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I have heard that some people buy stocks based on how much dividend they pay, because dividend is considered 'income'. But if I buy a stock for 100$ and it pays a $1 dividend, the stock would also drop by $1. So really, is there any benefit to the dividend? It seems the drop in price would cancel out the 'income', so what is the point in getting the dividend?

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    Are you day-trading ? Or investing longer term ? – User.1 Apr 7 '14 at 2:51
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    Curious why all the downvotes, the question seems legit to me. And some great answers are coming in. – JTP - Apologise to Monica Apr 7 '14 at 12:24
  • Perhaps you should count your lucky stars when this situation occurs. It creates a fantastic buy opportunity, and you have income to do it. – Pete B. Apr 7 '14 at 13:38
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    Probably for many of the same reasons that lenders like regular interest payments over the life of a debt rather than receiving a lump sum of principal and interest all at the end. – NL7 Apr 8 '14 at 19:22
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    This is a great question. I signed in just to upvote it. – Ben Mar 12 '16 at 4:19
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There are many reasons for buying stock for dividends.

You are right in the sense that in theory a stock's price will go down in value by the amount of the dividend. As the amount of dividend was adding to the value of the company, but now has been paid out to shareholder, so now the company is worth less by the value of the dividend. However, in real life this may or may not happen. Sometimes the price will drop by less than the value of the dividend. Sometimes the price will drop by more than the dividend. And other times the price will go up even though the stock has gone ex-dividend.

We can say that if the price has dropped by exactly the amount of the dividend then there has been no change in the stockholders value, if the price has dropped by more than the value of the dividend then there has been a drop to the stockholder's value, and if the price has gone up or dropped by less than the value of the dividend then there has been a increase to the stockholder's value.

Benefits of Buying Stocks with Good Dividends:

  • Buying up-trending stocks with regular dividend will provide good long term returns.
  • Some countries may have beneficial tax treatment for dividends compared to capital gains. In Australia investors get tax credits if they receive dividends from post tax profits.
  • Regular dividends can produce a regular source of income to retirees and help supplement the income of those still working.
  • Stocks with high dividends attract demand from investors thus potentially adding to the increase of the stock price over time.

What you shouldn't do however, is buy stocks solely due to the dividend. Be aware that if a company starts reducing its dividends, it could be an early warning sign that the company may be heading into financial troubles. That is why holding a stock that is dropping in price purely for its dividend can be a very dangerous practice.

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    +1 - your 3rd bullet deserves a bit of expanding. The investor who wishes to hold long term but would like income from a stock struggles with the issue of needing to sell shares on a regular basis to get cash. The dividend stock holder can take the cash or choose reinvestment, watching their share qty grow over time. – JTP - Apologise to Monica Apr 7 '14 at 12:07
  • What is the reason of the volatility of the price after a dividend? Or in other words, why the price doesn't drop by exactly the amount of the dividend? – abdullah kahraman Apr 7 '18 at 5:30
  • @abdullahkahraman - on a normal day when the stock does not go ex-dividend, would you expect the stock to not move at all and stay always at the same price? If not, then why would you expect on ex-dividend day for the price to drop by exactly the value of the dividend and stay at that price all day? – Victor Apr 7 '18 at 6:15
  • Oh, I understand.. Thank you and sorry, newbie here. So it is my misunderstanding of trying to match this volatility with the dividend. – abdullah kahraman Apr 7 '18 at 9:50
  • You are conflating what happens on the corporate side with what happens in your brokerage account. Share price (U.S.) drops by the exact amount of the dividend on the ex-div date. It is done by the stock exchange. That creates a capital loss equal to the dividend. If non sheltered, dividends are taxed as income but they are not actual income until share price appreciates to the close the day before ex-dividend date (ignoring the modest compounding gain from reinvested dividends). – Bob Baerker Jul 26 '18 at 20:36
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You buy stocks for dividends over the long term. If a share of stock pays $1.00 in dividends every quarter, that's four dollars a year. If you bought it for $40, it pays out $4 in a year, and it's still worth roughly $40 at the end of the year, you're $4 richer. People will often invest large amounts of money in stable stocks not planning to sell it, but only collect the dividends which are either re-invested or pulled out as income.

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    "if ... it's still worth roughly $40 at the end of the year" => that is a big if. – assylias Apr 7 '14 at 19:27
  • In order for that $4 in dividends to be income, share price must appreciate $4 back to the purchase price of $40. Otherwise, you are just being paid $4 from your brokerage account and you have to pay taxes on it if non sheltered. – Bob Baerker Jul 26 '18 at 20:38
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I'm not a financial expert, but saying that paying a $1 dividend will reduce the value of the stock by $1 sounds like awfully simple-minded reasoning to me. It appears to be based on the assumption that the price of a stock is equal to the value of the assets of a company divided by the total number of shares. But that simply isn't true. You don't even need to do any in-depth analysis to prove it. Just look at share prices over a few days. You should easily be able to find stocks whose price varied wildly. If, say, a company becomes the target of a federal investigation, the share price will plummet the day the announcement is made. Did the company's assets really disappear that day? No. What's happened is that the company's long term prospects are now in doubt. Or a company announces a promising new product. The share price shoots up. They may not have sold a single unit of the new product yet, they haven't made a dollar. But their future prospects now look improved.

Many factors go into determining a stock price. Sure, total assets is a factor. But more important is anticipated future earning. I think a very simple case could be made that if a stock never paid any dividends, and if everyone knew it would never pay any dividends, that stock is worthless. The stock will never produce any profit to the owner. So why should you be willing to pay anything for it? One could say, The value could go up and you could sell at a profit. But on what basis would the value go up? Why would investors be willing to pay larger and larger amounts of money for an asset that produces zero income?

Update

I think I understand the source of the confusion now, so let me add to my answer.

Suppose that a company's stock is selling for, say, $10. And to simplify the discussion let's suppose that there is absolutely nothing affecting the value of that stock except an expected dividend. The company plans to pay a dividend on a specific date of $1 per share. This dividend is announced well in advance. Everyone knows that it will be paid, and everyone is extremely confidant that in fact the company really will pay it -- they won't run out of money or any such.

Then in a pure market, we would expect that as the date of that dividend approaches, the price of the stock would rise until the day before the dividend is paid, it is $11. Then the day after the dividend is paid the price would fall back to $10. Why? Because the person who owns the stock on the "dividend day" will get that $1. So if you bought the stock the day before the dividend, the next day you would immediately receive $1. If without the dividend the stock is worth $10, then the day before the dividend the stock is worth $11 because you know that the next day you will get a $1 "refund". If you buy the stock the day after the dividend is paid, you will not get the $1 -- it will go to the person who had the stock yesterday -- so the value of the stock falls back to the "normal" $10.

So if you look at the value of a stock immediately after a dividend is paid, yes, it will be less than it was the day before by an amount equal to the dividend. (Plus or minus all the other things that affect the value of a stock, which in many cases would totally mask this effect.) But this does not mean that the dividend is worthless. Just the opposite. The reason the stock price fell was precisely because the dividend has value. BUT IT ONLY HAS VALUE TO THE PERSON WHO GETS IT. It does me no good that YOU get a $1 dividend. I want ME to get the money. So if I buy the stock after the dividend was paid, I missed my chance.

So sure, in the very short term, a stock loses value after paying a dividend. But this does not mean that dividends in general reduce the value of a stock. Just the opposite. The price fell because it had gone up in anticipation of the dividend and is now returning to the "normal" level. Without the dividend, the price would never have gone up in the first place.

Imagine you had a company with negligible assets. For example, an accounting firm that rents office space so it doesn't own a building, its only tangible assets are some office supplies and the like. So if the company liquidates, it would be worth pretty much zero. Everybody knows that if liquidated, the company would be worth zero. Further suppose that everyone somehow knows that this company will never, ever again pay a dividend. (Maybe federal regulators are shutting the company down because it's products were declared unacceptably hazardous, or the company was built around one genius who just died, etc.) What is the stock worth? Zero. It is an investment that you KNOW has a zero return. Why would anyone be willing to pay anything for it? It's no answer to say that you might buy the stock in the hope that the price of the stock will go up and you can sell at a profit even with no dividends. Why would anyone else pay anything for this stock? Well, unless their stock certificates are pretty and people like to collect them or something like that. Otherwise you're supposing that people would knowingly buy into a pyramid scheme.

(Of course in real life there are usually uncertainties. If a company is dying, some people may believe, rightly or wrongly, that there is still hope of reviving it. Etc.)

Don't confuse the value of the assets of a company with the value of its stock. They are related, of course -- all else being equal, a company with a billion dollars in assets will have a higher market capitalization than a company with ten dollars in assets. But you can't calculate the price of a company's stock by adding up the value of all its assets, subtracting liabilities, and dividing by the number of shares. That's just not how it works. Long term, the value of any stock is not the value of the assets but the net present value of the total future expected dividends. Subject to all sorts of complexities in real life.

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    "I'm not a financial expert, but saying that paying a $1 dividend will reduce the value of the stock by $1 sounds like awfully simple-minded reasoning to me." => it is (approximately) the truth though... And it happens to make sense: if a company is worth $1bn and they pay out $10m in dividends it is only worth $990m after the payment: cash has gone out of their bank account. – assylias Apr 7 '14 at 19:25
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    assylias is correct, the value of the company goes down by the amount of the div., because the amount of div. has come out of the assets of the company. Before the ex-div. date $10m was part of the company's assets, as of ex-div. date that $10m has been allocated to the shareholders. What you refer to Jay, is the stock price, which doesn't always relate to the true value of the stock. A stock price always commences ex-div. date at minus the dividend amount and then moves up or down from this point. In less liquid stocks the first trade on ex-div. date might vary considerably from this point. – Victor Apr 8 '14 at 4:39
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    @assylias A company's BALANCE SHEET will show a reduction in assets of $10 million if they pay $10 million in dividends. But total value of stock is not necessarily equal to total assets. You are confusing two vastly different things. I see you are talking about ex-dividend dates. But this is a technicality. If a company is planning to pay a dividend on, say, March 31, then the value of the stock on April 1 is less than the value on March 30 because if you buy on April 1 you will not receive the dividend while if you buy on March 30 you will. This has nothing to do with the company's ... – Jay Apr 8 '14 at 13:41
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    "we would expect that as the date of that dividend approaches, the price of the stock would rise until the day before the dividend is paid, it is $11" So a $10 stock rises to $11 until the ex div date? Sorry, this is nonsense. The dividend capture play may have been profitable years ago, but today, once the noise is removed, there is no gain to be had. – JTP - Apologise to Monica Apr 8 '14 at 19:28
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    @JoeTaxpayer As I said, "Plus or minus all the other things that affect the value of a stock, which in many cases would totally mask this effect." Also, my logic above does not lead to the conclusion that it pays to buy a stock the day before a dividend just to collect the dividend. Just the opposite: You'd collect the dividend, and the price of the stock would then immediately fall by the amount of the divided, cancelling out the benefit. – Jay Apr 9 '14 at 13:43
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I'm fairly convinced there is no difference whatsoever between dividend payment and capital appreciation. It only makes financial sense for the stock price to be decreased by the dividend payment so over the course of any specified time interval, without the dividend the stock price would have been that much higher were the dividends not paid. Total return is equal.

I think this is like so many things in finance that seem different but actually aren't.

If a stock does not pay a dividend, you can synthetically create a dividend by periodically selling shares.

Doing this would incur periodic trade commissions, however. That does seem like a loss to the investor. For this reason, I do see some real benefit to a dividend. I'd rather get a check in the mail than I would have to pay a trade commission, which would offset a percentage of the dividend.

Does anybody know if there are other hidden fees associated with dividend payments that might offset the trade commissions? One thought I had was fees to the company to establish and maintain a dividend-payment program. Are there significant administrative fees, banking fees, etc. to the company that materially decrease its value? Even if this were the case, I don't know how I'd detect or measure it because there's such a loose association between many corporate financials (e.g. cash on hand) and stock price.

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Their is no arbitrage opportunity with "buying dividends." You're buying a taxable event. This is a largely misunderstood topic. The stock always drops by the amount if the dividend on the ex date. The stock opens that day trading "ex" (excluding) the dividend. It then pays out later based in the shareholders on record.

There is a lot of talk about price movement and value here. That can happen but it's from trading not from the dividend per se. Yes sometimes you do see a stock pop the day prior to ex date because people are buying the stock for the dividend but the trading aspect of a stock is determined by supply and demand from people trading the stock.

The dividends are paid out from the owners equity section of the balance sheet. This is a return of equity to shareholders. The idea is to give owners of the company some of their investment back (from when they bought the stock) without having the owners sell the shares of the company. After all if it's a good company you want to keep holding it so it will appreciate. Another similar way to think of it is like a bonds interest payment.

People sometimes forget when trading that these are actual companies meant to be invested in. Your buying an ownership in the company with your cash.

It really makes no difference to buy the dividend or not, all other things constant. Though market activity can add or lose value from trading as normal.

1

Another plus, besides supplemental income, to receiving dividend checks as opposed to reinvesting them is that those $$ are now out of the market and can't drop 50% or 60% like Y2K and 2008. The idea of investing for the long term is now fraught with worry after those two events, because the next time, (smart economists say), it might not come back - a la 25 years to recover from the great depression. Plusfact technological quantum leaps, IT, automation, and the robots are taking over - can't hold that back forever, and the market will be the first one to smell the end of the economic status quo, and head for the hills, or in this case, deep dark scary valleys.

  • How is this better than just maintaining an allocation that includes a decent amount of cash? – JTP - Apologise to Monica Aug 16 '15 at 2:01
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    It is only better if the stock price goes up over time, which happens more often than the reverse. And when the stock goes down it's worse. Risk is a necessary evil to win good stock gains. When one withdrawals their annual 2.5% higher dividend, say from their John Deere Stock account, instead of reinvesting it, they eliminate the risk of losing some or all of that dividend. Given one is taking the risk, it is a small hedge against another crash. – kara Aug 16 '15 at 12:58
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The stock will slowly gain that $1 during the year.

Suppose we have the highly theoretical situation that a company's stock is worth exactly $10 right after it paid its dividend, its dividend is always $1 per stock, and the company and everything else is so stable that its value never changes.

Then the stock value right before the next dividend is paid will be close to $11 -- after all, it's worth a certain $1 dividend the next day, plus the $10 stock.

And in between, half a year after the dividend was paid, it will be in between, say $10.50, or actually slightly less than that (because people like to buy in late so they can make money some other way with the money first).

But the point holds -- the price decrease on the day that dividend is paid had been building up the whole period before that decrease.

So stock dividends do make you money.

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Best as i can tell, the simple answer is: the smartest approach to investing for dividends is to pick a company that is, has, and will continue to make a solid profits. there are lots of them out there. specifically, companies with no debt, a history of long-term and steady growth and a stable market share will, almost always recoup any drop in stock valuation due to a dividend payout...and usually in short order. this is why dividends were created...as a mechanism for distributing profits back to investor without diminishing thier stake in the company. the trick then, is to find such companies with the best ratio between stock price and dividend payout. and again, there are a lot of good options out there.

All the trepidation is justified however, as many unscrupulous companies will try to pull investors in with high dividends as a means to simply generate capital. these companies have few of the quality attributes mentioned above. instead, High debt, fluctuating or negative profits, minimal market share or diminishing growth present a very risky long term play and will be avoided by this conservative investor.

-1

Victor, Yes the drop in price does completely cancel the dividend at first. However, as others have noted, there are other forces working on the price as well.

If dividends were pointless then the following scenario would be true: Let's assume, hypothetically, two identical stocks, only one of which pays a 2% annual dividend quarterly. At the end of the year we would expect the share price of the dividend stock to be 2% lower than the non-dividend stock. And an equal investment in both stocks would yield exactly the same amount of money.

So that is a hypothetical, and here is real market example:

I compared, i.e. took the ratio of Vanguard's S&P 500 ETF (VOO) closing price to the S&P 500 Index closing price from sep 9, (2010-2014), after accounting for the VOO 2013 split. The VOO pays a quarterly dividend(about 2%/year), the S&P is an index, hence no dividend. The VOO share price, reduced each quarter by the dividend, still grew more than the S&P each year except 2012 to 2013, but looking at the entire 4yr period the VOO share price grew 80.3987% while S&P grew 80.083% (1/3 of 1% more for VOO). VOO does drop about 1/2% relative to S&P on every ex date, but obviously it makes it up.

There are other forces working on VOO. VOO is trade-able, therefore subject to supply/demand pressures, while the S&P 500 is not. So for the VOO ETF the data does not indicate pointless dividends but instead implies dividends are free money.

StockCharts.com supports this. S&P500 for last 1244 days (9/8/2010) shows 90% growth http://stockcharts.com/freecharts/perf.php?%24SPX while VOO for last 1244 days shows 105% growth http://stockcharts.com/freecharts/perf.php?VOO

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