Dividend Questions?

Question

I have a quick question about dividends. I'm trying to figur them out becuase say a company has a dividend of 1dollar per share and on the date of it they issue it and now the stocks worth a dollar less. Whats the point of it?

Answer 1

Imagine on January 1st you own ABC corp and bought it at 100 per share that day. On February 1st, the stock is trading at 110 and they announce a dividend effective March 1st payable March 15th to owners of record on March 1st.

On February 28th the price was 115 and opened on March 1st at 114 plus $1 in dividends. The market had already priced in the dividend and expected it so it ceases being a bonus, it is just part of the way things are.

Stocks that pay dividends are less volatile because some of the reward of owning the stock is being paid before it was sold. The price can vary wildly, but if people know a certain stream of cash will be coming in the middle, they are willing to pay extra for that early stream of cash, and that fixed stream is less volatile than the end residual value of the company when it liquidates, if it ever liquidates.

The Hudson Bay company is, if I remember correctly, 400 years old. If it never paid a dividend, the original owners would never see a penny from the company (they are obviously dead though) and only if someone else is willing to pay for it will it have value to them.

Think of a dividend as a negative price and stocks as human refuse. If I offered you excrement in exchange for money, you probably would not offer to take it, but if I paid you, you might take it. Now imagine this deal, give me 10,000 dollars and when I am done with it, between now and 2407, I will return it and any reward that occurs. Your interest in terms of voting is so small that you have no control over my behavior. If I am like the Enron management you just are out of luck. However, if I am willing to pay you intermediate sums, you are more likely to accept this than if you have to wait until I liquidate the firm. Dividends are like a negative price. Otherwise, I am asking to take your money and never actually give you anything tangible in return. Stocks only hold value if other people will buy them.

Answer 2

If you get tired of the long answer before mine..here is a simple explanation.

If you own a share of a company and every ninety days ( quarter) the company pays its shareholders, who are shown as a shareholder on such and such a date - "the record date", a $0.90 dividend per share then you can see that the stock, regardless of everything else, is worth a penny more each day as the dividend qualifying date approaches. So, since you know when that date is, you may decide to purchase shares in that company the day before, and voila, you get a $0.90 payback a week or so later. Everyone know this - so the value of the stock increases by the amount of the anticipated dividend as the shareholder record date approaches. The day after, the stock is "ex-dividend" which means you have to wait another ninety days to get a dividend - the stock reverts to its base price. The day after it is worth a penny more and so on.

Answer 3

You get cash in your pocket & stock tends to grow the $1 back. You need some liquid return from your investments.