The Mystery of Spending Only Dividends Behavior

[haha]

In my former country (where my income comes from), you can easily build a consistent dividend portfolio (stocks, reits and tresury bonds) which will give you 5-6% of dividend yield, when you go to the conservative side. If you wanna get more DY and less growth, increase reits, electrical and bank stocks. Then, you might be at a 7-8% DY. In both cases, they would grow faster than inflation (specially bank stocks).

By the other hand, stock prices fluctuates a lot. In no way I would be safe if I dip into principal.

Could you please name this country. Most of us here can invest almost anywhere. If we knew what country you were referencing it could even help us.

Ha

 

[CRLLS]

Dividends are paid by the company from profits, reserves or by the selling of company owned stock, not from stock values. It is the market (you and I and a few thousand other investors) that determines stock prices. It is only anecdotal IMO, that the market expects a dividend to be paid and figures that into the market price. When a dividend is paid out, the book value of the company is reduced and the market responds. There is no formula that I know that sets the stock prices based on dividend dates upcoming or recently paid out.

 

[enjoyinglife102]

My takeaway is whatever works for somebody to successfully implement a disciplined, solid financial plan that enables them to live the life they want is all that matters. I have the behavioral games going on in my head as well spending dividends and interest. Sure helps me to hang on when equities tank; they're still generating income. Maybe I'm not that sophisticated or smart but I know I'm happy!

 

[redduck]

...Maybe I'm not that sophisticated or smart but I know I'm happy!

So, one out of three ain't bad? (I think you got the right one).

 

[ERD50]

Dividends and stock price can fluctuate less dependently. Dividends are related to company profit. Stock prices are defined by market using a lot of variables. So, the “dividends come from principal” argument is essentially insufficient.

Insufficient for what? To explain everything about a stock's current price? OK, but that's not what I said. It is one factor.

Dividends come from the principal of the stock, there is no other place for them to come from. I like Oldshooter's water analogy - you take something out, that 'something' came from somewhere that now has less of it. Anything else is magic.

Reads like you’re talking funds and I’m talking stocks. They react differently.

No, the concept is exactly the same. It's just easier to see in a Mutual Fund that makes a large distribution that represents an entire year's accumulation, and being more diversified, these funds are generally less volatile than an individual stock.

It's not as easily seen in a stock that pays out 1% a quarter, and moves more than that some days, but the effect most certainly is there, sometimes buried in noise.

-ERD50

 

[OldShooter]

Dividends are paid by the company from profits, reserves or by the selling of company owned stock, not from stock values. ...

Sometimes it can be useful to consider extreme cases.

Suppose a company had sold all its assets for cash, then it paid that cash to its shareholders. What would happen to the company's stock price? It would go to zero, of course, because there would be nothing left.

Suppose it only paid out half the cash? The stock price would be halved. A quarter of the cash paid out, company value goes down by a quarter. And so on.

The only way you can say that paying out a small amount of cash won't affect the stock price at all is to argue that shareholders and potential buyers won't notice that the value of the company has been diminished. Which seems unlikely. Which is why stock prices drop on ex dividend days.

 

[retiredgeek]

But its true. A dividend is lopped off the end of the stock price. That is why there is an ex dividend date and the value falls. You gain the value back on the pay date and you can choose how to receive it. As cash or reinvested.

Market volatility "corrects" the ex-date discount quickly.

 

[retiredgeek]

Sometimes it can be useful to consider extreme cases.

Suppose a company had sold all its assets for cash, then it paid that cash to its shareholders. What would happen to the company's stock price? It would go to zero, of course, because there would be nothing left.

Suppose it only paid out half the cash? The stock price would be halved. A quarter of the cash paid out, company value goes down by a quarter. And so on.

The only way you can say that paying out a small amount of cash won't affect the stock price at all is to argue that shareholders and potential buyers won't notice that the value of the company has been diminished. Which seems unlikely. Which is why stock prices drop on ex dividend days.

Equity is not the same as market price. If we talking extremes, a company could sell half his assets, making his equity value becomes half the original. But the market could still prices it the same as before.

You can certainly say dividends are part of the equity, but not the price (except on the artiticial adjustment on ex-date).

Dividends and "principal market price" follow different paths. One derives from profit. The other, from everything. There is certainly a correlation at some level, but they are not the same.

Would you say every time you receive rental income from a house, it is being discounted from the house value?

 

[COcheesehead]

Market volatility "corrects" the ex-date discount quickly.

Of course, the stock is in the market, but now ex dividend.

 

[timemoveson]

Could you please name this country. Most of us here can invest almost anywhere. If we knew what country you were referencing it could even help us.

Ha

He/she might mean Canada.

I use this strategy with a large portfolio and would say the Canadian numbers are 3.75-5% "safe" yield (easy to achieve, tax advantaged, multi-decade track records, annual growth, no impact from 2008, etc.) and 5-7% higher yield (more risk, use some REITs which have no tax advantages, sectoral concentration needed, etc.).

 

[OldShooter]

Equity is not the same as market price. ...

So you are arguing that they are two different things, not connected in any way?

Explain this, please, using the example of a bankrupt company, no equity. Is the stock price still unconnected? Just some random number?

 

[CRLLS]

Sometimes it can be useful to consider extreme cases.

Suppose a company had sold all its assets for cash, then it paid that cash to its shareholders. What would happen to the company's stock price? It would go to zero, of course, because there would be nothing left.

Suppose it only paid out half the cash? The stock price would be halved. A quarter of the cash paid out, company value goes down by a quarter. And so on.

The only way you can say that paying out a small amount of cash won't affect the stock price at all is to argue that shareholders and potential buyers won't notice that the value of the company has been diminished. Which seems unlikely. Which is why stock prices drop on ex dividend days.

Well, there are book assets that one could sell and there are people assets. With zero book value there could still be value that might warrant a positive stock price. But my point was that there is no formulae that can be used to set or determine the actual stock price from a company's book value. Sure we can all run some numbers to determine a good price to buy or sell for us. But the actual price a stock sells for on a given day is determined by other, less mathematical ways. Certainly the company can't calculate and publish their books an a real time basis 24/7/365. In your example, almost never is there a 1 to 1 relationship of a 50% loss of book value to a 50% loss of stock price, or 5% and 5% for that matter.

One example how there is no real relationship: Think how companies are sometimes raided and then sold off for its assets. here the book assets are greater than the stock value.

 

[Dash man]

I can tell you what the open price is...

And a fraction of a second later it will change.

 

[retiredgeek]

So you are arguing that they are two different things, not connected in any way?

Explain this, please, using the example of a bankrupt company, no equity. Is the stock price still unconnected? Just some random number?

Never said they are not connected. Actually, I even said they correlate in some level. Extremes, like bankrupcy would be a case where price = equity (book value) = dividends.

 

[retiredgeek]

Could you please name this country. Most of us here can invest almost anywhere. If we knew what country you were referencing it could even help us.

Ha

Havent seen your question before. I am talking about Brazil.
You can buy ADRs from Brazil. Their dividends are even considered qualified dividends for the IRS, since they are negotiated here in USA.

 

[YVRRocketSurgery]

I understand Steve Eismann of "The Big Short" fame considers Canadian banks to be in a bubble and is shorting them. FyI.

I agree some of the telecoms are interesting.

While yes he's shorting a number of Canadian banks/financials, I'm not sure he's characterized them as being in a "bubble." Rather it sound like he expects them to go through a rough patch of quarterly results/earnings due to normalization credit from a period of expansion/heavy lending; ie a cyclical issue. I think he even says he's not characterizing it as a calamity situation.

 

[ERD50]

Well, there are book assets that one could sell and there are people assets. With zero book value there could still be value that might warrant a positive stock price. But my point was that there is no formulae that can be used to set or determine the actual stock price from a company's book value. ....

One example how there is no real relationship: Think how companies are sometimes raided and then sold off for its assets. here the book assets are greater than the stock value.

And a fraction of a second later it will change.

Sure, but that doesn't change the fact that the dividend affects that stock price.

I recall an example used a while back, not sure if I came up with it or not, might have been samclem? But consider this:

You have a car to sell. You have 10 serious buyers in your driveway take a serious look, and ask each of them to write down their offer on a piece of paper and you'll take the highest one. You have also pointed out the envelope on the dashboard with $1,000 cash in it.

You collect the bids, and then say - sorry, I need to remove the $1,000 cash from the deal. I guarantee you everyone will say, no fair, unless they are all allowed to drop their offer by $1,000.

How can it be otherwise?

And yet, each person may have put a different value on the car and cash. And each may have picked a different number on any given day. But I'm certain everyone would consistently say that removing $1,000 cash from the deal made the deal worth $1,000 less.

That happens when a stock goes ex-div, there's just a lot of noise riding along.

-ERD50

 

[RobbieB]

But if it's a lambo for 50 grand and you remove a grand I'll still pay 50 grand.

I like noise.

 

[CardsFan]

Sure, but that doesn't change the fact that the dividend affects that stock price.

I recall an example used a while back, not sure if I came up with it or not, might have been samclem? But consider this:

You have a car to sell. You have 10 serious buyers in your driveway take a serious look, and ask each of them to write down their offer on a piece of paper and you'll take the highest one. You have also pointed out the envelope on the dashboard with $1,000 cash in it.

You collect the bids, and then say - sorry, I need to remove the $1,000 cash from the deal. I guarantee you everyone will say, no fair, unless they are all allowed to drop their offer by $1,000.

How can it be otherwise?

And yet, each person may have put a different value on the car and cash. And each may have picked a different number on any given day. But I'm certain everyone would consistently say that removing $1,000 cash from the deal made the deal worth $1,000 less.

That happens when a stock goes ex-div, there's just a lot of noise riding along.

-ERD50

I like the analogy. But suppose the next day you bring in 10 more serious buyers, but don't do the envelope thing. I wonder how the bids would compare. And for kicks let's assume this is a vehicle in the $50k price range (so $1k would be about a 2% "dividend"). I would bet there would be a significant overlap with the previous day.

Edit to add, RobbieB beat me to it, with a shorter answer.

 

[ERD50]

I like the analogy. But suppose the next day you bring in 10 more serious buyers, but don't do the envelope thing. I wonder how the bids would compare. And for kicks let's assume this is a vehicle in the $50k price range (so $1k would be about a 2% "dividend"). I would bet there would be a significant overlap with the previous day.

Edit to add, RobbieB beat me to it, with a shorter answer.

But the market knows about the $1,000 cash. It is public information, there is a date certain attached to it. It will not be ignored. As I said, other things will make the prices move around (up or down beyond the div), but $1,000 is $1,000.

If you were right, then why would any company bother with some piddlin' little 4% dividend? They'd say, heck, no one devalues our stock when we give away our money, so let's give more away, and people will say "look, a money machine!", and more people will buy the stock to get that dividend, keeping the price up. We just keep giving money away, and there's no downside!The stock is just propped up, no matter how much we give away! Until there is no more money to hand out.

Sounds like Bernie Madoff.

-ERD50

 

[Montecfo]

While yes he's shorting a number of Canadian banks/financials, I'm not sure he's characterized them as being in a "bubble." Rather it sound like he expects them to go through a rough patch of quarterly results/earnings due to normalization credit from a period of expansion/heavy lending; ie a cyclical issue. I think he even says he's not characterizing it as a calamity situation.

Many quotes including "severe correction" He may not be right, I take no position. But he has been quite vocal.

 

[ERD50]

Let's make the analogy a bit tighter:

So lets say you have those 10 bidders in the room. You say you will deliver the car in 7 days to the highest bidder.

You offer two deals to the group, and they must submit a bid for each deal.

Deal #1) You will mark the bill of sale as 1PM today, and you will include the $1,000 cash envelope.

Deal #2) You will mark the bill of sale as 2PM today, and you will NOT include $1,000 cash envelope.

Who in their right mind would not submit their bids $1,000 higher on the offer that includes the cash?

-ERD50

 

[CardsFan]

But the market knows about the $1,000 cash. It is public information, there is a date certain attached to it. It will not be ignored. As I said, other things will make the prices move around (up or down beyond the div), but $1,000 is $1,000.
-ERD50

I think we are actually in agreement. My point was simply that the market determines the price going forward, and the dividend is soon forgotten (or really lost in the volatility, as others have said).

FWIW, we take all dividends and CG's in cash. It makes it simpler to withdraw funds (from after tax accounts) and to re-balance (in the tax deferred accounts). Exception is the Roth's, they get reinvested.

 

[Running_Man]

Sometimes it can be useful to consider extreme cases.

Suppose a company had sold all its assets for cash, then it paid that cash to its shareholders. What would happen to the company's stock price? It would go to zero, of course, because there would be nothing left.

Suppose it only paid out half the cash? The stock price would be halved. A quarter of the cash paid out, company value goes down by a quarter. And so on.

The only way you can say that paying out a small amount of cash won't affect the stock price at all is to argue that shareholders and potential buyers won't notice that the value of the company has been diminished. Which seems unlikely. Which is why stock prices drop on ex dividend days.

This is simply untrue, Suppose Company A is managed by Bernie Maddoff, Company B is managed by Elon Musk, the only assets they hold after announcing they are selling all assets, worth the same amount are cash and both announce they are paying half of their cash to shareholders, do you honestly believe both stocks would sell for the same price after the distribution? Even if Bernie kept half his cash and Elon gave all his cash the value of the Elon company would be astronomical compared to Bernie's. All Elon would have to tweet is that this is his Mar's exploration company for the future and when needed he will borrow money, assemble a team and issue additional shares and you'd be talking a company worth billions with no assets.

The price of a stock is not the net asset value but a the belief in the ability of the owners to turn those assets into future profits. So little of a company can depend on excess cash that it's payout has NO effect on the stock price, excepting as a book entry when the dividend is paid out, immediately the valuation is based on future expectations and the actions of who decided to buy and sell that day.

A company can have no profits a net negative business and still sell for billions because of belief in the company, see Lyft for a current example that in it's IPO stated there is no current path to profitability and may be subject to financial ruin by current lawsuits. No matter... do you actually believe the value of Lyft would be lower by 50 cents if they started with 50 cents per share of cash less?

 

[Oz investor]

i aspire to fund my retirement from dividends ( after the end of 2019 )

i have several holdings where i participate in the dividend reinvestment plan currently

( and several that pay dividends in cash currently )



in 2020 i i plan the swap ( those where i reinvest 100% of the cash ) the 50% cash dividends ( and 50% shares ) this hopefully will cover my living expenses plus a little extra to invest wisely ( even if the market dips again , say 25% ) obviously should the markets drop more ( and that is entirely possible ) i will have to crunch the numbers , spend less here , delay some plans and maybe even stop investing extra for the short term