps more than a year ago as well as all international funds.

when the dollar was weak years ago i held funds like fidelity export and multinational. exploited that fund until the dollar got stronger and dumped it for more domestic stocks.

which is why i never look at my funds against a bench mark. neither fund that year beat its index but working as a team they bested it by a lot. i look at my total portfolio performance .


slight shifts in the portfolios but all done to fit the bigger picture for now. i call it buy and manage . it is a long term strategy but with a more active stance. never an in the market or out kind of thing just a case of is there a better choice for the current outlook in the portfolio.

i may change 2or 3 funds out in a year some years even less or many even zero.

 

[marko]

sorry to say yep that is it. '

the mechanics of the dividend payment itself is no different really than a stock split.

whatever your worth the day before is the same amount you have at the start of the new quarter. the percentage gain is based on dollars not shares.

people think of thiese payments as if they were bank interest which they are not.. a 6% vtotal return made up of 2% dividends and 4% appreciation is no different than any other stock that returned the same 6% providing you reinvested the dividend.

Ok. Agreed and understood.

But! I checked the NAV of my funds/stocks the day before a large year end dividend and shortly thereafter.

In most cases, the NAV price recovered to pre-dividend/CG within a week or so and in all cases within 2 months. PLUS if one had reinvested, the growth would reflect that change even more so which wouldn't be as great without the dividend reinvest.

So, over a shortly longer period than the next day, it would seem that dividends have more than a neutral value.

Or am I out in the weeds (per usual)?

 

[mathjak107]

the dollars started with are identical though. market action will pull the same dollars over the quarter the same percentage regardless of what combination of number of shares and share price those dollars are made up of.

the fact that the opening price has to be adjusted downward before the stock comes out of the gate means its value is the same no matter what and investment dollars at the gate are the same as they were. .

the trading of that stock takes place all quarter long but if it was 10k before the reinvested dividend and 10k after the dividend is reinvested then 10k is what your investment starts life at for the new quarter and when that bell rings where it goes is based on percentage up or down on 10k not just share price..

while you may see the dividend re-trace the next day after the adjusted price opened .the reality is if it did not pay the dividend the share price would have ended up higher than it did with the same percentage gain.

if you got a 5% dividend on a 10 buck stock , you started out with a 9.50 share price and .50 cent dividend reinvested.

lets say the stock went up 10% on the next day. you have a share price of 10.45 and roughly 1.05 shares after the reinvestment. that is 11 bucks in value rounded off.


if there was no dividend and the stock went up the same 10% next day you would have 1 share at 11.00

it all equals the same amount in the end. it has to mathamatically.

think of a fund distribution which is no different, it is a wash and just the culmination of where you stood right before.

on a volatile day that fund can retrace the distribution but you are no better or worse off than if it didn't make it. you are just up less share price wise if they did do it but the percentage gain is the same regardless.

our gains are measured in compounding off starting values . could be daily ,quarterly yearly or anyother measure.


if the dollars are the same total value and the gains are the same percentage the results can't be anything but the same. all that is varying is the number of shares and the share price when a dividend is payed and reinvested but it is all the same starting value.

i know it is hard to imagine that the dividend money reinvested when shares are lower isn't helping or hurting you but folks confuse it with rebalancing or adding new money in down markets where you are actully changing the allocation and investment amount in that starting value of the investment.

 

[marko]

the dollars started with are identical though. market action will pull the same dollars over the quarter the same percentage regardless of what combination of number of shares and share price those dollars are made up of.

the fact that the opening price has to be adjusted downward before the stock comes out of the gate means its value is the same no matter what and investment dollars at the gate are the same as they were. .


on a volatile day that fund can retrace the distribution but you are no better or worse off than if it didn't make it. you are just up less share price wise if they did do it but the percentage gain is the same regardless.


.

But couldn't one argue that, like a stock split, the lower price attracted more buyers to subsequently raise the price? Without the drop in price (from dividends/split, whatever) the price might not have subsequently gone up as much.

I'm not challenging here...I'm a true math idiot, but that would be my perspective.

 

[mathjak107]

usually the drop is so slight as to not really be a factor unlike a split.

if it is a good stock people will buy it regardless. i mean in a year the s&p is paying about 2% in dividends on average. hardly an incentive.

besides if the stock just goes up enough to just even retrace the dividend than the buyer is right back to the same price by the quarters end anyway.

what you could do is avoid the tax implication but the odds are you will not buy it at the open price and will end up buying wherever the markets pull it after the opening bell. it may even trade on the futures market opening at the reduced price and already started trading.