1

Looking dividends such as Microsoft: https://www.microsoft.com/en-us/Investor/dividends-and-stock-history.aspx

Per stock pays 0.6 USD whilst if I need to buy one stock I'll pay ~300 USD. Why Dividend profit is MUCH smaller compared to dividend cost? Even its dividend is relatively Smaller than IPO itself!!!

Similar fashion does happen with TSMC: https://investor.tsmc.com/english/dividends Its dividend is about $2.75 whilst its stock is ~100USD (at time we speak).

3 Answers 3

5

Imagine you owned a company worth $100 and split it up into 100 shares worth a dollar each. Then each quarter you paid each shareholder a $10 dollar dividend.

In a year your company with a total value of $100 gave out $4,000 to the shareholders.

(1) where did that money come from?
(2) How long would you be in business if you sold everything the company owned 4 times a year and handed it out to the owners?

This hypothetical is what you are proposing.

3

You are thinking of the $300 purchase of stock as an "expense" that you need to get back, but that's not what's happening.

You're paying $300 for something that you can turn around and sell for $300, so at that moment you haven't lost anything (I'm ignoring the bid/ask spread assuming the stock is very liquid).

So you shouldn't expect to "get your money back" through dividends. If a company was "worth" $300 per share and paid you $300 out of its cash - that company would then be worthless!

To get "return" the company needs to continue to profit and grow so that the value of the shares that you bought for $300 goes up. Dividends do not help the company grow or profit - they are a way to give a portion of that $300 back in cash, but the value of the stock foes down by the same amount.

1

At a high level. Philosophically, the way dividends should work is, some of the profit of the company is being passed to its owners.[1]

Essentially the issue you're noticing is that when you buy a share of Microsoft, you are buying more than the dividend payments. You're buying all of the company's assets, and earnings, debts, etc; the company is a lot of things. There are a lot of different ways to measure the value of a company. One measure of valuation is the Price to net Earnings Ratio (P/E Ratio). Right now Microsoft's P/E ratio is 38.32. Microsoft's share price is about $342. With these two numbers we can infer that net earnings per share of Microsoft is about $8.92 per year. (342/38.32) By the measurement of the P/E ratio, you're buying the stock for a little more than 38 years of the company's earnings.

This means Microsoft, the whole company, earned about $9 per share. Microsoft pays regular dividends quarterly, the most recent dividend was $0.62, but in 2021 Microsoft paid shareholders $2.30. Microsoft shareholders received 25% of the profit of the whole company ($2.30/$9). How much do you think the company should send to you rather than reinvesting or otherwise allocating the capital?

Separately, dividends aren't "profit" to the shareholder. The share price is reduced by the amount of the dividend when it's issued. You'll receive your $0.62 per share, but the share price will be reduced by $0.62.

I personally like dividends, I think it's important for companies to be managed with the shareholders in mind and I don't want to be required to sell stock to unlock value, but a dividend payment is not the same as interest from a bank account or a bond coupon payment.


1: There are lots of companies that pay out more in dividends than their profit, that's an entirely different issue.

2
  • So a divident is a small ammount paid and is a long term strategy for example I buy $300 value ob a stock and If I keep it I expect in about 82yrs to have ROI right? Dec 11, 2021 at 12:03
  • @DimitriosDesyllas No, you still have the stock that you could sell. But also recognize that dividends are not "return". The value of the stock goes down the same amount. In order to get return the value of the stock will have to go up.
    – D Stanley
    Dec 11, 2021 at 17:06

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