The value of Stocks

[jefipius]

In this case, the earnings of the acquired company are eventually paid out as dividends to the stockholders of the acquiring company. One way or another, earnings are expected to one day be shared with the owners. Stocks are not just a Ponzi scheme, as suggested by the original poster's question.

I still have to disagree. The hope that sometime, by the grace of mgt a company may decide to give out a dividend seem a pretty slim basis for valuation - especially since it seems that paying a dividend has some negative consequences for the company -

"
So why doesn't Microsoft and its tech-ilk start paying dividends? ...[T]echnology companies are wary of paying dividends because it sends a negative signal ("we are a mature company") to the market. "

http://www.forbes.com/2002/04/03/0403dividends_2.html


So according to your logic, we are to hope that maybe some company in the future may purchase MicroSoft and they may pay dividends???

[Michael]

I still have to disagree.

Good. I learn more when people do this. I appreciate when people take the time to show me the error in my thought process.

So according to your logic, we are to hope that maybe some company in the future may purchase MicroSoft and they may pay dividends

Actually, MicroSoft has already started paying dividends.

[cute fuzzy bunny]

There was a rumor microsoft might pay out a very large dividend in the near future, but that was before they started handing out huge cash settlements.

[wabmester]

You can get your MSFT dividend here:

http://www.microsoftcalsettlement.com/

[BigMoneyJim]

I did some thinking last night about stocks & bonds, or more generally equities and securities, and I'm pondering the relationships between the two. As a result I'm also starting to think again about trying to start my own IT consulting small business.

It seems to me that bonds/securities are ultimately money borrowed to increase the value of somebody's equity/stock. They choose to borow money instead of sharing the equity in hopes of making larger returns. The lender has a lower upside potential but still gets paid even if the borrowing equity doesn't become more valuable--that is as long as it doesn't fail altogether and default on the loan.

If this is so, then why do bond returns sometimes outpace equities for several years running? It seems to me if the businesses borrowing the money aren't making decent returns then they might be better off becoming lenders themselves. Or if the equities are faltering then it would seem like there would be more defaults.

This investing stuff really makes my head spin sometimes, but I came to the conclusion that producing a product or service makes the most money but is riskiest; investing in equity in such businesses are not necessarily less risky but require less work. Lending these companies money is also less work and less risky but with the lowest returns.

Wandering off topic a bit, as an employee of a company I am loaning my services to the company for a more or less set fee. If my services produce lots of return beyond my compensation I don't get much or any bonus. If my services produce less than my compensation I will get laid off or fired eventually.

After many years in the workforce I am quite confident in my particular abilities and their value, but more and more my company overrides my judgement and effectively reduces the value of my service. If I start my own small business and work for myself I think I can satisfy customers and reap larger rewards, but I will have to work harder to manage the business and prospect for clients.

It's all an interesting mental exercise. I'd love to hear criticisms of my stock/bond analysis and my employee/owner analysis. It may make a difference what I do next after eliminating debt.

[Michael]

...why do bond returns sometimes outpace equities for several years running?

Equity dividends tend to be relatively stable, but the P/E multiples for equities fluctuate much faster than bond yield does. It is often the fluctuating P/E multiples that lead to bonds outpacing equities during equity P/E contraction periods.

[unclemick]

Cap gains/losses also occur in bond FUNDS as well as yield. So a bond held to maturity if it doesn't default has no cap gain/loss. Bond funds are a different animal. In some cases you want interest to rise for longer durations.

[cute fuzzy bunny]

My understanding (a nebulous statement on its own) is that bond funds held for the average duration of the bonds held have roughly the same "nav stability" as a bond of the same duration held separately. Rising interest rates also create a rise in dividend yield as new bonds are added.

Hence bond funds held for long periods of time (3 years for short, 10 years for intermediate, 20-30 for long term) should produce comparable "price protection" to owning the same duration bonds, and the yields will slowly ebb and flow with interest rates.

So owning bonds directly makes sense if you put enough dough into them to diversify and rates are good. Buying a bond fund is a good idea if you dont have the money to diversify, you think rates will rise, and you dont intend on selling for the length of the funds average duration as protection from short term NAV dents due to daily bond fluctuation. Oh yeah, and if you dont mind losing a quarter of a percent of dividend yield for the convenience.