# How much (if at all) do dividends matter?



## Earl (Apr 5, 2016)

What do you guys think of this guy's view that dividends are 100% irrelevant?


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## james4beach (Nov 15, 2012)

Ben Felix (PWL Capital) is correct. Dividends are a red herring; dividends don't matter. Each dividend knocks the share price down and is identical to selling shares. It's kind of like having a forced sale.

There are some advantages of dividends though. They are kind of like a cashflow stress-test for the company, so companies which pay moderate dividends might be in better shape.

And when you hold dividend stocks in a portfolio, they are automatic/recurring. That helps many people "buy and hold" without touching their stocks or worrying about them. So from a psychological aspect, I think dividends are beneficial to reduce the worry about one's stock holdings.

Automatic cash payments are also very convenient. So I do think they are convenient, and offer psychological benefits.


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## Eder (Feb 16, 2011)

I believe in my case dividends are 100% relevant. No decent dividend...no investment from me. My long term results lead me to believe I'll do better in the long run than my index using my metric as a primary screener.


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## Synergy (Mar 18, 2013)

Depending on your tax bracket, province, etc. dividends can be a very tax efficient way of receiving income. Short answer = it's depends and there's no simple answer.


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## Karlhungus (Oct 4, 2013)

Eder said:


> I believe in my case dividends are 100% relevant. No decent dividend...no investment from me. My long term results lead me to believe I'll do better in the long run than my index using my metric as a primary screener.


Out of curiosity, have you compared your ROR using this metric to the benchmark index over the years?


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## MrMatt (Dec 21, 2011)

I think a lot of the ideas floating around like to look at numbers, and metrics and comparisons.

Dividend investing reflect a certain philosophy to me.

If you are a dividend investor, you are looking at a profitable company, which pays out a portion of the profit.
That doesn't mean they're not investing, or growing.

The case is simple, they make a profit, and return some to the owners.

They're not playing the market, or constantly issuing stock to raise ever more money.

Plus the companies seem to be simpler to understand what they're actually doing.

I consider dividend stocks a subclass of equities.
You should consider the appropriate benchmark.





S&P/TSX Composite Dividend Index | S&P Dow Jones Indices


The S&P/TSX Composite Dividend Index aims to provide a broad-based benchmark of Canadian dividend-paying stocks. The index includes all stocks in the S&P/TSX Composite with positive annual dividend yields as of the latest rebalancing of the S&P/TSX Composite




www.spglobal.com









Developed Equity - S&P Dow Jones Indices


equity - developed




www.spglobal.com





As for metrics, I consider long term dividend paying companies somewhere between preferred shares and non dividend paying stocks.

Psychologically it's easy to understand how Fortis will make money, and how they can give that money to me.
It's really easy to buy and go to sleep at night.

Unlike Yahoo/Google or whatever tech darling is flying up for an impending crash.


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## Gator13 (Jan 5, 2020)

I have been a dividend investor for quite some time. That being said, the quality of the company paying the dividend comes first. Dividend investing has gone very well for me and I anticipate those dividends will provide me with a comfortable retirement. In most cases, I have also been rewarded with some very good capital growth from those same dividend paying companies.

Like other investment strategies or allocation models, it's definitely not a one size fits all.


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## gardner (Feb 13, 2014)

james4beach said:


> dividends don't matter


This is an oversimplification, surely. Dividends may affect some things and not others.

I think there are some businesses that generate cash that they do not need and cannot effectively use for internal purposes, and it is right and proper for them to return that cash to the investors. Otherwise, in the log run, you wind up with a huge pile of cash with a little itty-bitty bank inside it. What would BNS look like if it had never, ever, paid a dividend?


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## robfordlives (Sep 18, 2014)

100% agree. Dividend investing has cost me hundreds of thousands of lost profit as earlier I focused on the darlings of the Canadian market. All great dividend stocks!!! Severely under-performed a basic S&P fund.


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## MrMatt (Dec 21, 2011)

robfordlives said:


> 100% agree. Dividend investing has cost me hundreds of thousands of lost profit as earlier I focused on the darlings of the Canadian market. All great dividend stocks!!! Severely under-performed a basic S&P fund.


Which "basic S&P fund".
S&P TSX index? Or were you comparing Canadian equities to something else?


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## Spudd (Oct 11, 2011)

MrMatt said:


> Which "basic S&P fund".
> S&P TSX index? Or were you comparing Canadian equities to something else?


He probably means S&P 500.


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## doctrine (Sep 30, 2011)

gardner said:


> This is an oversimplification, surely. Dividends may affect some things and not others.
> 
> I think there are some businesses that generate cash that they do not need and cannot effectively use for internal purposes, and it is right and proper for them to return that cash to the investors. Otherwise, in the log run, you wind up with a huge pile of cash with a little itty-bitty bank inside it. What would BNS look like if it had never, ever, paid a dividend?


Almost certainly, a significant portion of the retained capital would have been excessively spent on compensation, acquisitions, and business growth at a lower rate of return than their core regulated businesses that would have resulted in a significant portion of that capital written down to zero as it was fed into who knows whoms pockets, as seen multiple times by multiple banks (and plenty of other companies) delivering multi billion dollar write-downs on failed ventures. Saying dividends 100% don't matter is usually clickbait and/or trolling, or ignorance. I believe this is mostly clickbait and marketing in this case.


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## MrMatt (Dec 21, 2011)

Spudd said:


> He probably means S&P 500.


That's actually kind of my point.
If you compare different investments, with different risk profiles you're likely to see different results.


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## Tostig (Nov 18, 2020)

Dividend paying stocks can be part of a diversified portfolio.

If you need to live off dividends, you'd have to have a lot of money to buy the underlying stocks. For example, if you want to live off $50,000 a year in dividends at the current 8% yield you can get, you would need to invest $625,000 and pray to god that nobody cuts their dividends (as RioCan had recently announced). In normal good economic times, high yields would typically be 4 to 5%. If you find anything higher, you'd better find out why and what's wrong with the company or the stock price.

I've played around strategizing buying utility stocks for the dividends to pay my actual bills. For example, in order to pay my annual Enbridge bill of about $1200, I would need to invest about $15,000 for the 8% current yield.

With growth stocks that do not pay any dividends, if you need annual income, you're going to have to sell some of your shares and as a result, negatively affect your portfolio dollar growth potential as some of your holding will eventually reach zero shares.


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## Karlhungus (Oct 4, 2013)

Tostig said:


> Dividend paying stocks can be part of a diversified portfolio.
> 
> If you need to live off dividends, you'd have to have a lot of money to buy the underlying stocks. For example, if you want to live off $50,000 a year in dividends at the current 8% yield you can get, you would need to invest $625,000 and pray to god that nobody cuts their dividends (as RioCan had recently announced). In normal good economic times, high yields would typically be 4 to 5%. If you find anything higher, you'd better find out why and what's wrong with the company or the stock price.
> 
> ...


Doesnt matter as long as you dont sell that last share. Look how much a share of Berkshire is worth.


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## james4beach (Nov 15, 2012)

Let's say there are two choices for the investor. They can either create a dividend-heavy portfolio (and live off the dividends), or create a standard portfolio and sell shares and units, living off the proceeds of those sales. An example of this second method is holding VBAL or Mawer Balanced Fund and routinely selling off some shares each year.

Both ways can work. The capital does not last longer doing it the dividend way vs the "selling off" way. There is a popular misconception that the dividend method makes the capital last longer - not true.

Buffett writes about this extensively in one of his old letters. The "selling off" method also gives you more control because you can choose how much cash (if any) you want to extract in a given year. If it's a really bad year in the market, you can choose not not sell any. In comparison if you're getting giant dividends from BCE and ENB in bad market years, you are (effectively) being forced to sell at a really bad time, which erodes your capital. Those dividends can really hurt when stocks are down badly, unless you immediately use the cash to re-buy shares.


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## gardner (Feb 13, 2014)

james4beach said:


> Buffett


But so many businesses are run by total charlatans who could not be trusted for a moment with the huge piles of retained earnings that Buffet sits on. 99% of business have some self-interested crook at the helm who will just use all the free cash to line is pockets and leave the investor with nothing.



> unless you immediately use the cash to re-buy shares.


Yes: DRIP and be happy.


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## james4beach (Nov 15, 2012)

gardner said:


> But so many businesses are run by total charlatans who could not be trusted for a moment with the huge piles of retained earnings that Buffet sits on. 99% of business have some self-interested crook at the helm who will just use all the free cash to line is pockets and leave the investor with nothing.


I hope a person wouldn't invest in those... or diversify broadly enough to reduce that risk.

But Buffett was talking about a general thing and illustrating the math of why it can be beneficial to hold equities and then "sell off" as needed, to generate cash.

You're pointing out that if management is crooked and isn't committed to generating ROE, that this approach will fail, and I agree. I just think that anyone investing in stocks has to believe that management is going to generate ROE. If they don't believe that fundamental thing about stocks, then why are they in stocks?


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## Money172375 (Jun 29, 2018)

All my non-reg is in the typical Canadian dividend payers. As I’ve said before, this was setup about 2-3 years, and while I enjoy the regular (so far) income stream, I do wonder about long term growth. Our TFSAs hold similar Canadian dividend payers. I was expecting to have to draw on the tfsa income, but that hasn’t happened. So, for the last year, I’ve been immediately reinvesting my TFSA income into the SP Index to broaden my exposure.

I fully understand the ability to sell off as needed, but mentally I’m not there yet to take this philosophy. If my dividend payers don’t grow their dividends over time, I’ll be in trouble.


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## MrMatt (Dec 21, 2011)

james4beach said:


> Let's say there are two choices for the investor. They can either create a dividend-heavy portfolio (and live off the dividends), or create a standard portfolio and sell shares and units, living off the proceeds of those sales. An example of this second method is holding VBAL or Mawer Balanced Fund and routinely selling off some shares each year.
> 
> Both ways can work. The capital does not last longer doing it the dividend way vs the "selling off" way. There is a popular misconception that the dividend method makes the capital last longer - not true.
> 
> Buffett writes about this extensively in one of his old letters. The "selling off" method also gives you more control because you can choose how much cash (if any) you want to extract in a given year. If it's a really bad year in the market, you can choose not not sell any. In comparison if you're getting giant dividends from BCE and ENB in bad market years, you are (effectively) being forced to sell at a really bad time, which erodes your capital. Those dividends can really hurt when stocks are down badly, unless you immediately use the cash to re-buy shares.


The math and logic is correct.
I used to believe that, and it's all technically correct.

However, psychology comes into play.
I like the idea of simply getting paid for my stake.

What should the company do with the excess cash they have piling up?

I don't like the idea of a company holding it when they don't have a good use for it.
I don't like investing it in low return projects just because they have to do something.
I love buybacks when it's an undervalued stock, but when it's fairly valued or overvalued I think that's a waste.

I think the "correct" answer with excess cash is "that's what we pay management for".


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## like_to_retire (Oct 9, 2016)

james4beach said:


> If it's a really bad year in the market, you can choose not not sell any. In comparison if you're getting giant dividends from BCE and ENB in bad market years, you are (effectively) being forced to sell at a really bad time, which erodes your capital. Those dividends can really hurt when stocks are down badly, unless you immediately use the cash to re-buy shares.


The share price of a stock is determined by the market. Dividends are determined by company bean counters. 

A company's financials can be quite solid during ridiculous market downturns that don't consider anything but panic.

I would rather be given a dividend than sell into a panic. It's the very reason to judiciously hold a cash reserve to weather down markets if you use the "sell shares" method of funding your retirement.

Yet you're arguing it matters not. I'll argue that those who "sell shares" have to keep a large cash drag that isn't required of dividend investors.

ltr


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## afulldeck (Mar 28, 2012)

like_to_retire said:


> The share price of a stock is determined by the market. Dividends are determined by company bean counters.
> 
> A company's financials can be quite solid during ridiculous market downturns that don't consider anything but panic.
> 
> ...


It's about control over monies. Some personalities would rather control income and tax hits, rather than being control by an outside entity to take a tax hit.


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## MrMike (Sep 30, 2020)

james4beach said:


> Each dividend knocks the share price down ....


I want to make 2 specific points that people are saying incorrectly.


See quote above - I've heard this a few times but I think people are confused. In the video, Ben says "When a company pays it's dividend, *the value of the company drops*." Not the share price! That doesn't drop. If a company pays $100 in dividends, the company is worth $100 less.

But that is the value of the company, not the stock price - stock prices are only effective buy people buying and sell shares - nothing more.


When Ben says "Dividends are irrelevant" he means Dividends are irrelevant to your investment returns. The title is kind of click bait. The point of what he's saying is that if your goal is to make more money that you put in, then you can achieve that with out dividends - they are irrelevant.
Case in point, my goal is to retire with a steady stream of income. I can get there in a few ways but let's stick with 2:

I invest in dividend paying stocks and get the snowball effect. When I retire, I'll have dividends in retirement. 
I invest in stocks like amazon, who doesn't pay a dividend, the value of the stocks goes up and when I retire, I sell those company for a huge profit. I then put my money in stocks that pay a dividend.
In the end, both routes will get me to the same point - dividend can be irrelevant . However, I fall into the category he talks about: I just like seeing dividends  They get me excited which makes me more disciplined in saving my money and investing it. But that is just me - other people don't need that carrot.


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## MrBlackhill (Jun 10, 2020)

MrMike said:


> See quote above - I've heard this a few times but I think people are confused. In the video, Ben says "When a company pays it's dividend, *the value of the company drops*." Not the share price! That doesn't drop.


It does reduce the share price, but then investors may be bullish and you won't see it because of the volatility.

Look at PSA.TO to see the effect.

At ex-dividend you own a $100 share, after the dividend is paid you own a $99 share + $1 dividend, so nothing is lost, nothing is created. The price is marked to open at $99 but if all investors want to pay $100, so be it. Why would I pay $100 for a stock just paid its dividend when I could buy it $100 the day before and get my $1 dividend right after?

Otherwise, I'd just make a list of all dividend payers, buy them on ex-dividend and sell them the day after and make instant +1%. With a list of 50 stocks with different ex-dividend dates, I'd make 50 times that easy +1% for a total of +64%, which would make no sense.









Make Ex-Dividends Work for You


Learn what happens to the market value of a share of stock when it goes "ex" and why. Find out how to keep your dividends out of the tax man's hands.




www.investopedia.com













How Dividends Affect Stock Prices


Find out how dividends affect the underlying stock's price, market psychology, and how to predict price changes after dividend declarations.




www.investopedia.com


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## MrMike (Sep 30, 2020)

MrBlackhill said:


> At ex-dividend you own a $100 share, after the dividend is paid you own a $99 share + $1 dividend, so nothing is lost, nothing is created. The price is marked to open at $99


Is this true? Can anyone point to a source that confirms this? Disclosure, i didn't read that 2nd link but I will, looks interesting. Is there a specific part of the article that has a source that confirms this?

From what I know, and i'm no expert, but there are before and after market buying. If that stocks opens at $1 less, that could be because the exdate has passed so people are now selling more, even before the market is open to everyone (people would hold off selling until after the exdate so they get are eligible to receive the dividend. once they are declared, they then sell).


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## cainvest (May 1, 2013)

MrMike said:


> Is this true?


Yes.


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## Tostig (Nov 18, 2020)

Karlhungus said:


> Doesnt matter as long as you dont sell that last share. Look how much a share of Berkshire is worth.


Brk.A is worth 345,000 per share. If you only needed, say, $50,000 to live off the next year, you will have to sell all of it and then reinvest the remainder in something else, like Brk.B until you eventually deplete those shares too.


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## Karlhungus (Oct 4, 2013)

Tostig said:


> Brk.A is worth 345,000 per share. If you only needed, say, $50,000 to live off the next year, you will have to sell all of it and then reinvest the remainder in something else, like Brk.B until you eventually deplete those shares too.


Yes true, however, as long as you dont sell more then the market is giving you, you will sell less and less shares as time goes on.


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## MrMike (Sep 30, 2020)

cainvest said:


> Yes.


source? And not an opinion article  something more official.


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## cainvest (May 1, 2013)

MrMike said:


> source? And not an opinion article  something more official.


How Does the Stock Price Change When a Dividend Is Paid?.

Lots of info available from a google search, pick a link from a site you trust.


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## gardner (Feb 13, 2014)

james4beach said:


> But Buffett was talking about a general thing and illustrating the math of why it can be beneficial to hold equities and then "sell off" as needed, to generate cash.


The math, being math, is obviously correct -- in the short term. Say a few quarters or even a few years.



> You're pointing out that if management is crooked and isn't committed to generating ROE, that this approach will fail, and I agree.


But they don't have to be genuinely crooked. Even the most firm handed trustworthy management will inevitably come under pressure to "do something" with the pile of cash. If the business is one that doesn't have a sensible path to growth, it will take an insensible path of speculation or some other means to dissipate itself uselessly. If the fundamentals decline for some reason that drives the stock price down, someone else will acquire them and dissipate the cash in a way that doesn't benefit the retail investor.

As the pile of cash grows, the pressure to "do something" and the temptation to crookedness increases. The lengths folks will go to to crack into that juicy nestegg of unspent cash will broaden.

The risk of retaining uninvested cash earnings for much more than a couple of years is just too great. Better to give it back to the investors to let them decide how to use it.


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## gardner (Feb 13, 2014)

Tostig said:


> Brk.A is worth 345,000 per share. If you only needed, say, $50,000 to live off the next year, you will have to sell all of it and then reinvest the remainder in something else, like Brk.B until you eventually deplete those shares too.


BRK.A can be converted to equivalent BRK.B shares.


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## MrMatt (Dec 21, 2011)

MrMike said:


> source? And not an opinion article  something more official.


For some stocks they are sufficiently volitile that a small dividend would be lost in the noise.
But you can go look at behaviour on the ex dividend date yourself.


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## MrMike (Sep 30, 2020)

MrMatt said:


> For some stocks they are sufficiently volitile that a small dividend would be lost in the noise.
> But you can go look at behaviour on the ex dividend date yourself.


that's my point, the fact that the price drops doesn't mean it's because the dividend. I've seen stocks go up on the exdate opening (not accounting for before market trading which I can't see). 

I have not seen anywhere that shows dividends affect stock price.


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## MrMike (Sep 30, 2020)

cainvest said:


> How Does the Stock Price Change When a Dividend Is Paid?.
> 
> Lots of info available from a google search, pick a link from a site you trust.


thanks. i'll take a read 

I've never heard of Stock market specialists haha I'll have to look up what they are.


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## MrBlackhill (Jun 10, 2020)

MrMike said:


> source? And not an opinion article  something more official.


My post had two links to Investopedia.



> The declaration of a dividend naturally encourages investors to purchase stock. Because investors know that they will receive a dividend if they purchase the stock before the ex-dividend date, they are willing to pay a premium. This causes the price of a stock to increase in the days leading up to the ex-dividend date. In general, the increase is about equal to the amount of the dividend, but the actual price change is based on market activity and not determined by any governing entity.
> 
> On the ex-date, investors may drive down the stock price by the amount of the dividend to account for the fact that new investors are not eligible to receive dividends and are therefore unwilling to pay a premium.





MrMike said:


> Is this true? Can anyone point to a source that confirms this? Disclosure, i didn't read that 2nd link but I will, looks interesting. Is there a specific part of the article that has a source that confirms this?
> 
> From what I know, and i'm no expert, but there are before and after market buying. If that stocks opens at $1 less, that could be because the exdate has passed so people are now selling more, even before the market is open to everyone (people would hold off selling until after the exdate so they get are eligible to receive the dividend. once they are declared, they then sell).


If we remove all the volatility and all other factors, the cycle of dividends is :

Price slowly increases as we approach the ex-dividend date
Price drops after the ex-dividend date
That's the cycle of dividends.

Obviously, the share price will be affected by many other factors, so you won't see that cycle.

Think about the logic behind. Say you buy a share with no volatility and no other factors affecting that special stock. You bought that share $100 on January 1 and it pays $1 dividend every end of month if you still hold it at the end of the month.

On January 30, someone wants to buy your share. Will you sell it $100? No, because you bought that share $100, held it a whole month and you're at 1 day of collecting your $1 dividend, so you'll most likely sell it for $101. You either keep your $100 and collect $1 or you sell at $101 and collect nothing. That's why the price slowly increases. Though that's paying a premium, because the buyer will have a lower yield on cost. But that premium is justified by the time value of money, as buying the share on January 30 allows the investor to collect the dividend almost immediately instead of waiting.

Say we are now on February 1, you've collected your $1 dividend and you're trying to sell your share at $101. Will it work? No, because the prior day people were ready to pay a premium at $101 to be able to collect that $1 dividend immediately, but now they would have to wait a whole month, so the price drops immediately back to $100.


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## MrBlackhill (Jun 10, 2020)

From @cainvest source:



> Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend. For example, if a stock trades at $50 per share and pays out a $0.25 quarterly dividend, the stock will be marked down to open at $49.75 per share.


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## Covariance (Oct 20, 2020)

Philosophically speaking. Assuming we are talking about active, not ownership through a passive index, why would one want to own shares in a company if they did not trust management and the board of directors to responsibly determine the appropriate dividend?


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## MrMatt (Dec 21, 2011)

MrMike said:


> that's my point, the fact that the price drops doesn't mean it's because the dividend. I've seen stocks go up on the exdate opening (not accounting for before market trading which I can't see).
> 
> I have not seen anywhere that shows dividends affect stock price.


Then you simply haven't looked in the right places.
Think about it.
Lets say a stock has $10 in assets today, so people pay $10 for it.
At midnight it gives everyone $5 cash, how much will people pay for it tomorrow?
They'll pay $5.

Of course in "the real world" it gets confusing, but that's the basic idea. If you cut out $x/share in assets, the price will drop accordingly.


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## MrMike (Sep 30, 2020)

MrMatt said:


> Then you simply haven't looked in the right places.
> Think about it.
> Lets say a stock has $10 in assets today, so people pay $10 for it.
> At midnight it gives everyone $5 cash, how much will people pay for it tomorrow?
> They'll pay $5.


What you just said is exactly why I think you're incorrect - the stock doesn't pay you, the company does. 

*The company gives you the money. 
The stock price is based on what people buy/sell each share for.*

The 2 are not related and it actually makes sense why they're not related. 

Now I can be wrong - believe it or not, I have been wrong a few times in my life  but I've never seen evidence to suggest otherwise..... about dividends and share price being related i mean. There's lots of evidence showing me being wrong haha


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## james4beach (Nov 15, 2012)

I do mean the price literally drops on the dividend. It's just obfuscated by a few effects.

First is mismatch in timing. The price drops on the ex date but you don't see the dividend until the payment date. When the cash shows up in the account, many people think it's free money... but the hit to the share price happened some time ago.

The second is market and daily volatility. This masks the effect because it's very difficult to see through the noise. But it's possible with some easy statistical corrections. For example, using the fact that any given day is randomly up or down (and averages out to zero) you can simply look at the price change on the ex dividend date, over a length of a few years. Average out those numbers. You will see that the share price *drops* on the ex date, once you remove the "noise".

Here's the method to see this for yourself:
1. pull up yahoo finance historical prices for a dividend stock
2. calculate the price change (in dollars) immediately after each ex dividend event
3. repeat that calculation going back 2 years or 5 years
4. average those numbers

One caveat are severe market events (like hugely good or hugely bad news) that happen to hit the market on the ex date. You will have to exclude those wild days because they aren't typical daily random noise. I think CNR once had an ex dividend date that coincided with a true market crash.

Average those price changes on the ex date, and you'll see that they average out to a negative drop of roughly the dividend amount.

I've posted examples on CMF before to show it. Dividends are great and convenient but make no mistake, the share price does take a hit. When a dividend is paid out during a very depressed market, the % change in the share price (the erosion of capital) is quite severe.

@MrMike has his theories on how this works, but at the end of the day, the proof is in the numbers. Anyone can verify it with a bit of work. But like I said, the effect is masked or obfuscated so it does take a bit of work to correct for the RANDOM daily noise on top of the dividend effect.


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## MrMatt (Dec 21, 2011)

MrMike said:


> What you just said is exactly why I think you're incorrect - the stock doesn't pay you, the company does.
> 
> *The company gives you the money.
> The stock price is based on what people buy/sell each share for.*
> ...


Yes
If a company is worth $10/share, and gives each shareholder $5 cash, there is only $5/share in value left in the company.

They absolutely ARE released, you can see it in the Cashflow statement.

I will pay more for a company with $10/share in assets than one with $5/share in assets (all else being equal)

Finally if James & I ever agree on something....


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## MrMike (Sep 30, 2020)

Sorry, there's so many posts it's hard to keep track of it.



MrBlackhill said:


> If we remove all the volatility and all other factors, the cycle of dividends is :
> 
> Price slowly increases as we approach the ex-dividend date
> Price drops after the ex-dividend date
> That's the cycle of dividends.


Right there! You say the Price drops after the ex-dividend date but it's not directly because of the dividend. The price drops because some... or a lot! of people sell the shares on the exdate.

Assume no one sells on the exdate - even though a dividend will be paid out, because no one sold their shares, the price of the stock would not go down. Do you think that is correct?


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## james4beach (Nov 15, 2012)

MrMatt said:


> Yes
> If a company is worth $10/share, and gives each shareholder $5 cash, there is only $5/share in value left in the company.
> 
> They absolutely ARE released, you can see it in the Cashflow statement.
> ...


MrMatt and I agree on quite a few things actually.


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## MrBlackhill (Jun 10, 2020)

But do you see what I'm trying to illustrate about why the stock price increases then drops?

Look at the chart of PSA.TO even though it's not the stock of a company.


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## MrMike (Sep 30, 2020)

MrBlackhill said:


> But do you see what I'm trying to illustrate about why the stock price increases then drops?


I understand that may happen - I'm not saying the stock price can't fall on the exdate (actually, i agree it does fall because that's when a lot of people sell).

I think what we're debating is: *Is the stock price falling on the ex-date directly related to a dividend payout? *The key word is "directly".

Not saying I'm right but everything I see suggest the stock price falls because people often sell on the ex-date.... they sell because once they're eligible for the dividend, they sell and put their money somewhere else.


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## MrBlackhill (Jun 10, 2020)

MrMike said:


> I understand that may happen - I'm not saying the stock price can't fall on the exdate (actually, i agree it does fall because that's when a lot of people sell).


It's not only due to selling, it's due because the stock value dropped.

What do you prefer between a stock at $100 paying $1 dividend tomorrow or a stock at $100 paying $1 dividend in one month?


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## Spudd (Oct 11, 2011)

MrMike said:


> I understand that may happen - I'm not saying the stock price can't fall on the exdate (actually, i agree it does fall because that's when a lot of people sell).
> 
> I think what we're debating is: *Is the stock price falling on the ex-date directly related to a dividend payout? *The key word is "directly".
> 
> Not saying I'm right but everything I see suggest the stock price falls because people often sell on the ex-date.... they sell because once they're eligible for the dividend, they sell and put their money somewhere else.


Have a look at this PDF from the NASD (National Association of Securities Dealers):


https://www.finra.org/sites/default/files/NoticeDocument/p003997.pdf



At the bottom of the first page, it says "The price of the stock is adjusted downward on the ex-date so that the amount of the distribution is reflected in the current stock price. ". 

I think that's pretty clear.


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## MrMike (Sep 30, 2020)

MrBlackhill said:


> It's not only due to selling, it's due because the stock value dropped.
> 
> What do you prefer between a stock at $100 paying $1 dividend tomorrow or a stock at $100 paying $1 dividend in one month?


To answer your question, it's the tomorrow 

So you're saying there are 2 things that bring the stock price down: 

Selling (It's not only due to selling)
Stock Value (the stock value dropped)
Let assume no one sells on the ex-date, just to eliminate this variable. I'm saying the stock price would not go down.

You're saying the stock value dropped but how is that related to the stock price? Who is marking the price down? Stock price goes down when people sell but since we're assuming no one sells, how will the stock price fall? Who is doing this? How does it happen?

FYI, I am taking this as a learning opportunity  thanks all for the discussion


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## MrMike (Sep 30, 2020)

Spudd said:


> At the bottom of the first page, it says "The price of the stock is adjusted downward on the ex-date so that the amount of the distribution is reflected in the current stock price. ".


Maybe I just don't understand the exact details of the stock market. I thought the price is tied to buying and selling. I don't understand how "price of the stock is adjusted downward" happens. Who is doing this? Where does this happen? Anyone have a nice youtube video that explains this? haha i like watching more than reading


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## cainvest (May 1, 2013)

MrMike said:


> The company gives you the money.
> The stock price is based on what people buy/sell each share for.
> 
> The 2 are not related and it actually makes sense why they're not related.


Yes and no to the above ... the stock exchange is required to make the adjustment based on the dividend paid out.

Might be better for you to think of it this way....
A stock closes at a price of $10.00 which was the last trade. A dividend is paid out of $0.10 per share. The stock exchange then adjusts the closing price to $9.90. What happens at the open on the next day's trading depends on the first trade, either the bid or the ask price, which may not be $9.90 it closed at the previous day.


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## Money172375 (Jun 29, 2018)

cainvest said:


> Yes and no to the above ... the stock exchange is required to make the adjustment based on the dividend payed out.
> 
> Might be better for you to think of it this way....
> A stock closes at a price of $10.00 which was the last trade. A dividend is paid out of $0.10 per share. The stock exchange then adjusts the closing price to $9.90. What happens at the open on the next day's trading depends on the first trade, either the bid or the ask price, which may not be $9.90 it closed at the previous day.


Is that really what happens? The exchange adjusts the price?


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## Spudd (Oct 11, 2011)

Money172375 said:


> Is that really what happens? The exchange adjusts the price?


Yes.


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## MrMike (Sep 30, 2020)

cainvest said:


> the stock exchange is required to make the adjustment based on the dividend payed out.


haha Money and I are thinking the same. But that makes sense. Now I want to find out how to trade before the market so I can buy at that lower price.


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## MrBlackhill (Jun 10, 2020)

MrMike said:


> To answer your question, it's the tomorrow


@Spudd Just provided the documentation.

The explanation is... So you said you prefer the one paying the dividend tomorrow. My next question is then... What premium would you be willing to pay to get that dividend tomorrow instead of waiting one month?

The answer should be... A premium equal to the dividend.


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## cainvest (May 1, 2013)

MrMike said:


> haha Money and I are thinking the same. But that makes sense. Now I want to find out how to trade before the market so I can buy at that lower price.


Honestly the dividend price drop is rarely (ever?) significant compared to the daily fluctuations and it's of no use in the real world.


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## MrMatt (Dec 21, 2011)

cainvest said:


> Honestly the dividend price drop is rarely (ever?) significant compared to the daily fluctuations and it's of no use in the real world.


That's what I meant by noise.
Today a 4% is relatively high, paid quarterly that's only 1%, and we see lots of >1% swings.

Also if it was significant, it would be arbitraged out by big players anyway.


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## MrBlackhill (Jun 10, 2020)

MrMatt said:


> That's what I meant by noise.
> Today a 4% is relatively high, paid quarterly that's only 1%, and we see lots of >1% swings.
> 
> Also if it was significant, it would be arbitraged out by big players anyway.


True, it's lost in noise, but it's still happening.

The market would not be fair without it.


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## MrBlackhill (Jun 10, 2020)

You can also look at adjusted closed price.









Adjusted Closing Price vs. Closing Price


In the stock market, there is a difference between closing price and adjusted closing price. While closing price is the actual price at the end of a day of trading, the adjusted closing price takes into account stock devaluations, like dividends, stock splits and new stock offerings.




budgeting.thenest.com







> The dividend can come either in the form of cash paid per share or as an additional percentage of shares. In either event, a dividend reduces the stock's value because the company is getting rid of some of its value by paying out the dividends.


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## Covariance (Oct 20, 2020)

Actual price variation due to dividends can easily be buried in price volatility when dividends are a small percentage of stock price. For instance a stock with a dividend yield of 2% that pays quarterly is actually paying 0.5% of the share price on each payment. If the beta on the stock is 1 then a +0.5% move in the market completely offsets the price change related to the dividend.

The lower the dividend yield and higher the beta and/or market volatility the more it is buried.

if you don’t believe dividends impact the cash price of a stock do not trade in the option market on option paying stocks.


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## Pluto (Sep 12, 2013)

About minute 4 he states that dividend payers and non dividend payers had the exact same return. I take that to mean that dividends matter to those that want them, and do not matter to those that don't want them. Ben Felix just goes around in circles. Much ado about nothing.


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## Pluto (Sep 12, 2013)

I have a stock that pays 5% yield on my cost. On top of that the share price gain is 167%. 
This idea that the share price must go down due to dividends being paid is just nonsense.


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## Retiredguy (Jul 24, 2013)

Pluto said:


> I have a stock that pays 5% yield on my cost. On top of that the share price gain is 167%.
> This idea that the share price must go down due to dividends being paid is just nonsense.


 Yeh my $6 sh ACB TD currently paying 3.16 div (.25 originally) and now trading at 72.00 has just been terrible. I cry every quarter.


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## MrBlackhill (Jun 10, 2020)

Pluto said:


> I have a stock that pays 5% yield on my cost. On top of that the share price gain is 167%.
> This idea that the share price must go down due to dividends being paid is just nonsense.


That must be GSY. The price went up because it's a growth stock, not a dividend stock and when it crashed it was trading at a huge discount, that's why the price went up. Plus, it's a high beta stock. You will definitely not see the effect of dividend dropping the share price on a high beta stock growing at 35% CAGR that has a small 2% dividend when trading at fair value.

GSY closed at $97.15 on December 22 but it paid a $0.45 dividend on December 23 so its adjusted close is $96.70. When it closed at $96.80 on December 23, its raw price dropped (from $97.15 to $96.80), but in terms of performance, due to dividend paid, it gained value (from $96.70 to $96.80). On December 22, you closed at $97.15 (unrealized), then on December 23 you closed at $96.80 plus $0.45 in cash, for a total value of $97.25 ($96.80 unrealized, $0.45 realized). Dividends are simply forcing realized gains instead of keeping them unrealized until you sell the shares by yourself. It's converting a part of the unrealized share value into realized value.

It's like when a stock splits one $100 stock into two $50 stocks. It's an action that doesn't create value, it's just a conversion.

What happened with GSY is that its growth and discount overcame its dividend.

















Adjusted Closing Price Definition


The adjusted closing price amends a stock's closing price to reflect that stock's value after accounting for any corporate actions.




www.investopedia.com







> A stock's price is typically affected by supply and demand of market participants. However, some corporate actions, such as stock splits, dividends, and rights offerings, affect a stock's price. Adjustments allow investors to obtain an accurate record of the stock's performance. Investors should understand how corporate actions are accounted for in a stock's adjusted closing price. It is especially useful when examining historical returns because it gives analysts an accurate representation of the firm's equity value.





> For example, assume a company declared a $1 cash dividend and was trading at $51 per share before then. All other things being equal, the stock price would fall to $50 because that $1 per share is no longer part of the company's assets. However, the dividends are still part of the investor's returns. By subtracting dividends from previous stock prices, we obtain the adjusted closing prices and a better picture of returns.


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## james4beach (Nov 15, 2012)

Covariance said:


> Actual price variation due to dividends can easily be buried in price volatility when dividends are a small percentage of stock price. For instance a stock with a dividend yield of 2% that pays quarterly is actually paying 0.5% of the share price on each payment. If the beta on the stock is 1 then a +0.5% move in the market completely offsets the price change related to the dividend.


Right, the effect gets buried (or masked). As you say, when the dividend is reasonably small, the effect is easily masked by typical daily market noise.

Many investors can't see that dividend price drop effect because of the noise on top of it. But the drop is still there. A bull market/rally also does a great job masking it due to stronger upward bias on the noisy daily moves... for the extend of the bull rally, anyway.

What else can be said? Wall Street knows this. The options market knows this. The _exchanges_ know it and even adjusts for it automatically. The market makers know this.


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## GreatLaker (Mar 23, 2014)

I used to think the market was so efficient that the smart money institutional investors were just bidding the stock price down at opening on the ex-dividend day to adjust for the fact that a dividend was just paid.

Then I learned that the exchanges were adjusting the opening price to compensate for it.


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## Gotime (Nov 28, 2020)

For me, I'm just interested in maximizing return and I receive dividends but don't necessarily seek them.
If a stock has a 7% dividend and is likely to trade sideways or trend down, I have no interest.
Canada has lots of good dividend stocks with great historical total returns though. Eg financials and some utilities like EMA or AQN.
But if I'm looking at other sectors, such as tech, of course dividends are irrelevant.
Also, when you look at reits, which are often judged by their distributions, you would miss out on great returns on more growth focused reits such as car.un which have had stronger overall returns


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## MrMatt (Dec 21, 2011)

Pluto said:


> I have a stock that pays 5% yield on my cost. On top of that the share price gain is 167%.
> This idea that the share price must go down due to dividends being paid is just nonsense.


Nobody said the price must go down.

Just that when a dollar of cash is paid out as a dividend from a stock the value of the stock drops by one dollar.
I think that's unarguable, the stock now has one less dollar in assets.

Now if you subscribe to the idea that the price is related to the value of the stock, it follows the price should also drop by one dollar.

Of course other things are happening that also cause the price/valuation to change, but to suggest that withdrawing cash from a corporation doesn't decrease the value is laughable.


Look at how much you have received in dividends from that stock.
If all those dividends were still on the books as cash, wouldn't the price of the stock be even higher?
They'd be sitting on that big pile of cash.


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## depassp (Mar 22, 2020)

This is something I still struggle with. There's another aspect to this that perhaps is being missed.

The investor should really only care about Total Return = Dividends + Capital Gains (net of taxes).

Let's avoid taxes to simplify so assume we're working with a registered account. Let's fix the total return at 7% and assume you have the choice between taking the 7% as monthly dividends or 7% as future capital gains.

I would choose monthly dividends because that gives me more choice and power NOW. I can choose to re-invest in the same company and compound my returns (or DRIP if available). I can choose to invest in another company and diversify my exposure. Or I can choose to take the income out of the market completely. I like having that choice and control. "A bird in the hand is worth two in the bush"


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## Jimmy (May 19, 2017)

Here is the accounting of it for a $2000 dividend which shows how RE are reduced by the dividend amount. The retained earnings (book value per share) declines ( a debit reduces a liability) by the dividend amount $2,000 when the company declares the dividend

It then decreases its cash assets (credit reduces an asset) by that amount when they are paid in cash.


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## Tostig (Nov 18, 2020)

The Magic of Compounding. I'm sure most of you have heard of it. You need to enroll in a DRIP. The only brokerage I know that purchases partial shares, Canadian ShareOwner, is winding down. So to maximize compounding you have to purchase as many shares as possible for each dividend payment to be able to purchase at least one full share.

And none of that is possible without dividends.

And just when you're all set up, companies like RioCan and Enbridge cancel their drip programs.


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## MrBlackhill (Jun 10, 2020)

depassp said:


> Let's fix the total return at 7% and assume you have the choice between taking the 7% as monthly dividends or 7% as future capital gains.
> 
> I would choose monthly dividends because that gives me more choice and power NOW.


Usually, stocks paying a high dividend are slowing in growth, so they have lower share price growth. For instance, stocks paying 4% dividends (or more) usually won't provide a total return higher than 15% CAGR whereas stocks paying less than 2% dividends can provide a total return in the range of 20% CAGR or even much more. Though, stocks paying dividends are considered more stable whereas growth stocks are considered riskier.

That's my interpretation of the market psychology for growth stocks vs dividend stocks.


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## MrMatt (Dec 21, 2011)

depassp said:


> This is something I still struggle with. There's another aspect to this that perhaps is being missed.
> 
> The investor should really only care about Total Return = Dividends + Capital Gains (net of taxes).


Actually the investor should really only care if the investment portfolio meets their objectives.

The thing with dividends is that the return is a bit more stable than capital gains, and selling off 1% of your portfolio every quarter.


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## Karlhungus (Oct 4, 2013)

Tostig said:


> The Magic of Compounding. I'm sure most of you have heard of it. You need to enroll in a DRIP. The only brokerage I know that purchases partial shares, Canadian ShareOwner, is winding down. So to maximize compounding you have to purchase as many shares as possible for each dividend payment to be able to purchase at least one full share.
> 
> And none of that is possible without dividends.
> 
> And just when you're all set up, companies like RioCan and Enbridge cancel their drip programs.


Stock appreciation compounds as well.


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## Karlhungus (Oct 4, 2013)

MrMike said:


> What you just said is exactly why I think you're incorrect - the stock doesn't pay you, the company does.
> 
> *The company gives you the money.
> The stock price is based on what people buy/sell each share for.*
> ...


The collection of stocks is essentially the company. Saying the stock or the company pays you a dividend is the same thing. 

Think about this, lets say 2 people are trying to value a company. 1 person thinks its worth 750,000 and person 2 thinks its worth 1,000,000. Now, lets say theres a third person. This person thinks its valued at 850,000. Now, imagine theres a million people valuing the same company. The value is going to be exactly whats its worth. Now, imagine that company pays out $100,000 in dividends. Almost every single person who valued that company will agree its now worth $100,000 less. Thats what happens when a dividend is paid.


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## Eder (Feb 16, 2011)

I enjoy market inefficiencies that often offer businesses on sale. (As long as they pay a dividend of course)


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## Pluto (Sep 12, 2013)

MrMatt said:


> Nobody said the price must go down.
> 
> Just that when a dollar of cash is paid out as a dividend from a stock the value of the stock drops by one dollar.
> I think that's unarguable, the stock now has one less dollar in assets.


1. Nobody disputes that. The dispute from my perspective is Ben Felix has uncovered a mole hill and he tries to make it look like the Swiss Alps. He himself says it doesn't matter. I agree it doesn't mater. So why try to make a mountain out of a mole hill?
2. Lots of stocks have had tons of cash. it is not necessarily reflected in the stock price. Sometimes it takes years, if ever, for cash to be reflected in the stock price.


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## Pluto (Sep 12, 2013)

Retiredguy said:


> Yeh my $6 sh ACB TD currently paying 3.16 div (.25 originally) and now trading at 72.00 has just been terrible. I cry every quarter.


Yep. Good going. I admire your persistence and patience. that is a huge part of what investing is about.


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## MrMike (Sep 30, 2020)

MrMatt said:


> Nobody said the price must go down.
> 
> Just that when a dollar of cash is paid out as a dividend from a stock the value of the stock drops by one dollar.


...isn't that what you exactly say?  I'm just teasing

"when a dollar of cash is paid out as a dividend from a stock" = "the value of the stock drops by one dollar"
go down = drops

If I were a day trader, which I'm not, I think I would be buying stocks on the exdate and then selling just before the exdate.


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## james4beach (Nov 15, 2012)

Pluto said:


> 1. Nobody disputes that. The dispute from my perspective is Ben Felix has uncovered a mole hill and he tries to make it look like the Swiss Alps. He himself says it doesn't matter. I agree it doesn't mater. So why try to make a mountain out of a mole hill?


The reason for the focus on this is that this fundamental misunderstanding about dividends can lead to some bad decisions.

Many people (even authors of books) still think that dividends are free money. For the people who don't realize that the share price goes down with dividend payments, they think that the dividends are a net booster of returns... extra income / free money *on top* of the capital gains. (This is the fundamental misunderstanding)

This leads some people into creating dividend-heavy portfolios because of the notion that their retirement savings can last longer. It's the misguided idea that dividends prevent you from having to "eat into capital".

This leads to bad portfolio designs, like portfolios that are not diversified, and heavily concentrated in bank stocks or energy stocks (remember when that was popular?) or buying stocks with very high dividend yields. Just think how much tangible harm was caused by this misunderstanding, with all those people who loaded up on income trusts and Canroys back when those were popular.


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## Eder (Feb 16, 2011)

Yet a reasonable and steadily increasing dividend remains one of the most important metrics to determine good companies to own. Its not different this time and...ya...dividends matter. 

I doubt I would have bothered with my business had it not spewed share holder dividends at us every year. I certainly wouldn't bother with any public company that thinks it doesn't need to pay its shareholders.


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## cainvest (May 1, 2013)

james4beach said:


> This leads some people into creating dividend-heavy portfolios because of the notion that their retirement savings can last longer. It's the misguided idea that dividends prevent you from having to "eat into capital".


But living off dividends can be a viable solution, just like selling off shares. Both of these methods require the underlying companies to be good money makers. Also note there are some good dividend companies that have growth as well.

If dividend company has no growth but a enough cash flow to support the dividend all is good. If a growth, non-dividend, company gains value enough to increase it's share price equal to the dividend company it's the same thing right?


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## Pluto (Sep 12, 2013)

james4beach said:


> The reason for the focus on this is that this fundamental misunderstanding about dividends can lead to some bad decisions.
> 
> Many people (even authors of books) still think that dividends are free money.


I have never read or heard anyone claim dividends are free money.


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