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This was asked by someone earlier but I did not get the answers.

What's the point of buying dividend stocks for yield when the stock's price itself may decline so much more?

Here's just one of the very popular high-yield dividend stock that pays ~15% divided and has fallen 25% since March.

https://stockcharts.com/freecharts/perf.php?amjl

And this happens to every single one.

What's the point of dividend yield when the original investment is losing? What about capital preservation?

The only way this can make sense is that the same stock owner now has 25% more stocks, keeping the net value of his shares the same.

Then, the dividend would be meaningful.

Or the share holder holds out long enough to accumulate enough yield to come above the total drop.

That would mean these stock buys should be timed just like other stocks. But buy them when?

Can someone explain this please.

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And this happens to every single one.

No it does not. A dividend will immediately reduce the price of the stock by the dividend amount, but not all dividend-paying stocks lose more than their dividend.

In fact, if you shift the chart you linked by just a few months (Nov 17 to Aug 18), you'll see that AMJL posted a 35% gain while paying about 20% in dividends, for a TOTAL return of 55%.

The only way this can make sense is, that the same stock owner now has 25% more stocks, keeping the net value of his shares the same.

No, if you had $100 in stock that paid a $5 dividend, the stock would drop to $95 and you'd have $5 in cash. Value is not created when a dividend is paid - it is just converted from stock to cash.

The point of a dividend is to let companies return profits to owners without forcing them to sell part of their ownership. With new, growing companies, dividends may not make sense financially, since the company would be better off putting the excess cash towards continued growth, making the company more valuable. Older, more mature companies sometimes have fewer opportunities for continued growth, and thus pay dividends to offer the owners a better return on the cash in their own investments.

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Stock prices go up as well as down. You just happen to be looking at a period when the market performed badly. If prices had gone up 20% you wouldn’t have any doubts, and that’s just as likely. Look at twenty-year price trends, which is long enough to smooth out most market fluctuations. Stocks are certainly riskier than bonds or money in the bank, which is why their average long-term returns are better.

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What's the point of buying Dividend Stocks for yield, when the Stock Price itself may decline so much more.

If that's the case then what's the point of buying ANY stock if you can lose money?

You don't invest in a stock for yield. Yield is just the conversion of stock value to cash that is returned to you, lowering your cost basis. It is not Total Return.

Here's just one of the very popular high-yield dividend stock that pays ~15% divided. And its fallen 25% since March.

If you bought and held this stock as it dropped 25% from your purchase price, it was a bad investment. Fortunately, the 15% yield offset some of your loss and you only lost 10%.

Whats the point of Dividend yield when the original investment is losing? What about capital preservation?

Capital preservation applies to any position regardless of whether it pays a dividend or not. The dividend isn't the problem here.

The only way this can make sense is, that the same stock owner now has 25% more stocks, keeping the net value of his shares the same.

For that to happen, the dividend would have had to have been 25%. With reinvestment, the value of the shares would have been somewhere in the vicinity of 'the same'. However, share price was dropping continuously, so reinvested shares would have lost some money as well and the return would have been a bit less than 'the same'.

Or, the share holder holds out long enough to accumulate enough yield to come above the total drop.

Buy low, sell high always makes money. Buy high (with this stock), not so much.

EDIT:

If you invested $10,000 in AMJL on 12/29/17 at $19.22 (closing price) then you bought 520.29 shares

You received $2.78 in dividends or a total of $1,446

AMJL closed at $11.17 on 12/28/18, down $8.05 for the year (a loss of $4,188).

Of the $8.05 price drop, $2.78 was due to share price reduction by the stock exchanges on the ex-dividend dates and $5.27 was due to poor stock performance.

Total Return = Capital Gain + Interest + Dividend

To keep it simple, let's ignore interest earned if dividends not reinvested

-$2,742 = - $4,188 + $1,446

Or you could achieve the same answer by adjusting the share price loss by the total amount of dividends received and multiply by the number of shares:

(- $8.05 + $2.78) x 520.29 = - $2,742

If the dividends were reinvested, then the number of shares owned on 12/29/18 would be 610.10 Because share price declined, reinvesting the dividends increased the loss.

610.10 * $11.17 - $10,000 = - $ 3,185

You can verify these numbers at:

https://www.dividendchannel.com/drip-returns-calculator/

  • Re "... you only lost 10%", that's only true if the OP sold the stock at that price. Otherwise, he still has the same shares of stock, the value of which will fluctuate according to a number of factors, many of which have absolutely nothing to do with that particular stock. In a couple of years the stock could well be back to its original price, or even higher. – jamesqf Dec 29 '18 at 18:37
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    @jamesqf 27 - Let's not conflate other possible events with the current situation. What happens in the future has nothing to do with the value today. It is a loss of 10%. In financial terms, it is called an UNREALIZED LOSS. – Bob Baerker Dec 29 '18 at 19:09
  • @jamesqf If one goes by the Efficient Market Hypothesis, then they have lost 10%. Furthermore, if one compares the actual universe to a hypothetical one in which they had not bought the stock in March, then to make those two universes comparable they would have to either sell the stock today in the former universe, or buy it today in the latter. Either way, they would be out 10% of the stock price compared to the hypothetical universe. While one could come up with an accounting system in which they have not lost money, those sort of accounting systems are what lead to Enrons. – Acccumulation Dec 29 '18 at 22:47
  • @Bob Baerker: If you think it's a loss... Well, just try deducting it on your Schedule D :-) And you seem to be missing the important point entirely: stocks go up and (alas!) down due to factors that have absolutely nothing to do with their inherent value. Or haven't you been reading the news these past few weeks? – jamesqf Dec 30 '18 at 4:26
  • @jamesqf Sch D is for realized losses; this one is unrealized (a somewhat artificial tax distinction that leads to complications like the wash-sale rule). Economically they are both losses. Re the "important point", I think you may be intuiting stock prices as a "mean-reverting" process where unrealized losses are likely to be temporary. Rather, the evidence favors a "martingale" process (efficient market) where a stock, no matter how "oversold", is about as likely to decline further as to rebound. Thus, when the value falls 10%, the expected value on any future date also falls 10%. – nanoman Dec 30 '18 at 23:17

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