Up 30....Down 30

[eta2020]

Running_Man you had explained it like a finance guy

Dividend growth is just a reflection of Earnings growth.

Earnings growth sooner or later leads to increased stock price.

[mathjak107]

Quote:

Originally Posted by Running_Man You are confusing earnings, dividend payments and Net Present Value and valuation of net present value. Of course a stock that issues a dividend has the stock fall by that exact price, since it happens today the net present value reduction is fully reflected in price. But it is not today's dividend that is affecting the stock price of dividend stocks it is the higher probability of future dividend payments and return to shareholder that provides a better floor for dividend stocks. Ideally the overall stock price is the NPV of future earnings and dividend payments discounted by prevailing interest rates and the confidence in the future earnings. A company with a history of dividend payments will have a firmer base in market turmoil and subsequently that portion can be valued with more certainty. As the dividend rises over time the certainty of the NPV also rises and is not affected by market rumors and provides a higher base for the shareholder. If a company is unable to achieve expected growth then the NPV falls, but whether a stock pays a dividend or not has absolutely no correlation to determine the future growth prospects of a company. Growth has far more to do with management, the market they are in and the effective use of available their available capital. Capital can be obtained through retained earnings, effective use of debt and issuing additional shares. To deem dividends as keeping a company from growing is not a reasonable idea in my opinion, but there are companies that pay out too much of their earnings in dividends and don't grow because of that just as there are companies that pay no dividend and don't grow because management makes bad investment decisions with their available capital. Again this is a management issue not a capital issue.

i disagree ,it is not the future earning out look that creates that drop in share price when the dividend is payed out. it is exchange rules that cause it regardless of earnings outlook, market perception ,greed and fear. all these things all play out in market action over the following quarter.

but the drop in share price from the payout has zero to do with all of the above .

it is no different than a mutual fund pay out. it is a wash! it is giving you money in the left pocket by taking it out of the right pocket.

the stock already reflects earnings and everything else when the dividend is payed out. heck if that wasn't the case we would all buy the day before a dividend is declared ,get it and sell profiting from the dividend.


finra 3220:

(1) In the case of a cash dividend or distribution, the price of the order shall be reduced by subtracting the dollar amount of the dividend or distribution from the price of the order and rounding the result to the next lower minimum quotation variation used in the primary market, provided that if there is more than one minimum quotation variation in the primary market, then the greater of the variations shall be used (e.g., if a market has minimum quotation variations of 1/16 or 1/32 of a dollar for securities trading in fractions, depending on the price of the security, or $.01 for securities trading in decimals, then the adjustment to open orders shall be in increments of 1/16 of a dollar for issues trading in fractions, and $.01 for issues trading in decimals);
(2) In the case of a stock dividend or split, the price of the order shall be reduced by rounding the dollar value of the stock dividend or split to the next higher minimum quotation variation used in the primary market as specified in paragraph (a)(1) and subtracting that amount from the price of the order; provided further, that the size of the order shall be increased by (A) multiplying the size of the original order by the numerator of the ratio of the dividend or split, (B) dividing the result by the denominator of the ratio of the dividend or split, and (C) rounding the result to the next lower round lot; and
(3) In the case of a dividend payable in either cash or securities at the option of the stockholder, the price of the order shall be reduced by the dollar value of the cash or securities, whichever is greater, according to the formulas in subparagraph (1) or (2), above; provided, that if the stockholder opts for securities, the size of the order shall be increased pursuant to the formula in subparagraph (2), above.

[Hamlet]

I tend to favor dividend paying companies because most of the companies I favor are strong but low-growth businesses. Take a company like Coke. Coke is a great business, but there really isn't much they can do to re-invest their earnings and get the same kind of returns on equity. They can either pay out dividends/buy back stock, or re-invest in a different business that is not likely to give them the same kinds of returns as their existing business.

The last thing I want is for management to take the earnings of a good business and re-invest them into a bad business, and there is a strong incentive for management to do this. Management generally gets paid better for running a bigger mediocre business than running a smaller great business.

It's different when you are investing in a smaller company with great growth prospects in a core business that is getting great returns on equity. Then you want them to retain earnings and grow the business.

It takes incredibly disiplined management to wisely invest profits from a great but low-growth business. There are companies out there like that (Berkshire comes to mind), but in general I'd rather have them stick to their existing business and cut me a check (or buy back stock if their valuation is reasonable).

[mathjak107]

i would never dispute the fact a company is what it is good or bad.. some companies go off on ventures that end up being di-worsification and hurting themselves.

but that really wasn't the discussion here.

my issue was only the fact some many think that the dividends are paying them to wait in downturns or helping their position and i dispute that logic.

any stock with similiar total returns can have a piece sold off and duplicate the dividend.

the mechanics are such the dividend payer would spin off a dividend and have a lower share price after , while the non payer would spin ioff a piece of the share and have a higher unreduced stock price. both are no better or worse than the other for the most part and both are now subject over the next quarter to market actions..

in theory while yes you are selling off shares in the non dividend payer the fact is by not having to first retrace from the reduction ,all things being equal in total return, less and less of a share has to be sold off as the price goes up to equal that dividend.

eventually the piece of share to duplicate the dividend is so small as to never run out of shares.

by the same token in theory a dividend payer that is in a downward trend and never recovers fully from each reduction after a pay out will in theory have lots of shares worth very little.

in either case it is the capital appreciation that brings up the share price so the income spin offs are recovered.

[heeyy_joe]

"my issue was only the fact some many think that the dividends are paying them to wait in downturns or helping their position and i dispute that logic." -mathjak107

Interesting viewpoint, guess I've been lucky to have had the illusion of accumulating so much wealth with a flawed strategy. You keep your theory and I'll reinvest those dividends anyways.

[mathjak107]

It is the discipline in either case. Things cannot turn out any different if total returns are the same. your strategy isn't flawed, just your interpretation of the math was.

some like myself will reinvest the dividends and pull income from a buffer. others prefer to pull dividends directly keeping less cash in the buffer.others use growth stocks and get no dividends. in either case the math is all going to be equal if returns are equal.

[Hamlet]

One difference is that the dividend doesn't fluctuate in value as erratically as the market price, and the dividend re-investment depends on the shareholder, not the management of the company.

Take 2008-2009. The dividend investor was receiving a portion of their earnings that they could re-invest at bargain prices. The companies themselves actually started hoarding cash rather than re-invest it at all.

Many, many, companies stopped their stock repurchase program during the downturn. They had just spent billions at much higher prices, but decided to stop the repurchase programs during the 50% off sale (Microsoft is the one in my portfolio that drove me nuts with this decision). Dividend investors still had the option to buy during the 50% off sale, because companies generally don't cut their dividend unless they absolutely have to.

Quote:

Originally Posted by mathjak107 It is the discipline in either case. Things cannot tern out any different if total returns are the same.

[mathjak107]

just think in terms of a fund dividend and reinvesting the distribution . you are no better or worse for it regardless of what kind of market it is done in . 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 dividend vs the distribution never happening and the prices were never reduced on your origonal shares.


a dividend paying fund is nothing more than a collection of stocks and behaves the same way. in effect it is reinvesting the dividends it gets and holding those shares to be distributed all at once instead of as they come in. once paid out it takes the same reduction and is then subjrect to market action all over again.

if that distribution never happened the market action would just start from a higher share price..

by the way According to Fidelity, on average during the past two decades, 9 percent of stocks with the highest yields cut or suspended dividends within one year, and in 2009, during the great recession, that number reached 40 percent.

interest and dividends are two very different things.

From 1980 to 2005, S&P 500 dividend payers outperformed non-payers by more than 2.6 percentage points each year.however from 2005 to 2014 non dividend payers averaged 5-6% more each year than the s&p 500.

interesting shift.

[eta2020]

Why Dividends Matter

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

[mathjak107]

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.

however companies that raise their dividend generally are doing so because they are in good financial health and you can take that fact to the bank.

no one can dispute that fact that companies with a history of raisings dividends is showing financial health.

but that does not change the myths of the math that people have about how the dividend works and what it does to the stocks price.

especially the math behind the myth of getting paid to wait.

[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.

Quote:

Originally Posted by mathjak107 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]

Quote:

Originally Posted by mathjak107 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]

Quote:

Originally Posted by 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 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]

Quote:

Originally Posted by eta2020 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.


Sent from my iPhone using Early Retirement Forum

[marko]

Quote:

Originally Posted by 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

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]

Quote:

Originally Posted by dallas27 Since a lot of dividends are paid with borrowed funds, i think your point could be argued. Sent from my iPhone using Early Retirement Forum

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.