0

I have a fairly broad question about the value of dividend stocks in a general sense. Principally, as a thought expirment, I'm considering a case where the broad market doesn't exist and the only value proposition from a dividend stock is the value of its dividend distribution over time. Since in my mind the value of the stock would the value of it to me, in a scenario where only I and the issuing company exist.

In this case if the yield is something like 5% on a $100 stock it will take me ~3 decades to reap only a meager profit from my investment... Of course I can sell the stock, but then someone else just incurs the cost... shifting the deficit to them. If the pay out is fixed (not a percentage of growing profits that I benefit from as an investor) and only adjusted for inflation then I don't see how this becomes be profitable at all for a very long time...

Is this just the reality of investing? Am I missing something? (Assuming I'm very ignorant and missing a broad general insight here).

2
  • Receiving a dividend lowers your cash at risk (5% a year in your example). It also provides compounding if the shares are reinvested, though it can be negative if share price declines. The real bang for the buck is share price appreciation: Dividends AND growth. A negative is that if received in a non-sheltered account, you may have to pay taxes for the privilege of receiving what is effectively your own money. Sep 23 at 0:51
  • 2
    Does this answer your question? If a stock doesn't pay dividends, then why is the stock worth anything?
    – Flux
    Sep 23 at 3:22

1 Answer 1

5

This is the reality of dividends. Dividends do not provide "return" because, since the dividend is cash out of the door with nothing in return, the value of the company (and hence the stock) drops by the amount of the dividend. So from a total value standpoint, you go from having a stock worth X to having D (dividend) in cash and a stock worth X-D.

The benefit of dividends is that you get some cash from your investment without having to sell part of it. The hope is that the company grows by at least the dividends it pays over time, otherwise eventually the company will waste away. So you should still expect some growth, but get the benefit of cash inflow in exchange for lower growth long-term.

You do have one flaw in your reasoning:

if the yield is something like 5% on a $100 stock it will take me ~3 decades to reap only a meager profit from my investment

This is not true. If you have a $100 stock that pays a 5% dividend and grows 5% (to make up for the dividend), after the dividend is paid you have $5 in cash and a stock worth $100. So you have "profited" because of the growth of the stock (not necessarily the dividend). In terms of cash yes it wold take a long time to get the initial investment back, but you could always sell the stock and get cash back immediately, so it's not fair to say that you won't recoup your investment for 30 years.

In other words, you don't "break even" once you get all of your initial investment back in dividends. If the stock grows by the same amount as the dividend, then you have doubled your investment. If the company does not grow and instead just pays out dividend, then you would have just extracted all of the value of the company in dividends and would "break even", but this is not the expectation with dividend stocks,

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.