Dividend Portfolio's

[mathjak107]

"Funds do occasionally drop the day they 'pay' dividends and then bounce back the next day when all those dividends are reinvested automatically by most fund holders."




not true either....the extra shares payed out by the dividend reinvestment dilute the existing value so the fund or stock is still lower...more shares divided by the overall value= lower price per share.

 

[cute fuzzy bunny]

actually right on the stock exchange website is a little bit about what happens when a stock pays a dividend.it does say the exchnge computors re-value the stock at the next days opening by dropping it the amount of the dividend payed out.thats why you never want to buy right before a dividend payout in a taxable account in a fund or a stock.its basically a non event thats taxable

Can you point that out, because I must be under a huge misunderstanding. I was of the opinion that buyers and sellers determine the exchange price of equities. I was unaware that some stock exchange computer determines the selling price. This *is* the US stock market we're talking about, yes?

Also, my comment was that this effect of a stock dropping after a dividend has not been something I have personally observed.

Edit: I see from reading several articles that unless the dividend is large and (generally) an extraordinary or one time special dividend, that traders do not factor the dividend into the stock price, and that any effect of an ordinary dividend payout is "lost in the trading noise".

not true either....the extra shares payed out by the dividend reinvestment dilute the existing value so the fund or stock is still lower...more shares divided by the overall value= lower price per share.

Having a little trouble with this logic as well...the fund issues shares to pay the dividend, diluting the NAV somewhat. The next day when most dividends are reinvested in most funds, that inflow causes more underlying shares to be bought, increasing the value of the fund in a comparable manner.

Again, my observation is as I described it.

 

[mathjak107]

Can you point that out, because I must be under a huge misunderstanding.  I was of the opinion that buyers and sellers determine the exchange price of equities.  I was unaware that some stock exchange computer determines the selling price.  This *is* the US stock market we're talking about, yes?

Also, my comment was that this effect of a stock dropping after a dividend has not been something I have personally observed.

Edit: I see from reading several articles that unless the dividend is large and (generally) an extraordinary or one time special dividend, that traders do not factor the dividend into the stock price, and that any effect of an ordinary dividend payout is "lost in the trading noise".

Having a little trouble with this logic as well...the fund issues shares to pay the dividend, diluting the NAV somewhat.  The next day when most dividends are reinvested in most funds, that inflow causes more underlying shares to be bought, increasing the value of the fund in a comparable manner.

Again, my observation is as I described it.

okay ill try to explain...yes the market sets the going price of stocks and funds but a dividend in either a stock or fund is actually a drop in the value of that company.to compensate all the exchanges do is take the closing price from the day before and subtract out the divident payment from the value at the opening the next morning before the stock is out for sale causing the issue to reflect the dividend.....

now in the case of a fund,,the fund has an example 10 shareholders each with 10,000 shares at 10.00 a share and the stocks it holds are worth 1,000,000 at the close...a 10% divedend is payed out......the dividends are reinvested ...so now you have 11,000 shares outstanding per person instead of the origonal 10,000 .. since you have 1,000,000 now divided by 10% more outstanding shares the price per share is worth less.

 

[cute fuzzy bunny]

okay ill try to explain...yes the market sets the going price of stocks and funds but a dividend in either a stock or fund is actually a drop in the value of that company.to compensate all the exchanges do is take the closing price from the day before and subtract out the divident payment from the value at the opening the next morning before the stock is out for sale causing the issue to reflect the dividend.....

But its still not visible in the share price as its traded, as I noted above. The original point was if an observable drop in stock price was due to a dividend payout. From what I have personally seen, and from what I am reading, trading fluctuations overwhelm any price changes due to the dividend, so the answer is "not really"...unless as i noted, an extraordinary and/or one-time large dividend that one would normally not see on the average stock is issued...say a dividend that is 20-25% of the stocks price.

now in the case of a fund,,the fund has an example 10 shareholders each with 10,000 shares at 10.00 a share and the stocks it holds are worth 1,000,000 at the close...a 10% divedend is payed out......the dividends are reinvested ...so now you have 11,000 shares outstanding per person instead of the origonal 10,000 .. since you have 1,000,000 now divided by 10% more outstanding shares the price per share is worth less.

But the dividend was paid out as an aggregate of the dividends paid out by the underlying stocks the fund owns, which the fund then in turn pays to the shareholders minus expenses. As discussed above, this does not materially affect the price of the underlying shares. And the 1000 shares (which have value when dispensed), when purchased as a function of the dividend reinvestment increase the capital value of the fund proportionally and presumably are then used to purchase additional underlying shares of the stocks the fund owns or to establish new positions in new stocks.

Simplifying the transactional discussion, the fund pays me 3% of my holdings, as that is the aggregate dividend. The value of the fund shares I own drops by 3% as they have paid me a 3% cash disbursement. I reinvest that paid dividend and now own 3% more shares than I did before, increasing the value of the fund by 3%. The payment and purchase generally happen on sequential business days. So a drop on one day and a rise on the next. However, some funds (income funds for ex) are prone to having people take the dividends and not reinvest them.

I think you're arguing discussing mechanics while I'm discussing observable events. Those two may in fact be mutually exclusive.

For example, if a man says or does something in the woods when his wife is not there, is he still wrong?

 

[mathjak107]

I reinvest that paid dividend and now own 3% more shares than I did before, increasing the value of the fund by 3%.


thats where the error is,,,the funds value actually dropped by the dividend amount..you putting the money back in only brought the funds value back to where it was but now with more outstanding shares..therefore the nav is just that much less...normally fund dividends are so low that they get buried in the following days trading so they arent readly noticed.but because of the huge distributions by most funds last year ooooh boy was it noticed this time...

 

[mathjak107]

IFROM FIDELITY'S WEBSITE Is a fund's share price affected when a distribution is paid?
Capital gains and dividend distributions will reduce the fund's net asset value per share (NAV) by the amount of the distribution on the ex-dividend date. For example, if a Fidelity mutual fund were to pay a distribution of $2.00 per share and the fund's net asset value (NAV) were $30.00 per share prior to the distribution, on the ex-dividend date, the NAV would be reduced by $2.00 per share. Market activity may also impact the fund's NAV on the ex-dividend date, so the total change in a fund's NAV may be more or less than the dividend.
Top

Does a fund's distribution affect its total return?
No. Distributions do not impact total return. Although the NAV drops when the distribution is paid, shareholders who reinvest their distributions also receive more shares.

 

[grumpy]

Think of it this way. When a company pays out a dividend to its shareholders, the aggregate amount of that dividend is no longer in the treasury of the company. It is in the checking accounts of the shareholders. Therefore, if I am considering buying a share of the company after a dividend payment, the amount I am willing to pay for that share should be less because the assets of the company are less. While it is true that this reduction may be masked by other trading fluctuations, the fact remains that, other things being equal, the price would have been higher were it not for the dividend payout.

Grumpy

 

[cute fuzzy bunny]

Grumpy - I am not debating that point and it is not what I said. Going back to word #1, what I said is that a holder of the stock does not wake up the day after a dividend payout and see that their individual stock is now trading on the open market at a discount representing that payout.

I've owned dividend paying stocks for a long time. Never ever once seen an x% drop the day after an x% payout where the drop was attributable to the dividend payout. Any real or perceived difference in the 'valuation' of the company and hence its stock price is lost in the trading 'noise.'

As far as the mutual fund thing...again, i was speaking of what is observed by the investor. Every dividend paying mutual fund I've owned dropped its NAV when the dividend was paid and then rose to the same or nearly the same the day after with the exception of the wellesley fund..I'm presuming the average owner of that is as likely to take the income rather than reinvest it. The dividend gets paid out, then the proceeds are reinvested into the fund. There are more shares but the asset value of the fund has gone up by the value of the reinvested dividends. This is pretty simple math.

 

[grumpy]

The mechanics are the same when mutual funds distribute capital gains. Then I clearly see the effect on the NAV. If a fund distributes $1.00 per share in capital gains, the price drops by $1.00. It isn't until the next day's close that the NAV partially recovers. In the case of year end cap gains distributions the NAV may not recover to the previous level for weeks or months. The effect is more noticable with capital gains distributed at the end of the year since they tend to be larger than quarterly dividend distributions.

I don't think we are disagreeing about any of this. Maybe just talking past each other.

Grumpy

 

[ats5g]

Grumpy - I am not debating that point and it is not what I said. Going back to word #1, what I said is that a holder of the stock does not wake up the day after a dividend payout and see that their individual stock is now trading on the open market at a discount representing that payout.

I've owned dividend paying stocks for a long time. Never ever once seen an x% drop the day after an x% payout where the drop was attributable to the dividend payout. Any real or perceived difference in the 'valuation' of the company and hence its stock price is lost in the trading 'noise.'

As far as the mutual fund thing...again, i was speaking of what is observed by the investor. Every dividend paying mutual fund I've owned dropped its NAV when the dividend was paid and then rose to the same or nearly the same the day after with the exception of the wellesley fund..I'm presuming the average owner of that is as likely to take the income rather than reinvest it. The dividend gets paid out, then the proceeds are reinvested into the fund. There are more shares but the asset value of the fund has gone up by the value of the reinvested dividends. This is pretty simple math.

Hey CFB,

Perhaps I'm just missing something, but are you sure you're looking at the correct day to determine the effect of the dividend? As 3 yrs to Go pointed out earlier, the stock starts trading without the dividend payout days or weeks before the dividend is actually paid out. See also, The Fool FAQ: Dividends, particularly the part about Declaration Date, Record Date, and Ex-dividend Date.

Re: the mutual fund dividends. If I understand what you're saying [I hope], you're observing that the NAV of the mutual funds is rising as a result of the investors reinvesting their dividends. Again, are you looking at the correct day? Make sure you're looking for what Vanguard calls the Record Date. This is the date on which you have to own shares of the fund to get the dividend [apologies if you already knew this ]. Anyhoo, I spot checked Vanguard's S&P 500 fund [VFINX] to make sure that any reinvested dividends didn't have much of any affect on the NAV.

I took VFINX's last dividend, whose record date was 12/27/05, reinvest date was 12/28/05 [also ex-dividend date] and distribution date was 12/29/05. Adjusting for the dividend distribution, the daily returns for 12/27/05-1/5/06 were almost exactly the same as the S&P 500 index [^GSPC on yahoo finance]. ** Note that the markets were closed on 12/31/05, 1/1/05 and 1/2/05, so there are only 7 days.

0.15%
-0.29%
-0.48%
1.65%
0.39%
0.01%

for VFINX and

0.13%
-0.30%
-0.49%
1.64%
0.37%
0.00%

for ^GSPC.

Now, perhaps VFINX is sooo freakin' big that the reinvested dividends didn't have much of an effect.

- Alec

 

[cute fuzzy bunny]

Grumpy...you're right...theres a big difference between repeating the mechanics and observing the actuality in practice. Neither has much to do with the other. Stock prices *should* drop as a company pays out a dividend as a function of that drop in intrinsic value, but since short term market movements only have a little bit to do with actual finances (vs market momentum and psychology and the other 52,000 day to day influences), I tend to look at the actualities. Almost nobody pays less for a stock the day after the dividend because a dividend was paid. Except as stated, when the dividend is truly signficant and unusual.

As far as the mutual fund effect, do this math because my wife wants me to get back to watching the rest of the Soprano's season premier now that the baby is out of the bath...

See what a 100 shares of VFINX are worth the day the dividends and capital gains are paid (at the end of the year). See how much is paid out. See what the share price of the fund is on the dividend reinvestment date (the next day after the dividend is paid). Take your payout from the dividends and capital gains and divide by the price on the reinvestment date (which is lower than the date the dividend is pulled). Now take your original number of shares and their value on the reinvestment date, add the number of shares you bought as part of that reinvestment and their value. Add the two pairs of numbers. Compare the value on the day the dividend was issued and the value on the reinvestment date.

Voila. You have more shares. For many funds, the net value is the same.

If something else was the case, nobody would ever reinvest their dividends. Why would you if they suddenly became valueless? Why would anyone own high dividend value stocks if they mechanically lost their dividends from the base value at the moment they were issued, not to be recovered in the very near term?

Nobody. Because that isnt how it works. From the investors perspective. From a per share perspective, for a microsecond, in an accountants handbook...perhaps so. Not particularly relevant though.

Just to repeat...the reality:

- Stocks pay a dividend. There may be a very short term effect on intrinsic measured share value, however no visible and persistent value effect on stock price.
- Mutual funds pay dividends. Whether you take your dividends in cash or as reinvested shares, the NET value to the investor with the possible exception of the VERY immediate time frame is positive. Not neutral. Not negative.

If anyone can provide a reasonable and demonstrable argument as to why either of the above statements is false, it surely would turn the investing world on its ear...

 

[grumpy]

I've completely lost interest in this discussion.

Grumpy

 

[mathjak107]

from north american clearing house"
"
Reducing Orders

orders on the specialist's book are reduced when a stock goes ex-dividend, and these are detailed in the following paragraphs.
All orders entered below the market are reduced on the ex-date - that is, the first date on which the new owner of stock does not qualify for the next dividend. On the ex-date, the price of the stock drops by the amount of the distribution. Orders reduced include buy limits, sell stops and sell stop limits. Without this reduction, trading at the lower price on the ex-dividend date could cause execution. This is illustrated in the following chart:


Dividend
Value Reduction
(Equiv. Fraction)
Order Price
Less Reduction
Order Price
After Reduction

$.20
$.25 (1/4)
35 1/8 - 1/4
= 34 7/8


$.52 $.62 1/2 (5/8)
35 1/8 - 5/8
= 34 1/2


$.02 $.12 1/2 (1/8)
35 1/8 - 1/8
= 35"

whats interesting is automatically all limit orders are reduced also after a dividend payout to avoid execution of the limit orders now hitting their target.makes sense but i wasnt concious of the fact that all the limit orders too are effected by the auto-reprice system after dividend payout.....

 

[cute fuzzy bunny]

:

From the motley fool web site:

"In most cases, since dividends are small compared to the daily fluctuations in stock price, this adjustment is lost in normal trading noise." No 'destruction of capital value' to the investor who owns the dividend paying stock.

From the actual calculation I noted above:

Owning 100 Shares of VFINX as of 12/27 when the dividend is paid, price 116.25 per share, investors value 11625. Dividend of .60c per share is paid, or $60. Reinvest price on 11/28 is 115.82. $60 dividend buys .52 shares @ reinvest price of 115.82. Investors value in the fund is 100 shares @ 115.82 (11582) plus .52 shares @115.82 equals a total investors value of $11642

Value day before the dividend paid: $11625 After $11642. No "destruction of value" to the investor in dividend paying mutual funds.

 

[ats5g]

CFB,

My apologies.  I thought you were saying that the NAV of the fund goes up the day after the ex-dividend date because of the reinvestment of dividends. The return of VFINX b/w 12/27 + 12/28 is almost exactly the same return as the S&P 500 index, so I would assume that the reinvestment of dividends has no/little affect of the fund's return.

- Alec

 

[cute fuzzy bunny]

I simply made the mistake of running afoul of the belief that stock (and fund) prices are set by some economic function that can be quantified.

Dividend payouts and stock prices are not a zero sum game is all the point I wished to make. You dont end up losing by owning dividend payers, and there isnt a formula to tell you what the price of a stock or fund will be the next day as a result of a financially minute action the prior day.