Think about it. Before you get the dividend, you own the stock of the company. The amount to be distributed to you as dividend is in the coffers of the company. After you get the dividend, the money disappears from the coffers of the company but you still own the stock. In other words, the value of stock before the dividend must be equal to the stock + dividend received after the dividend. Even if the company does not pay a dividend, the cash retained in the company is also owned by the investor. So why are people so excited about dividends?
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5Cash owned by the investor != cash available to use by the investor.– littleadvCommented Jan 11, 2015 at 12:03
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6I wish investors still preferred dividends. Unfortunately too many are looking for a quick buck and have been forcing companies to manage for stock price growth ... which is not always healthy for either company or investors.– keshlamCommented Jan 11, 2015 at 14:52
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3 Answers
This question is predicated on the assumption that investors prefer dividends, as this depends on who you're speaking to. Some investors prefer growth stocks (some which don't pay dividends), so in this case, we're covering the percent of investors who like dividend paying stocks.
It depends on who you ask and it also depends on how self-aware they are because some people may give reasons that make little financial sense. The two major benefits that I hear are fundamentally psychological:
Dividends are like mini-paychecks. Since people get a dopamine jolt from receiving a paycheck, I would predict the same holds true for receiving dividends. More than likely, the brain feels a reward when getting dividends; even if the dividend stock performs lower than a growth stock for a decade, the experience of receiving dividends may feel more rewarding (plus, depending on the institution, they may get a report or see the tax information for the year, and that also feels good).
Some value investors don't reinvest dividends, as they believe the price of the stock matters (stocks are either cheap or expensive and automatic reinvestment to these investors implies that the price of a stock doesn't matter), so dividends allow them to rebuild their cash after a buy. They can either buy more shares, if the stock is cheap, or keep the cash if the stock is expensive. Think about Warren Buffett here: he purchased $3 billion worth of shares of Wells Fargo at approximately $8-12 a share in 2009 (from my memory, as people were shocked that be bought into a bank when no one liked banks). Consider how much money he makes from dividends off that purchase alone and if he were to currently believe Wells Fargo was overpriced, he could keep the cash and buy something else he believes is cheaper. In these cases, dividends automatically build cash cushions post buying and many value investors believe that one should always have cash on hand.
This second point is a little tricky because it can involve risk assessment: some investors believe that high dividend paying stocks, like MO, won't experience the huge declines of indexes like the SPY. MO routed the SPY in 2009 (29% vs. 19%) and these investors believe that's because it's yield was too desired (it feels safer to them - the index side would argue "but what happens in the long run?"). The problem I have with this argument (which is frequent) is that it doesn't hold true for every high yield stock, though some high yield stocks do show strong resistance levels during bear markets.
answered Jan 11, 2015 at 12:41
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3Also, some countries may have special tax treatment for dividends - for example Franking Credits in Australia.– VictorCommented Jan 11, 2015 at 20:13
Stocks aren't just paper -- they're ownership of a company. Getting cash from a stock that doesn't pay dividends basically means reducing your stake in the company.
If the stock pays dividends, on the other hand, you still have the same shares, but now you have cash too. You can choose to buy more of the company...or, more importantly, to use it elsewhere if that's what you want to do.
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One of the most common misconceptions about dividends among new or unsophisticated investors is that a dividend is free money. It is not. Dividends are just cash flow, not actual income. They do not provide Total Return nor do they increase the value of your position or account (if received in a non sheltered account, you are losing money because of taxation). This is because on the ex-dividend date, share price is reduced by the EXACT amount of the dividend, creating an equal capital loss. Commented Jun 25, 2020 at 21:16
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@BobBaerker: True enough. You're losing money to Uncle Sam either way, though -- without dividends, you're just putting off the bill til you sell.– cHaoCommented Jun 25, 2020 at 22:12
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Another issue is that by paying taxes on non sheltered dividends received, you reduce the compound rate. It's above my pay grade to know the result "X" years down the road when you factor in the compound rate, taxation now versus later as well as tax bracket bracket differences. My gut feeling is that getting taxable dividends is the poorer choice. Commented Jun 25, 2020 at 22:37
Some investors (pension funds or insurance companies) need to pay out a certain amount of money to their clients. They need cash on a periodical basis, and thus prefer dividend paying stock more.
