Originally Posted by heeyy_joe
I'll reinvest those dividends at lower prices..thank you!
great , but total return is still identical. more shares at lower prices is not a bargain when they reduce the share price at the same time by the same amount...
each payment you get and reinvest is just the company breaking a piece of your share price off , reducing the price of your share by that amount and then you put it back in.
all in all total return stays the same.
it is really no different than reinvesting the dividend payment of a mutual fund which is just a collection of stocks . nothing gained ,nothing lost from the payment itself..
the mechanics of a dividend are one of the least understood areas in investing because folks equate it to interest .
interest once it is paid is on top of your previous balance. a dividend is paid and the share price is reduced by the amount paid leaving you no better or worse than before it was paid.
after a dividend is payed the next quarter is spent trying to retrace what was paid out or more and then the process starts over again.
a total return of 6% made up of 2% dividends reinvested and 4% appreciation is identical to a non dividend payer that had 6% from appreciation only and no reinvested dividends.
dividends just make it easier because each quarter you get a check in the mail box as opposed to generating the same payment on our own from our portfolio but given the same return on the same dollars the process is identical.
if the dividends are qualified they may have a tax advantage if you are selling off pieces of your portfolio but other than that nothing gained or lost from reinvested dividends.
one other point about dividends that the folks at s&p are discovering..
compounding on investor money is the key to growing money.
a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.
what is interesting is dividends have increased to the highest levels since 1998 with a record increase of 17.8 billion dollars in increased dividends payed out just 1st quarter. the 2nd quarter was even bigger.
all dow stocks pay dividends and 84% of the s&p 500 does too.
but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up..
a good part of that capital from free cash flow is gone forever and no longer available for compounding.
mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns..
in fact one of the least efficient ways to grow investor money now is paying it out as a dividend.
as chuck akre said ,free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.
many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money.
midcaps and small caps have compounded the last 5 years at rate of 5-6% higher then their dividend paying cousins.
time will tell if the big ole dividend payers are still providing much compounding of investor money as they did in their more nimble days but in either case it all boils down to total return and the same total return will always yield the same return no matter how it is arrived at ,whether reinvesting dividends or straight appreciation...