# Share price drop when dividends are paid



## james4beach (Nov 15, 2012)

I want to describe (and show examples) of something that I thought was well known, but apparently is not: that share prices decline at the moment dividends are paid out, roughly by the amount of the dividend paid. This results in cash in your hand, but a corresponding drop in the share price.

Many people mistakenly believe that holding a dividend stock during market declines is better than selling shares to raise the same amount of cash. This is not true; each dividend paid out takes a bite out of the share value. If the share price is low, that bite ... the dividend amount ... is an even larger % of the total value.

It is very hard to see that this occurs because of daily price volatility and because dividends are usually small. The daily volatility _always mask this effect_ ... but that does not mean it's not happening. I have two examples:

ENB paid a 0.810 dividend, with ex dividend date Feb 13, 2020
FTS paid a 0.4775 dividend, with ex dividend date Feb 14, 2020

Both of these stocks have big dividends, and the market was reasonably calm at the time, so this is a great opportunity to observe this effect. We can try to remove this annoying volatility by estimating where the share price should have gone based on the sector movement that day.

ENB: From Feb 12 close to Feb 13 close, the XEG sector fell -0.56%. This means that based on ENB's Feb 12 closing price of 57.13, we'd expect the next day's close to be roughly 56.81. The Feb 13 closing price was in fact 55.75, *an additional loss of $1.06 (vs 0.81 dividend)*

FTS: From Feb 13 close to Feb 14 close, the XUT sector rose +0.87%. This means that based on FTS's Feb 13 closing price of 58.42, we'd expect the next day's close to be roughly 58.93. The Feb 14 closing price was in fact 58.36, *an additional loss of $0.57 (vs 0.48 dividend)*

Estimating using the sector movement involves some uncertainty of course, but it does a reasonable job. Notice how the share prices dropped by roughly the same amount as the dividends transferred to you on the ex dividend date. In fact, in these cases the share prices dropped even more than the dividend paid -- but same ballpark.

Let's take another more recent example with a big dividend payer, BCE. The last ex dividend was Sept 14, paying out 0.833. To again estimate the broader market move that day, we can look at Telus which has a very strong correlation with BCE over these days. From Sep 11 to Sep 14 (over the weekend), Telus was up +0.38%. On Sep 11, BCE closed at 56.94 so we can estimate it should end the next day around 57.16. The Sep 14 closing price was in fact 55.75, *an additional loss of $1.41 (vs 0.83 dividend)*

In summary:

* The share price drops by roughly the amount of the dividend. It's masked by daily volatility, which makes it hard to see, but it's still there once you correct for the volatility

* When the market is depressed, and you get a dividend, it's still just as "harmful" as selling shares. You can think of the dividend as a forced little sale.

Additional resources: see this video from PWL Capital. You're not going to like it. Quoting Ben Felix: "Receiving a dividend in a down-market is exactly, and I mean exactly, the same as selling off some shares in a down market."


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## james4beach (Nov 15, 2012)

Here's a different way to show it. CIBC data directly from the Yahoo historical data, here is each ex dividend date and the share price decline (closing to closing).

Notice that sometimes the dividend doesn't hurt the share price at all. The negative numbers are a gain in share price on the ex div:










The average however is $1.43 share price decline on the ex dividend date
The average dividend is $1.40

Isn't this convincing? Yeah, the share price fluctuates on the payment of the dividend. But the average is NOT zero. The average is very close to the cash dividends paid out.


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## james4beach (Nov 15, 2012)

But I can hear the dividend investors now saying, well these are unfair examples. Those stocks were all somewhat weak over 2 years and had big dividends.

Fine, let's try *CNR* which has a much smaller dividend and is a very strong stock. As before, here's the closing-to-closing share price drop on the ex date, and a column showing the cash dividend amount. Here, I removed March 9 which happened to coincide with a market crash and had a $12 share price drop that day!










The pattern is very clear once you average out multiple dividend payments. The average drop in share price is similar to the amount of dividends paid out. If you average this over longer periods I think you'll find they become even closer.


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## Beaver101 (Nov 14, 2011)

Thanks for this detailed analysis. My question becomes does this mean "dividend" investors were/are being hoodwiinked? I mean there're thousands of us in this category of investors ... uggh.


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## bgc_fan (Apr 5, 2009)

james4beach said:


> * The share price drops by roughly the amount of the dividend. It's masked by daily volatility, which makes it hard to see, but it's still there once you correct for the volatility


I'm not going to disagree with this; however, it must be emphasized that this is a self-fulfilling prophecy in action. People think that the share price should drop by the dividend amount so they price it accordingly, it doesn't actually reflect any financials like price to book ratio. For example, if the P/B ratio is 2, and you reduce the book value by issuing dividends, i.e. $1/share, the price goes down $1/share instead of $2/share. So if the original price was $20, the P/B ratio will now be 2.11 ($19/$9).


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## AltaRed (Jun 8, 2009)

It ultimately does not matter though. The principles James articulates are sound and the reason, for example, while most? some? brokerages automatically adjust the limit prices of unfilled orders down by the amount of the dividend.

The difficulty investors have is translating that into real life when stock price valuations are mixed in with the concept and they live by the 'buy low and sell high' concept. Those who can successfully navigate the minefield feel better when they could have drawn the same value as the dividend by selling 4 shares of the stock at some other point in that fiscal quarter rather than 6 shares of the stock during that quarter due to price rise. The problem is the investor has no way of actually comparing the exact same company with 2 classes of stock, Class A paying a dividend and Class B keeping the dividend as retained earnings for share price appreciation.

This is the concept of Horizons ETFs. If one could strip out the swap fee, the "total return" of the Horizons ETF would be, with the same MER, exactly the same as the "total return" of the Vanguard ETF based on exactly the same constituents over time. In the Horiizon's case, all return is ultimately received as cap gains while in the Vanguard case, it is a mix of investment income plus capital gains.

Added: Most retirees, however, don't want to deal with all those moving parts, so human nature dictates them liking the certainty and predictability of periodic investment income. So do I for the most part, so I like my portfolio spinning off a 3% distribution yield. It minimizes any effort I need to make (and possible mistakes I might make) to also sell off holdings periodically to meet my cash flow needs. This whole debate would go away if all we could hold was VRIF and we would receive ~4% yield every month. It is why this ETF could become rather popular.


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## kcowan (Jul 1, 2010)

I do not argue with Jame's analysis. I do however prefer after tax dividends to capital gains. Plus it avoids reducing my total position if the market recovers. But if the holding is in a taxfree account, then total yield analysis makes more sense.


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## Pluto (Sep 12, 2013)

Most people who have held a good dividend paying stock for a length of time don't care. For example, ENB in the pic. The little wiggle on dividend day is not relevant to the overall perspective.


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## Pluto (Sep 12, 2013)

^
Also this is the result of 10000 in enb starting in '95 to present with dividends reinvested









the little wiggle on dividend day is a moot point as far as I can see.


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## james4beach (Nov 15, 2012)

Beaver101 said:


> Thanks for this detailed analysis. My question becomes does this mean "dividend" investors were/are being hoodwiinked? I mean there're thousands of us in this category of investors ... uggh.


Maybe I should clarify, nobody is being hoodwinked. The result is exactly what is expected (dividends paid, share prices drop) and wealth is preserved through this process. I just wanted to illustrate the mechanics, that's all.

As AltaRed and kcowan say, there are other good reasons people prefer dividends. Replying in a sec to those


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## andrewf (Mar 1, 2010)

bgc_fan said:


> I'm not going to disagree with this; however, it must be emphasized that this is a self-fulfilling prophecy in action. People think that the share price should drop by the dividend amount so they price it accordingly, it doesn't actually reflect any financials like price to book ratio. For example, if the P/B ratio is 2, and you reduce the book value by issuing dividends, i.e. $1/share, the price goes down $1/share instead of $2/share. So if the original price was $20, the P/B ratio will now be 2.11 ($19/$9).


Well, if it didn't you could run an ex-div arbitrage fund. Buy on record date, sell on ex-div and collect the dividend.


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## james4beach (Nov 15, 2012)

AltaRed said:


> It ultimately does not matter though. The principles James articulates are sound and the reason, for example, while most? some? brokerages automatically adjust the limit prices of unfilled orders down by the amount of the dividend.
> . . .
> Added: Most retirees, however, don't want to deal with all those moving parts, so human nature dictates them liking the certainty and predictability of periodic investment income. So do I for the most part, so I like my portfolio spinning off a 3% distribution yield. *It minimizes any effort I need to make (and possible mistakes I might make)* to also sell off holdings periodically


I completely agree here. Most retirees, and probably most people in general, can benefit from dividends because they are on a routine & predictable schedule. They happen automatically without any intervention. As you say here, any effort and requirement to touch the stock (place a trade) is a possible mistake that can occur.

So I do like dividends for the systematic cash transfer. It's really great that it's automated and effortless.

It means you don't have to place trades, you don't have to worry about timing or drive yourself nuts trying to anticipate price direction. Systematic and auto-scheduled is _good_!



kcowan said:


> I do not argue with Jame's analysis. I do however prefer after tax dividends to capital gains. Plus it avoids reducing my total position if the market recovers. But if the holding is in a taxfree account, then total yield analysis makes more sense.


Sure no question there are tax differences and considerations between cap gains and dividends. So while I describe the share price changes as equivalent (numbers in those tables) an individual should look at their tax considerations as well.


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## scorpion_ca (Nov 3, 2014)

Can you please clarify what I am missing here? For example -

10 shares @ 100 = $1,000
10% dividend distributed yearly = $100
Share price drops in the dividend payout day = $900 but I still own 10 shares. I noticed share price usually recovers in a week or two after the dividend payment. It could take longer than that but eventually the total price goes back to $1,000.

If I were to sell a share instead of getting dividend payment, I would have 9 shares @ $100 = $900 plus $100 cash. Share price increases 10% after some time. Now I have 9 shares for $990 that is $10 less than the dividend payment scenario.

Isn't it better to get a dividend payment instead of selling the shares to get cash? Share price drops on the dividend payout day but you don't lose the number of shares and next time you would get more dividend since you have more shares.


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## bgc_fan (Apr 5, 2009)

andrewf said:


> Well, if it didn't you could run an ex-div arbitrage fund. Buy on record date, sell on ex-div and collect the dividend.


You're saying that if it didn't drop in price you would run such a fund? Wouldn't such an ex-div arbitrage fund be taking advantage of this? I'm just trying to sort out what you are proposing.


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## Beaver101 (Nov 14, 2011)

james4beach said:


> Maybe I should clarify, nobody is being hoodwinked. The result is exactly what is expected (dividends paid, share prices drop) and wealth is preserved through this process. I just wanted to illustrate the mechanics, that's all.
> 
> As AltaRed and kcowan say, there are other good reasons people prefer dividends. Replying in a sec to those


 ... whew! I thought I was missing something but just can't figure out what it is ... so it's assuring to say or conclude that dividend-investing is safe (for the long term).


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## james4beach (Nov 15, 2012)

Beaver101 said:


> ... whew! I thought I was missing something but just can't figure out what it is ... so it's assuring to say or conclude that dividend-investing is safe (for the long term).


Totally safe, as long as you don't compromise diversification and quality of your holdings. So for example I think dividend funds like CDZ and ZDV are perfectly good long term investments. They have good sector diversification and hold good quality companies.

In contrast, an example of a bad/dangerous dividend portfolio would be holding only: KEY, ENB, IGM, GWO. It's bad not because the holdings are terrible, but because it has high sector concentration and individual stock exposure, plus equities with abnormally high payouts. One might look at it and get excited because it yields a whopping 8% while forgetting about diversification and sector exposure.


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## andrewf (Mar 1, 2010)

bgc_fan said:


> You're saying that if it didn't drop in price you would run such a fund? Wouldn't such an ex-div arbitrage fund be taking advantage of this? I'm just trying to sort out what you are proposing.


I'm saying it makes sense for the stock to drop by the dividend amount. If it didn't, traders could exploit by only holding companies during the windows between record date and payment date. 

And P/B should back out cash, no? If a company is worth 3x book value, and the company raises $10B in cash, do you think share price would increase by $30B?


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## kcowan (Jul 1, 2010)

scorpion_ca said:


> ...
> If I were to sell a share instead of getting dividend payment, I would have 9 shares @ $100 = $900 plus $100 cash. Share price increases 10% after some time. Now I have 9 shares for $990 that is $10 less than the dividend payment scenario.


Also you will have paid $9.99 to sell those shares (OK maybe $7.99).


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## Gator13 (Jan 5, 2020)

James is correct that the market adjusts the share price by the amount of the dividend on the ex dividend date.

In addition to the cost of selling the shares as noted above, (if you have 20 or 30 dividend paying companies you would need to sell shares of each of them 4 or 12 times per year) you also should take into consideration the ability to DRIP AND that dividend paying stocks quite often increase in value leading leading up to the ex dividend date.

I like dividends for the tax efficiency. A husband and wife can each have approximately 57k of dividends per annum and pay no federal or provincial tax in some provinces such as Alberta and Ontario. In Ontario you would have to pay $750 healthcare premium. 114k after tax for a couple affords a comfortable lifestyle.


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## AltaRed (Jun 8, 2009)

Bottom line is investors like dividend paying stocks for personality/behavioural reasons, and for lower income individuals, picking up on what Gator has just posted, the DTC is worth more than an individual's personal tax rate. At some level ~$100k or so though, depending on province, cap gains tax rate = DTC tax rate, and is a better choice at even higher incomes (meaning companies NOT paying a dividend and simply having their total return in share price appreciation is a better deal for high(er) income investors). Taxes are a different issue than what James started this thread for, but ultimately are a factor at different income levels.


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## Rusty O'Toole (Feb 1, 2012)

My question is, do dividend stocks RISE in price between the time the divvy is announced and it is paid?


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## james4beach (Nov 15, 2012)

Taxes are definitely an issue. If I had $3 million sitting around and no other sources of income, I might put it into XIU (more realistically, one or two solid ETFs)

Then I would get my $94,000 annual dividend, pay about 5% tax overall and keep $89,000 after taxes ... also known as "nil" taxes.

If the SimpleTax estimator is to believed, at that level of income this works out extremely efficiently.


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## Gator13 (Jan 5, 2020)

I questioned the accuracy of Simple Tax so l also ran it through TaxTips Income Tax calculator and it came out the same. (I was testing 57k of dividends)


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## bgc_fan (Apr 5, 2009)

andrewf said:


> I'm saying it makes sense for the stock to drop by the dividend amount. If it didn't, traders could exploit by only holding companies during the windows between record date and payment date.


Except in most cases the stock will go back to the ex-div price within weeks. Whether you want to attribute that to normal market fluctuations or the fact that the dividend effect dissipates, is up to you.



andrewf said:


> And P/B should back out cash, no? If a company is worth 3x book value, and the company raises $10B in cash, do you think share price would increase by $30B?


No, because if you are raising $10B through debt, you'll have a balancing line in the liabilities. If you are raising $10B through shares, then you'll have share dilution which will result in a lower book value PER share, which can balance the increased company book value.


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## fireseeker (Jul 24, 2017)

scorpion_ca said:


> Can you please clarify what I am missing here? For example -
> 
> 10 shares @ 100 = $1,000
> 10% dividend distributed yearly = $100
> ...


I have underlined what you are missing: The cash. 
It can be re-invested and will return its own gain. Assuming it is re-invested in equities, it should return an amount similar to your shares (on average).

The friction of trade fees is the same, whether you are re-investing dividends or the proceeds from a stock sale.


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## doctrine (Sep 30, 2011)

This analysis is interesting, but mostly meaningless in real terms, unless to convince individual investors to avoid trying to arbitrage or time purchases based on dividend payment dates, which is correct. As others have stated, it is basically a truism. It is like checking a clock after the hour passes to make sure the number has moved up by 1.


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## james4beach (Nov 15, 2012)

doctrine said:


> This analysis is interesting, but mostly meaningless in real terms, unless to convince individual investors to avoid trying to arbitrage or time purchases based on dividend payment dates, which is correct. As others have stated, it is basically a truism. It is like checking a clock after the hour passes to make sure the number has moved up by 1.


It isn't obvious to everyone


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## james4beach (Nov 15, 2012)

Gator13 said:


> I questioned the accuracy of Simple Tax so l also ran it through TaxTips Income Tax calculator and it came out the same. (I was testing 57k of dividends)


Pretty crazy isn't it? Now I just have to get my hands on $3 million and I'm set.


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## Eclectic12 (Oct 20, 2010)

fireseeker said:


> I have underlined what you are missing: The cash.
> It can be re-invested and will return its own gain. Assuming it is re-invested in equities, it should return an amount similar to your shares (on average) ...


While in accumulation mode ... sure.

With the comparison being dividend income to selling shares for income, I'm thinking the build in assumption is that the income is going to be spent.




fireseeker said:


> ... The friction of trade fees is the same, whether you are re-investing dividends or the proceeds from a stock sale.


I don't see how it could be.

The dividend income cash will have at most, one trading fee while the stock sale will have one for selling the stock then a second one for re-investing the proceeds. 
Where income is not the priority, I'd expect the more likely situation to be that a trading fee to re-invest the dividend income while the stock holder avoids the trading fee by staying invested.

The dividend income investor might be able to minimise the friction using DRIPs but there's likely a remainder that will force a trading free that that stock holder can choose to avoid completely.


Cheers


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## Karlhungus (Oct 4, 2013)

doctrine said:


> This analysis is interesting, but mostly meaningless in real terms, unless to convince individual investors to avoid trying to arbitrage or time purchases based on dividend payment dates, which is correct. As others have stated, it is basically a truism. It is like checking a clock after the hour passes to make sure the number has moved up by 1.


I disagree. This analysis is very important for young investors who are trying to learn. Or older investors who still do not understand. When I was young, the only way I could wrap my mind around compounding interest was with dividends. Therefore, I focused my attention on collecting stocks that paid good dividends and were considered blue chip long standing companies. As of today, I dont think that is a good strategy, nor would it be maximizing my money - which IMO is the goal. There are still many out there, (lots in my family included), who still focus far too much on dividends and IMO it will hurt them in the long run. Ignoring taxes for the current discussion, total return is the only thing that matters.


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## cainvest (May 1, 2013)

james4beach said:


> I completely agree here. Most retirees, and probably most people in general, can benefit from dividends because they are on a routine & predictable schedule. They happen automatically without any intervention. As you say here, any effort and requirement to touch the stock (place a trade) is a possible mistake that can occur.
> 
> So I do like dividends for the systematic cash transfer. It's really great that it's automated and effortless.
> 
> It means you don't have to place trades, you don't have to worry about timing or drive yourself nuts trying to anticipate price direction. Systematic and auto-scheduled is _good_!


Exactly, the mechanics of dividends for those retired are so much better than selling off shares. Reccuring revenue from dividends with a known time and (generally) increasing output from good companies can really smooth things out.


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## Eclectic12 (Oct 20, 2010)

Karlhungus said:


> doctrine said:
> 
> 
> > This analysis is interesting, but mostly meaningless in real terms ...
> ...


The problem I've had is applying it. Usually when I've found a sector or investment I like, dividends or no dividends is set by the sector where there's little or no choice. Where I can recall a choice, the choice was between a small, newer, smaller company versus an older, mature, larger one.

Cheers


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## AltaRed (Jun 8, 2009)

Gator13 said:


> I questioned the accuracy of Simple Tax so l also ran it through TaxTips Income Tax calculator and it came out the same. (I was testing 57k of dividends)


Except it is never that pure. Up to retirement, one has employment earnings and probably some Other income (ex-Canada investment income and interest) that is fully taxed Taxable Income (net of deductions) that takes away remaining tax room for eligible dividends. Post-retirement, one will have CPP, OAS, RRIF annual withdrawals, etc. all fully taxed as Taxable Income before considering eligible dividends. 

IOW, statements like $57k of eligible dividend income before any tax is due is an academic exercise and won't exist in real life. The only real value is to recognize that the DTC is a valuable component of one's investment portfolio to minimize taxes but the value is highly dependent on one's total Taxable Income. At some Taxable Income level, the DTC becomes less valuable than the 50% inclusion rate on Cap Gains...... as demonstrated by Tax Tips (Ontario), that crossover point is $97k taxable income.


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## bgc_fan (Apr 5, 2009)

Eclectic12 said:


> The problem I've had is applying it. Usually when I've found a sector or investment I like, dividends or no dividends is set by the sector where there's little or no choice. Where I can recall a choice, the choice was between a small, newer, smaller company versus an older, mature, larger one.
> 
> Cheers


That's generally the company lifecycle. At the start, all the money is going into expansion and establishing itself in the market. If they survive and become an established company with solid cashflow, they'll need something else to attract investors and to do something with their cash IF they aren't reinvesting it.


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## andrewf (Mar 1, 2010)

bgc_fan said:


> Except in most cases the stock will go back to the ex-div price within weeks. Whether you want to attribute that to normal market fluctuations or the fact that the dividend effect dissipates, is up to you.


This is kind of like saying dividends are magic. Most companies only return a small portion of their total return in dividends (at most 25-35%). So it is kind of expected that the other 65-75% of the total return causes share price appreciation to overcome the decline due to the dividend payout in a matter of weeks, for sufficiently small dividends. If a company with 10% has total return and 2% dividend, each quarterly dividend would cause share price to decline by 0.5%, which would take 0.5%/8% of a year to typically surpass, or about 3-4 weeks. No magic.



> No, because if you are raising $10B through debt, you'll have a balancing line in the liabilities. If you are raising $10B through shares, then you'll have share dilution which will result in a lower book value PER share, which can balance the increased company book value.


Debt is a red herring. Also ignore per share, I'm talking capitalization. If a company trades at 3x P/B including cash, you have a free money pump that could issue new shares as the company would increase in value at 3x the rate it raised cash. Sounds like value creation to me. The company could just be in the business of raising cash by issuing equity and its capitalization would increase far faster than its shareholder equity.

More meaningful is to deduct net cash from the capitalization and book value.


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## james4beach (Nov 15, 2012)

Karlhungus said:


> I disagree. This analysis is very important for young investors who are trying to learn. Or older investors who still do not understand. When I was young, the only way I could wrap my mind around compounding interest was with dividends. Therefore, I focused my attention on collecting stocks that paid good dividends and were considered blue chip long standing companies. As of today, I dont think that is a good strategy, nor would it be maximizing my money - which IMO is the goal. There are still many out there, (lots in my family included), who still focus far too much on dividends and IMO it will hurt them in the long run. Ignoring taxes for the current discussion, total return is the only thing that matters.


Yeah thanks for mentioning this.

At least from my own conversations with people, I've found that some people think the dividend is "free money". There is a common belief that the dividend cash is new, or generated, or freshly minted somehow.

This leads to all kinds of misconceptions. For example some people specifically seek out high yielding stocks and DRIP all dividends, thinking that this provides a special or magical kind of performance boosting/compounding effect.


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## bgc_fan (Apr 5, 2009)

andrewf said:


> This is kind of like saying dividends are magic. Most companies only return a small portion of their total return in dividends (at most 25-35%). So it is kind of expected that the other 65-75% of the total return causes share price appreciation to overcome the decline due to the dividend payout in a matter of weeks, for sufficiently small dividends. If a company with 10% has total return and 2% dividend, each quarterly dividend would cause share price to decline by 0.5%, which would take 0.5%/8% of a year to typically surpass, or about 3-4 weeks. No magic.


I think you are completely missing my original point. Share prices are disconnected from actual fundamentals. Because on date of payout you get X amount per share, buyers will only pay previous day's closing share price - X. There is nothing related to the underlying fundamentals.



andrewf said:


> Debt is a red herring. Also ignore per share, I'm talking capitalization. If a company trades at 3x P/B including cash, you have a free money pump that could issue new shares as the company would increase in value at 3x the rate it raised cash. Sounds like value creation to me. The company could just be in the business of raising cash by issuing equity and its capitalization would increase far faster than its shareholder equity.
> 
> More meaningful is to deduct net cash from the capitalization and book value.


Uh. No. Either you accept debt, or you don't use book value as part of your screening tool because the definition of book value is based on assets and liabilities. 
Now you're talking about printing money via shares essentially. The small problem with that is that eventually people who purchase the shares are going to expect to get some sort of return. A company that is continuously putting out shares is diluting the ownership of existing shareholders, meaning they are starting to lose more of the company pie. That in turn is going to put a pressure on the stock because now if you start using EPS or any per share metric (which is what you have to do because I care about what I own of the company), those numbers are going to decrease.


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## james4beach (Nov 15, 2012)

bgc_fan said:


> I think you are completely missing my original point. Share prices are disconnected from actual fundamentals. Because on date of payout you get X amount per share, buyers will only pay previous day's closing share price - X. There is nothing related to the underlying fundamentals.


I see it differently. The fundamentals are always there, and so is daily market volatility and noise. What you see in the real world is the SUM of the two. It's not that the fundamentals are made irrelevant by daily noise.

Before the dividend is paid, the cash is sitting in the company's retained earnings account. When the div is paid, that cash comes out of retained earnings. Based on fundamentals, taking the balance sheet view, the company is immediately worth less than the previous valuation by the amount of the cash dividends paid. With everything else being equal, this is the fundamental change.

Yes there is obviously daily volatility and other movements that happen, but they are _piled on top_ of the fundamentals. So even if a day or two, or a week, goes by, the fundamental thing remains the same: the company has just lost a huge amount of cash, and is fundamentally worth less by some amount.

I think many people shrug off the share price drop (and say it tends to recover) because the fact that the market generally rises with time obscures all of this. The stock market tends to rise, so the share price will bounce back, but if you look at it closely those share prices don't rise so much that they erase the ex dividend drop. In other words, Mr. Market does not just "forgive" the dividend and let you keep it as if it was free money.

*~ The Proof ~*

If Mr. Market was willing to forgive the dividend payment, then every dividend would be free money. The proof that this does not happen is in the long term performance of dividend-heavy stocks vs the benchmark indexes. One can compare, say, XDV to XIU or in the US, things like VYM or DVY vs SPY.

What you'll find in all of those dividend ETF vs benchmark comparisons is that, _even including the dividends paid_, the total performance of the dividend portfolios is about the same as the index (usually much less than index, actually). This is the proof that the market does not just, irrationally, forgive the dividends and forget about the resulting drop in company value at the time of each payment.

Yes the stock market is somewhat irrational and yes, prices are volatile BUT the long term results show that the market does not just let share prices bounce back as if no dividend was paid (free money).


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> IOW, statements like $57k of eligible dividend income before any tax is due is an academic exercise and won't exist in real life ...


For most ... yes. 

For a few, I can recall posts from those who took early retirement plus are deferring CPP/OAS as saying their dividend income was all they had for at least a decade.


Cheers


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## AltaRed (Jun 8, 2009)

I can see where it there could be a temporary thing in a situation like that, but it also means that person likely has no diversification at all - reliant on dividend equities in the Canadian equity market. That is a risky proposition if the loonie and/or Cdn market went south due to Ottawa screwing up the economy or corporate tax rate going to zero (means DTC goes to zero too). I'd not bet my future on such concentration.


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## james4beach (Nov 15, 2012)

AltaRed said:


> I can see where it there could be a temporary thing in a situation like that, but it also means that person likely has no diversification at all - reliant on dividend equities in the Canadian equity market. That is a risky proposition if the loonie and/or Cdn market went south due to Ottawa screwing up the economy or corporate tax rate going to zero (means DTC goes to zero too). I'd not bet my future on such concentration.


Good point, that's true. Foreign assets are vital for currency protection, and fixed income offers diversification for very bad markets or even deflation.

I would still choose the diversified asset allocation at the end of the day, even if it's less tax efficient. Besides, tax laws change.


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## cainvest (May 1, 2013)

james4beach said:


> *~ The Proof ~*
> 
> If Mr. Market was willing to forgive the dividend payment, then every dividend would be free money.


So does the market forgive payroll? Guess that comes from the free money tree?


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## james4beach (Nov 15, 2012)

cainvest said:


> So does the market forgive payroll? Guess that comes from the free money tree?


Payroll is a known expense, and reduces net income. This is known to the market at the time of their earnings releases and yes, the market does take into account payroll. As I'm sure you know, the moment earnings get released, the market starts adjusting valuation.

Similarly, dividends are cash going out the door, and the market also takes them into account.

The market does not forgive either payroll or dividends. Both are taken into account in the share valuation, as expected.


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## scorpion_ca (Nov 3, 2014)

fireseeker said:


> I have underlined what you are missing: The cash.
> It can be re-invested and will return its own gain. Assuming it is re-invested in equities, it should return an amount similar to your shares (on average).
> 
> The friction of trade fees is the same, whether you are re-investing dividends or the proceeds from a stock sale.


On the same note, the dividend can be used to buy different equities or used as a DRIP that would result in more dividend for the next period. 

I am not saying that the dividend paying stocks are better than the total return stocks. I think investors should have combination of both dividend paying and total return stocks.


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## cainvest (May 1, 2013)

james4beach said:


> Payroll is a known expense, and reduces net income. This is known to the market at the time of their earnings releases and yes, the market does take into account payroll. As I'm sure you know, the moment earnings get released, the market starts adjusting valuation.
> 
> Similarly, dividends are cash going out the door, and the market also takes them into account.
> 
> The market does not forgive either payroll or dividends. Both are taken into account in the share valuation, as expected.


Yup, and that's all you really need to know ... both are known expenses so the market will not react to them unless one (or both) of those change on their balance sheet. 

I think your previous "proof" on stock comparison is a very weak relationship.


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## james4beach (Nov 15, 2012)

cainvest said:


> Yup, and that's all you really need to know ... both are known expenses so the market will not react to them unless one (or both) of those change on their balance sheet.
> 
> I think your previous "proof" on stock comparison is a very weak relationship.


I agree that they are both known expenses but I think they happen at different times. The payroll (or any kind of business expense) is revealed after the fact in quarterly filings for the preceding quarter. The expense that's reported happened _months_ ago.

The dividend is different since it's an immediate and precisely known event (cash leaving the Retained Earnings account) as it's literally cash going out the door 2 days after the ex dividend date.


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## Pluto (Sep 12, 2013)

james4beach said:


> I see it differently. The fundamentals are always there, and so is daily market volatility and noise. What you see in the real world is the SUM of the two. It's not that the fundamentals are made irrelevant by daily noise.
> 
> Before the dividend is paid, the cash is sitting in the company's retained earnings account. When the div is paid, that cash comes out of retained earnings. Based on fundamentals, taking the balance sheet view, the company is immediately worth less than the previous valuation by the amount of the cash dividends paid. With everything else being equal, this is the fundamental change.
> 
> ...





james4beach said:


> I see it differently. The fundamentals are always there, and so is daily market volatility and noise. What you see in the real world is the SUM of the two. It's not that the fundamentals are made irrelevant by daily noise.
> 
> Before the dividend is paid, the cash is sitting in the company's retained earnings account. When the div is paid, that cash comes out of retained earnings. Based on fundamentals, taking the balance sheet view, the company is immediately worth less than the previous valuation by the amount of the cash dividends paid. With everything else being equal, this is the fundamental change.
> 
> ...





james4beach said:


> I think many people shrug off the share price drop (and say it tends to recover) because the fact that the market generally rises with time obscures all of this. The stock market tends to rise, so the share price will bounce back, but if you look at it closely those share prices don't rise so much that they erase the ex dividend drop. In other words, Mr. Market does not just "forgive" the dividend and let you keep it as if it was free money.


Your underlying point seems to be that investing for capital growth is better than investing for dividends and everybody should agree. 

But every one does not agree and you do not accept that. 
Probably every stock BRK owned paid a dividend, but they did fine in capital growth.


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## cainvest (May 1, 2013)

james4beach said:


> I agree that they are both known expenses but I think they happen at different times. The payroll (or any kind of business expense) is revealed after the fact in quarterly filings for the preceding quarter. The expense that's reported happened _months_ ago.
> 
> The dividend is different since it's an immediate and precisely known event (cash leaving the Retained Earnings account) as it's literally cash going out the door 2 days after the ex dividend date.


Not sure where you're going with this, your timing example doesn't matter. Both will be assessed when the financial reports come out, as in, do they have the money to meet their expenses. The only other real factor (not quarterly related) would be news, like CEO gets a $100M bonus, dividend increase/decrease or some other news that effects their income/profit.


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> I can see where it there could be a temporary thing in a situation like that, but it also means that person likely has no diversification at all - reliant on dividend equities in the Canadian equity market ...


Isn't the common recommendation to put one's Canadian investments in a taxable account while US ones should go into one's RRSP, making it a YMMV situation?
I suppose one could run out of RRSP contribution room to keep the ex-Canada investments tax deferred. Or the growth might be so much that one decides to change the plan of deferring RRSP/RRIF withdrawals.

The long term scenario from posts seen in the past would be a business owner who is only drawing eligible dividends as compensation. CPP, if it's in the picture at all, may be minimal. The posts were from a while ago from before the recent changes so there may be less of this.

Cheers


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## AltaRed (Jun 8, 2009)

May apply to some as you suggest. However, it would be a long shot to believe the only material source of income in retirement would be eligible dividends and thus... mostly an academic exercise. No wish to get into a debate about it though.


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## Gator13 (Jan 5, 2020)

The market does adjust the share price by the amount of the dividend on the ex dividend date. That doesn't make growth stocks better than dividend paying stocks. Companies, growth or dividend, can dilute share value by issuing new shares or using shares for acquisitions. Often, growth companies choose not to pay dividends because they need the capital to grow. Obviously, companies that pay dividends can also have significant growth. I certainly won't turn my nose up a good company because it pays a dividend nor one that doesn't.


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## AltaRed (Jun 8, 2009)

That is the whole point. Consider a stock for its total return, robustness, track record, etc.


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## james4beach (Nov 15, 2012)

In case anyone is interested, a lot of stocks go ex dividend tomorrow: AQN, POW, TRP, CPX, NTR


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## james4beach (Nov 15, 2012)

And here's what happened to these stocks today which was the ex dividend day. I used share prices seen this afternoon at a time the TSX was about unchanged for the day.








All of their prices are down after paying the dividend. Even after considering the dividend gained, most of them are at a net loss! I found that surprising. And consider that XIC is at 0% so it's not like the broad market has fallen today.


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## AltaRed (Jun 8, 2009)

The movement is never precise just simply because there is inherent market movement anyway. The trend is the more important thing.


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## Gator13 (Jan 5, 2020)

But also consider the run up in the past few days. Using AQN as an example, if you follow the Adjusted Close number, the price went up today.










*Close price adjusted for splits.**Adjusted close price adjusted for both dividends and splits.


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## james4beach (Nov 15, 2012)

Gator13 said:


> But also consider the run up in the past few days. Using AQN as an example, if you follow the Adjusted Close number, the price went up today.


Yes it has rallied recently. There is always volatility happening on any given stock, sector or the broad market.

Ultimately the more meaningful numbers are the long term total returns of dividend portfolios vs the regular stock index, over several years.


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