Ex Dividend

[maybesomeday]

Ok maybe someone can explain ex Dividend to me, today in my brokerage account I was down a lot more than the actual market for stock (T) and I researched it and they said it was because of ex Dividend date is today, but how do you make any money if the take out the same amount you make when the Dividend hits.. why would anyone be in any of these stocks if they pay the money out of your own account, looks to me I will break even when the Dividend hits but today I lost money

 

[Walt34]

Oh, I misunderstood. I thought this was about how much happier I was when my Ex went away....

 

[OneLushBonus]

Ex Dividend means that if you own the stock by that date, you get the dividend (which usually comes a few weeks later). When a dividend is announce, the market will reprice the stock to take that into account.

Think of it this way: a stock is valued at $100. A $5 dividend is announced. If you own that stock, you then have a $100 stock AND $5 in dividends coming your way. If you buy it after the dividend was announced and before the ex dividend date, it's value is $105 (the value + the dividend), and so the cost of the stock is going to be $105 because the dividend is attached. If you were to buy it after the ex dividend date, you miss out on the dividend, so you're back to just the value of the stock, or $100, and whoever owned it before you is entitled to the dividend.

And you didn't lose any money today. You'll be getting that money in a few weeks as a dividend.

 

[OldShooter]

Ok maybe someone can explain ex Dividend to me, today in my brokerage account I was down a lot more than the actual market for stock (T) and I researched it and they said it was because of ex Dividend date is today, but how do you make any money if the take out the same amount you make when the Dividend hits.. why would anyone be in any of these stocks if they pay the money out of your own account, looks to me I will break even when the Dividend hits but today I lost money

Well, you have cracked the code on dividends. Basically they just move money from one pocket (at the company) to another (yours). It's the same as moving money from one of your own pockets to another. You haven't lost any money. The check is in the mail.

One way to look at dividends is that you are getting a share of the company's profits. That's a classic view. The stock regains value as another quarter of profits begins to pile up.

Another way to look at it is as a management failure; they have not figured out a way to profitably invest your money within the company, so they are giving it back to you. Said another way, a company that does not pay dividends is investing your money for you.

Yet another way to look at it is that dividends are a tax inefficient way to return shareholders' money and should never be paid. A better way is to repurchase stock, which theoretically will cause the remaining stock value to rise and produce capital gains for shareholders that each shareholder can harvest based on his/her needs and tax situation.

I expect that people will be along soon to argue about this.

 

[Souschef]

Oh, I misunderstood. I thought this was about how much happier I was when my Ex went away....

 

[marko]

Another way to look at it is as a management failure; they have not figured out a way to profitably invest your money within the company, so they are giving it back to you. Said another way, a company that does not pay dividends is investing your money for you.

As a company that paid dividends, our view was that the shareholder was an owner of the company. As an owner you deserved a certain compensation for that ownership. Sounds like BS, but we really believed that.

We were [-]highly[/-] obscenely profitable and certainly had figured out a way to invest our profits (R&D, capital improvements, employee development, M&A, etc) but what was left over was still a hefty amount of cash which we felt belonged to those who were shareholders/owners.

In fact, one year we had such a surplus that we issued a one-time dividend of something like 35% (I forget the actual number) just to burn off the extra cash.

Point being, we were so profitable it would be hard to argue that we didn't know how to invest in or run the company.

We'd even get letters sometimes from older people who looked forward to the dividends and would share some hokey stories about how they appreciated the income.

 

[pb4uski]

Or another way of thinking about it. The stock is trading at $105 and pays a $5 dividend and goes ex-dividend... the share price drops to $100... but you also have a receivable from the company for $5 for the dividend and will collect that receivable in a few days.. at which point you'll have $5 in cash and shares worth $100.

 

[ERD50]

Well, you have cracked the code on dividends. ...

I expect that people will be along soon to argue about this.

Maybe this thread should be merged with the "9-year fixed income plan " thread?

As a company that paid dividends, our view was that the shareholder was an owner of the company. As an owner you deserved a certain compensation for that ownership. Sounds like BS, but we really believed that.

We were [-]highly[/-] obscenely profitable and certainly had figured out a way to invest our profits (R&D, capital improvements, employee development, M&A, etc) but what was left over was still a hefty amount of cash which we felt belonged to those who were shareholders/owners.

In fact, one year we had such a surplus that we issued a one-time dividend of something like 35% (I forget the actual number) just to burn off the extra cash.

Point being, we were so profitable it would be hard to argue that we didn't know how to invest in or run the company. ....

Well, that's not contrary to what OldShooter said, in fact it seems to support it.

On one hand, you say you would know how to invest it in the company, but you also said you gave a dividend "just to burn off the cash"? Well, why not invest it then? Clearly, the shareholders would benefit when these great investments created value and raised the share price of the stock they own?

And to the OP's point - you either distributed it, or retained it. If you retained it, it boosted the share price. The shareholder benefited from your gains, whether distributed or retained.

-ERD50

 

[MRG]

Ok maybe someone can explain ex Dividend to me, today in my brokerage account I was down a lot more than the actual market for stock (T) and I researched it and they said it was because of ex Dividend date is today, but how do you make any money if the take out the same amount you make when the Dividend hits.. why would anyone be in any of these stocks if they pay the money out of your own account, looks to me I will break even when the Dividend hits but today I lost money

You can reinvest your distribution and take advantage of the lower price to buy in.

You might want to look at a chart of the issue(T) over time. Note when the dividend is played, some charts have an indicator, and the price. You will see it drop and then regain the old price, perhaps appreciate from there until the next dividend. Ideally over time the chart goes from the lower left to the upper right.

Granted T doesn't do that, hasn't for a long time. It's paying off a bunch of cash every year. Perhaps too much? Is that what you want? I get all the T I want from simple index funds.

 

[RxMan]

This report highlights the importance of dividends on total returns. I’ve always believed in dividends and I think there is a place for dividend stocks in a portfolio for those concerned with generating income.

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

 

[audreyh1]

Companies can easily blow profits they reinvest in their company instead of paying out as dividends. It’s happened many times. Peter Lynch used to complain about “deworsification”.

Not to mention frequent horrible timing on stock buybacks.

So I prefer dividends paid over financial engineering to boost stock prices short term.

 

[ERD50]

This report highlights the importance of dividends on total returns. I’ve always believed in dividends and I think there is a place for dividend stocks in a portfolio for those concerned with generating income.

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

Your first sentence is a fact. Your second sentence is not a logical extension of that fact, and is not backed by any data that I have seen.


No one here is saying to ignore dividends. It has been said many times "dividends are a component of total return".

The total market includes dividend payers, so that's fine. But there is no reason that we have been shown to concentrate on dividend payers. That is a sector, and we have not been shown that this sector out-performs the Total Market.

Be careful with some of the information presented in that link. Yes, they show that some range of dividend payers out-perform the S&P sometimes, but.... (very big but)....

As far as I can tell, that is a rear-view mirror look. Looks like what they are doing is comparing the past year by div-payers versus S&P. So for example, if a company cut their div to zero, due to bad financials, they would be moved from the div-payers, to the non-div payers.

What you need to look at is a list of div payers selected 10 years ago, and it could be updated over time (but not in the rear view mirror), and see if those picks beat the S&P going forward.

I could do the same sort of selection and say "I looked at non-div payers that grew more than 25% over the year, and they beat the S&P almost every time". See, it makes no sense to select after the fact. It is not actionable. But this seems to be the sort of analysis the high-div group relies on to try to defend their "feelings".

And to poster ESR,who claims we can trust the BOD to manage these divs for us, an interesting excerpt ....

Payout Ratio: A Critical Metric

One reason why second-quintile dividend stocks came out ahead is because the first-quintile’s excessive dividend payouts haven’t always been sustainable. The best way to measure whether a company will be able to pay a consistent dividend is through the payout ratio.

The payout ratio is calculated by dividing the yearly dividend per share by the earnings per share. A high payout ratio means that a company is using a significant percentage of its earnings to pay a dividend, which leaves them with less money to invest in future growth of the business.

The chart below illustrates the average dividend payout ratio since 1979 for the first two quintiles of dividend payers within the Russell 1000 Index.3 The first-quintile stocks had an average dividend payout ratio of 72%, while the second quintile had a 41% average payout ratio.

A payout ratio of 72% could be difficult to sustain if a company experiences a drop in earnings. Once this happens, a company could be forced to cut its dividend. A dividend cut is often viewed as a sign of weakness in the financial markets and frequently results in a decline in the price of the company’s stock.

-ERD50

 

[ERD50]

Companies can easily blow profits they reinvest in their company instead of paying out as dividends. It’s happened many times. Peter Lynch used to complain about “deworsification”.

Not to mention frequent horrible timing on stock buybacks.

So I prefer dividends paid over financial engineering to boost stock prices short term.

And many of the companies that have provided a significant part of the growth on the market use their money to invest and grow the company instead of paying dividends.

Seems all you are saying is you don't want to see a company make a bad financial decision. That holds for any company regardless of their dividend payout. Again, where is the data showing these div payers to be a good choice for an investor?

-ERD50

 

[OldShooter]

This report highlights the importance of dividends on total returns. I’ve always believed in dividends and I think there is a place for dividend stocks in a portfolio for those concerned with generating income.

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

Thanks for the link. I think quite a bit of the report is useful, particularly the first few pages and the discussion of the "too-high" dividend pitfall. I agree with @ERD50, though, regarding survivorship bias. The fact that the author never mentions this important issue tells me that he/she has effectively been cherry-picking many of the fine-detail numbers and conclusions. Such is life, I guess. "Caveat emptor" applies to so many of these proprietary reports. At least the author is not primarily hawking his firm's products, like so many of thes "reports" do.

 

[ERD50]

Thanks for the link. I think quite a bit of the report is useful, particularly the first few pages and the discussion of the "too-high" dividend pitfall. I agree with @ERD50, though, regarding survivorship bias. The fact that the author never mentions this important issue tells me that he/she has effectively been cherry-picking many of the fine-detail numbers and conclusions. Such is life, I guess. "Caveat emptor" applies to so many of these proprietary reports. At least the author is not primarily hawking his firm's products, like so many of thes "reports" do.

Yes, but we can "read between the lines" of their fine print (bold mine):

Past performance is not a guarantee of future results. For illustrative purposes only.

Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market.

The graph is not representative of any Hartford Fund’s performance, and does not take into account fees and charges associated with actual investments.

S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Indices are unmanaged and not available for direct investment.

I know much of that is a legal requirement, so that's fine. But my big question is, if Hartford thinks this data is meaningful, why don't they offer a fund that uses this 'strategy' to beat the market? Is it because they don't have a crystal ball to pick winners after the fact?

That's how it appears to me.

And while their 'S&P index.... not available for direct investment' is technically true, you can invest in a good representation of that index for a very, very low fee. So I find that statement to be misleading, and I suspect it is intentionally so. I've heard that claim used by some hucksters - "You can't buy an index, it's impossible! It's just a concept, hah-hah, they are playing you for a fool!", with no further explanation that you can do the next best thing, and it's really, really close. And likely better than anything they try to sell you.

-ERD50

 

[OldShooter]

You're a little harder on these guys than I am.

Big picture, if this guy knew how to make consistently winning investments he would not be stuffing himself into a suit every morning and going to work in a building where the windows don't even open. He is just some schlub trying to make a living. He may not even understand survivorship bias.

Re "You can't buy an index" yes that is pretty common and, as you point out, strictly accurate. Certainly the hucksters will not also point out that it's easy to come within a few basis points of an index's performance. Would you if you were them? Of course not. I don't get too steamed up about it and I think we are seeing it less now that all the fund managers have cut each others' throats on fees.

Re "strategy to beat the market" I don't see a specific strategy in there and, if there was one, the Hartford compliance guys probably would have stripped it out. Few people want to be on the record with actionable recommendations these days, particularly as retail investors are becoming increasingly aware that few, if any, "strategies" are likely to beat the market over the long haul.

So I just read the report for what it is and don't find it to be annoying at all.

 

[dirtbiker]

Well, you have cracked the code on dividends. Basically they just move money from one pocket (at the company) to another (yours). It's the same as moving money from one of your own pockets to another. You haven't lost any money. The check is in the mail.

One way to look at dividends is that you are getting a share of the company's profits. That's a classic view. The stock regains value as another quarter of profits begins to pile up.

Another way to look at it is as a management failure; they have not figured out a way to profitably invest your money within the company, so they are giving it back to you. Said another way, a company that does not pay dividends is investing your money for you.

Yet another way to look at it is that dividends are a tax inefficient way to return shareholders' money and should never be paid. A better way is to repurchase stock, which theoretically will cause the remaining stock value to rise and produce capital gains for shareholders that each shareholder can harvest based on his/her needs and tax situation.

I expect that people will be along soon to argue about this.

Dividends are not always a management failure (though they certainly can be). Some types of companies are set up specifically with dividend income generation as a business goal (such as REITs). There are other highly successful corporations generating gobs of income that are paying dividends. Look at Apple, who has been a consistent dividend payer since 2012. Coca Cola has been paying dividends since the 20s. These two mega-successful corporations have had notoriously good management and have outperformed the market big time. You'd have a very hard time arguing management failure here.

And as far as repurchasing stock, yes, that's great. However, it only makes sense if the stock can be purchased below its intrinsic value (Buffett's take on it. I won't take credit). If it can't, does the company sit on piles of cash? Or does it pay out?

I'm a fan of dividends. The downside is that they're not tax advantageous, like you pointed out, however, they're cash-paying income on top of capital appreciation.

 

[ERD50]

Dividends are not always a management failure (though they certainly can be). .... There are other highly successful corporations generating gobs of income that are paying dividends. Look at Apple, who has been a consistent dividend payer since 2012. ....

I'm pretty sure that most of Apple's growth came from the time they were not paying a dividend.

The point is, some companies do well, some do not, some are just average. It does not appear that dividends are any sort of indicator of their future.

... I'm a fan of dividends. The downside is that they're not tax advantageous, like you pointed out, however, they're cash-paying income on top of capital appreciation.

Why are you a fan? It looks like the high-div sector provides less money to the investor. Is there any good reason to prefer that money in the form of dividends rather than some combo of dividends and capital appreciation? A good enough reason to actually accept less money for it (as the data seems to show)? I like money.

-ERD50

 

[ERD50]

I was curious, turns out your choice of Apple as an example was a poor one. I had forgotten that they paid a div much earlier too:

https://finance.yahoo.com/chart

https://yhoo.it/2S4MOKO << short link...

Roughly:

from 1980 to 1987, no div, and grew ~ 3x.

from 1987 to 1995, they paid a dividend, and look to be flat or negative (probably slightly positive if you include the divs, this is an NAV chart).

from 1995 to 2012, no div, and grew from ~ $1.40 to ~ $83. ~ 60x!!!!!

from 2012 to present, they paid a dividend, and grew from ~ $83 to $203 . ~ 2.5x

If I had a time machine, I'd take the no-div AAPL! How about you?

PS: this 'proves' nothing, other than divs may not be such a reliable indicator.

-ERD50

 

[dirtbiker]

I'm pretty sure that most of Apple's growth came from the time they were not paying a dividend.

The point is, some companies do well, some do not, some are just average. It does not appear that dividends are any sort of indicator of their future.

You would enjoy a 20% annual return if you had invested the day before their first ex-dividend date. Not too shabby, and handily beat out the market.

My point was that dividends shoudn't always be described as a management failure.

Why are you a fan? It looks like the high-div sector provides less money to the investor. Is there any good reason to prefer that money in the form of dividends rather than some combo of dividends and capital appreciation? A good enough reason to actually accept less money for it (as the data seems to show)? I like money.

-ERD50

I'm a fan for a few reasons. First, dividend stocks (I didn't say high dividend stocks, as the highest can mean recent stock price drop, unattainable long term dividend, etc.) are generally more stable and less risky. I invest 100% in equities, large blue chip stocks are my conservative portion of my portfolio. Second, I haven't seen any solid data to show that dividend stocks underperform the market. Do you have a link that shows this? And of course I would like the combo of dividends and capital appreciation, rather than just dividends. Obviously. I clearly stated that in my post you quoted. Third, dividend paying stocks weather financial crises better. If my 100,000 investment in a large Blue Chip paying 3% dividends bottoms out to $30,000, I'm still collecting $3000 per year that I then reinvest to pick up shares at a bargain. Sure, some companies slash dividends during recessions, but most blue chips don't. Fourth, they actually force management to be disciplined. Charlie Munger once said (I think this is a quote, not a paraphrase) "the quickest way to solve Berkshire Hathaway's capital reinvestment risk would be to pay out most of the earnings as a dividend. The management can't screw up what it doesn't control. It's a brilliantly simple truth. Dividends impose discipline." He was referencing what to do after he and Warren pass away. And lastly, it's' a misconception that just because a stock pays dividends that it doesn't grow. That's simply just not the case.

There are a lot of good reasons to like dividend stocks. They're not for everyone, but I like them. Keep in mind, I don't only have dividend stocks, but I don't shy away from them.

 

[OldShooter]

As a passive investor I don't really have a dog in this fight but I thought you guys might be interested in something that was presented at today's 2Q19 investment review meeting for a nonprofit I'm involved with. The chart shows the YTD2019 total return for the S&P 500 and five subcategories of dividend-payers ranging from 3.5%+ to zero.

​

So the way you read it, for example, is to see that companies paying dividends in the 1.6-2.4% range delivered total return of 23.8% in the first half. Ref the debate here, it seems that high dividends were negatively correlated with high total return. But of course six months is a pretty short time from which to make generalizations.

(Sorry, I have no way to get a chart that covers a longer time period.)

 

[RobbieB]

Cool. I just looked and my divi's last year were 2.4%. My guys are doing it right!

 

[ERD50]

You would enjoy a 20% annual return if you had invested the day before their first ex-dividend date. Not too shabby, and handily beat out the market.

My point was that dividends shouldn't always be described as a management failure.
...

I agree. I'm saying that divs don't really seem to be indicative of anything. But we are getting silly to try to take away too much from any one company - that was just to illustrate, let's get back to the big picture.

.... I'm a fan for a few reasons. First, dividend stocks (I didn't say high dividend stocks, as the highest can mean recent stock price drop, unattainable long term dividend, etc.) are generally more stable and less risky. ....

... dividend paying stocks weather financial crises better .....

... I haven't seen any solid data to show that dividend stocks underperform the market. Do you have a link that shows this? .... .

Yes, several. Here are a few from this thread (disregard any ref to HYD, that was in error):

http://www.early-retirement.org/forums/f28/9-year-fixed-income-plan-98420.html#post2264445

OK, so I looked at ARTFX. Unfortunately, the history only goes back to 2014, so we can't see how it performed during the 2000 and 2008 periods. But even over this short period, it performed very similarly to a 40/60 blend.

http://bit.ly/2KXAZW0 << short link to portfolio visualizer

http://bit.ly/2KWoWIN << added Wellesley; same story

---------------------------

And yet, when I plug these into Portfolio Backtester, it shows that VTI outperforms a blend of VIG/VYM. And if I add in some bonds to make the performance about equal, the standard dev is very, very close.

Where's the advantage? Can you demonstrate the advantage, rather than just claim there is one? This isn't "poo-poo-ing" anything, it is letting the numbers talk.

http://bit.ly/2L7T9EL << short link

-------------------------------

So another back-test. Here VYM under-performs the total market (CAGR of 7.7% vs 8.44% for VTI), though with a small reduction in std dev (14.17% vs 15.24% for VTI).

If we adjust for near-equal performance with an 81/19 AA to bonds, the VTI/Bond mix has significantly lower std dev ( 11.86% vs VYM's 14.17%). This is to Bernstein's point (I think it was Bernstein, can't swear to it), you are better off adjusting the AA, than to try to goose returns with high-yield. He didn't find any alpha in the high yield, and neither have I.

http://bit.ly/2S0YkXN << short link to back-test

And if you look closely, you'll see that the div funds dropped more in the crash. There was no safety. Even when pulling 4%, or 3.3% or whatever from both.

Let's see your links that show over-performance. I like money, I'd like to see them.

... Fourth, they actually force management to be disciplined. Charlie Munger once said (I think this is a quote, not a paraphrase) "the quickest way to solve Berkshire Hathaway's capital reinvestment risk would be to pay out most of the earnings as a dividend. The management can't screw up what it doesn't control. It's a brilliantly simple truth. Dividends impose discipline." He was referencing what to do after he and Warren pass away. And lastly, it's' a misconception that just because a stock pays dividends that it doesn't grow. That's simply just not the case. ...

And if that is the case, it should show in the data. Where's the data to support this?

Who has this misconception you threw out? Of course div payers can also grow.

... There are a lot of good reasons to like dividend stocks. They're not for everyone, but I like them. Keep in mind, I don't only have dividend stocks, but I don't shy away from them.

I don't shy away from them either, I accept every one of them that is in my S&P500 or Total Market funds/ETFs. But I'm also not interested in investing in a sector of funds of div payers without clear evidence of an advantage.

Show me, please show me!

-ERD50

 

[ERD50]

Cool. I just looked and my divi's last year were 2.4%. My guys are doing it right!

Not if the 2.4% was a weghted average of stocks with > 3.5% and < 0.6% dividends!

I honestly don't understand this obsession with dividends. Just buy the market and take a nap. If it's good enough for nunnun, it's good enough for me! (reference to the 'Beat Boho' thread for those not in on the joke).

-ERD50

 

[pb4uski]

https://www.forbes.com/sites/jimdah...oid-focusing-on-dividend-stocks/#3c6e3eea7479

Through my work at The White Coat Investor where I help high income professionals to get a "fair shake" on Wall Street, I have run into many investors who inappropriately focus their investments on dividend-paying stocks. While there are far worse ways to invest, a focus on dividend-paying stocks has an almost cult-like following. There are five reasons why overly focusing on dividends is generally an investing error. ....

# 1 Uncompensated Risk ....
# 2 Failure To Focus On Total Return ....
# 3 Mistake Dividend Stocks For Bonds ....
# 4 Dividends Are Tax-inefficient ....
# 5 Inefficient Method To Get A Value Tilt ....

Dividend stocks need not be avoided completely. In fact, I essentially own all of the dividend paying stocks in the world via total market index funds. However, these five arguments demonstrate well why building a portfolio composed entirely of a handful or two of high-yield stocks is a mistake that will be regretted by many investors.