My question should be more like: why dividends are inseparable from the appreciation of a stock's price?
The common explanation is something like:
Stock A pays a $10 (10%) dividend and a share is worth $100. Stock B pays no dividend and is also worth $100/share. If they both grow by 10% at the end of the year, you would have the same return on the both of them. This is because A's prices goes up to $110 and after paying a $10 dividend, A's share price goes down to $100. B's price grows to $110. 100+10=110
Makes sense. But not to me. I don't know why but I can't wrap my head around why the dividend takes money away from the share price. I thought the share price was the price for the piece of the company, and not the money is pays out. Is that not true?
To me, I see a dividend as the same thing as income from renting out a property. If you own a $100k house (assume no mortgage) and you rent it out for $1k/month, your yearly income from the house is $12k (12%). If the price of the house goes up 10%, then you still have the $12k but also $110k house so your total net worth is $122k. But if you (for the sake of argument) just owned the house so that it appreciates in value and did not rent it out, you would be $12k short at a 10% growth. This is because rental income is separate from the value of the house, obviously.
Why are dividends not the same? Why do dividends take money out of share price and not considered income from the company the same way rent is income from property?
As an aside, I understand that stocks that pay dividends are not automatically better than stocks that don't. That isn't my claim. Dividends are irrelevant in determining whether a stock is a solid investment (that is not to say they are irrelevant to your returns, see this calculator).