# Dividend vs Capital appreciation



## Karlhungus (Oct 4, 2013)

I have a question that maybe the more savvy investors of this forum can help me with. I can get behind the idea that it doesnt matter if company XYZ pays a dividend or not, your ROI over time will be relatively the same. I guess the theory is if they dont pay a dividend then the company just reinvests the money back in and the company grows over time. But what about DRIP's? Does the fact that you can continually buy more units of a company give the edge to dividend investing?


----------



## andrewf (Mar 1, 2010)

No. Unless you reinvest dividends, your return would be lower than if the company kept the cash and reinvested.


----------



## Eclectic12 (Oct 20, 2010)

^^^^

Wasn't the question about reinvesting the dividends *using* a DRIP?

I'd still think the DRIP could do worse due to the two factors. The first is that a broker DRIP is going to leave small amounts. The second is that even if it's a full DRIP (i.e. allows fractional shares so that all the dividend is re-invested), the dividend paying company has costs to get those dividends figured out then paid out that the non-dividend paying company does not have.



Of course to get a true comparison, one would have to find companies that are dividend & non-dividend payers where the metrics are similar enough to make a comparison.



Cheers


----------



## Soon Forget (Mar 25, 2014)

Karlhungus said:


> Does the fact that you can continually buy more units of a company give the edge to dividend investing?


No, this is artificial since the dividend comes out of the share price. So after you DRIP you now own more shares with a slightly lower price, but the total value is the same as if the dividend hadn't occurred.

Along with the reasons mentioned by Eclectic, taxes could also give the edge one way or the other if this is done in a taxable account.


----------



## namelessone (Sep 28, 2012)

After 8 years of investing, I came to realize the value of dividend. It provides money to buy more stock at market drop. It provides more stability to share price. I prefer growth stock with low payout ratio and a history of dividend increase. The fact of the business to increase dividend for the long term is an indication of the predictability of future business growth. Now, all my positions pay dividend/income.


----------



## Valueinvestor (Dec 10, 2014)

A mix of dividends and stock price increase is best. Paying out too much in dividends will hurt stock price over the decades


----------



## donald (Apr 18, 2011)

One thing that gets left out all the time about dividend payers vs non-dividend payers is that some of the best companies in the world pay them and have the attractive quality you want in a investment:
wide moat/proven business that spans many many recessions(a proven company)legacy...top skill management etc(to many things to lists)
most non dividend companies are the ones who end up being bought by div companies anyways
I actually view a dividend as a + because the div company has to always have that capital pay'd out every quater it creates a environment where capital allocation is measured to the ninth degree and forces a dividend company to be disciplined(imo bodes well long-term)
People say a non dividend payer is better because they can re-invest the capital instead of rewarding the shareholder and longer term it creates better value but
It leaves room for much more mistakes(companies are far from perfect and esp small caps **** up all the time....they are more 'fast and loose'
You might not get they same growth as a non dividend payer but there are more duds in the non dividend camp that can sink you more than payers imo
Stack a list of the 10 best companies you can think of(many pay a div)against 10 companies that don't
besides brk.....name the 10 best non div paying companies listed in canada or us 
start from there and you will find out your risks go up going non div imo


----------



## OnlyMyOpinion (Sep 1, 2013)

^++1 Good points! Companies that don't pay dividends tend to be earlier in their 'life' and carry more inherent risk (not always, but generally).


----------



## donald (Apr 18, 2011)

^yeah
than that brings in the emotional toughness of a investor
does not have a yield as a lever of safety
you need to bring a lot more skill to table as a non div investor!
if your lacking the skill and emotional aspect you might puke your investment up at the exact wrong time and call uncle when mr market is being non rational nasty!
than your really cooked.


----------



## james4beach (Nov 15, 2012)

If you DRIP and reinvest all dividends back into the stock, you have effectively transformed the stock into an equivalent non dividend paying stock. Dividends and DRIP'ing don't magically create money out of thin air.

Look at the stock as a "black box". If you have $1000 of equity holding in a stock and it pays a dividend, the moment the dividend is paid out, the stock price drops on the exchange. You DRIP that dividend to buy more shares, and your new holding (more shares x less price) is still $1000. *No value has been created in the dividend activity; it's simply a cashflow.*

This actually illustrates how silly it is for people to go out of their way to _seek_ high yielding stocks, and then DRIP those dividends. People do this because they incorrectly perceive dividends as a kind of extra income, and thus (incorrectly) think that DRIPs compound growth. This reflects a fundamental misunderstanding of where the dividend comes from.

The dividend is just a mechanism; it's a cashflow. It's an extremely useful mechanism to automatically extract cash from an equity holding. It's easier and more automatic than selling shares to convert equity to cash, but it amounts to the same thing!

I'm not criticizing all DRIPs. This scenario makes sense: you have a company that is a good investment and you don't care one way or another if it pays dividends. By DRIP'ing the dividends, you decide to not extract the cashflow from the equity.


----------



## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> ... (incorrectly) think that DRIPs compound growth. This reflects a fundamental misunderstanding of where the dividend comes from... selling shares to convert equity to cash,... it amounts to the same thing!
> I'm not criticizing all DRIPs. This scenario makes sense: you have a company that is a good investment and you don't care one way or another if it pays dividends. By DRIP'ing the dividends, you decide to not extract the cashflow from the equity.


Not to overstate this, but when DRIP'ing, a dividend paid out when a stock has dropped in value (due to negative market sentiment, global economic concerns, etc.) will buy more of those cheaper shares. A dividend paid out when the stock is high in value will buy fewer additional shares. That is where the dollar cost averaging comes from. The compounding comes from the fact that DRIP'ing incrementally buys more shares which increases the dividend payout which in turn buys more shares through the DRIP. 
I agree that these are very incremental and very long term benefits. They are also more noticeable when you hold a larger number of shares. But they are real and a true long term holding or portfolio of such holdings will show this growth.
The bigger value IMO is the auto-investment that DRIP'ing allows, into a stock that is paying you a decent, tax-advantaged (versus interest) dividend.


----------



## andrewf (Mar 1, 2010)

It is entirely an artifact of your mind. When the share price is low, the share drops by the dividend amount on the ex-div date, just like always. So it drops by x%, you reinvest the x% and get the same share value back as if there had not been a dividend issued (other than the DRIP discount, if any).


----------



## Pluto (Sep 12, 2013)

I think we need to make a distinction between share price and value. When a dividend is paid, the value of the company goes down by the amount of the dividend, but the share price doesn't necessarily go down. 

Sometimes when a company announces a dividend increase the share price actually spikes up a bit. In the long run, however, it is value that will win. 

Often stocks that do not pay a dividend are on a fast growth track and they need the money to finance expansion. Such companies usually get a premium p/e and when the growth hits a pot hole, or the market in general tanks, the stock takes the elevator down. Its tricky for the investor. 

Then there are companies like aapl: Huge pile of cash that does not necessarily get recognized by the market. Wouldn't you rather have a big dividend? At least the money is in your hand in lieu of wishing the market would recognize it in the form of a higher share price.


----------



## atrp2biz (Sep 22, 2010)

Pluto said:


> I think we need to make a distinction between share price and value. When a dividend is paid, the value of the company goes down by the amount of the dividend, but the share price doesn't necessarily go down.
> 
> Sometimes when a company announces a dividend increase the share price actually spikes up a bit. In the long run, however, it is value that will win.


When a company announces a dividend increase, it hasn't yet gone x-dividend. When it does, in isolation, the share price will go down by that amount.



Pluto said:


> Often stocks that do not pay a dividend are on a fast growth track and they need the money to finance expansion. Such companies usually get a premium p/e and when the growth hits a pot hole, or the market in general tanks, the stock takes the elevator down. Its tricky for the investor.
> 
> Then there are companies like aapl: Huge pile of cash that does not necessarily get recognized by the market. Wouldn't you rather have a big dividend? At least the money is in your hand in lieu of wishing the market would recognize it in the form of a higher share price.


Agreed, AAPL is sitting a pile of cash. AAPL's issue is that that cash hasn't been repatriated and taxed. So they are sitting on a bunch of cash/working capital that cannot be efficiently employed. That's why AAPL issued bonds (last year?)--to acquire domestic money to pay its dividends and execute its buy-back strategy.


----------



## james4beach (Nov 15, 2012)

Pluto said:


> I think we need to make a distinction between share price and value. When a dividend is paid, the value of the company goes down by the amount of the dividend, *but the share price doesn't necessarily go down*.


Not necessarily, true, but that's a general stock market movement.

The share price at the opening is adjusted by market makers to exactly reflect the dividend being paid out, it's a direct subtraction -- part of stock market mechanics. There is regular market volatility on top of that. Because we've been in a bull market, that's where you guys have gotten the idea that the share price doesn't decline due to ex div. You're seeing the daily tendency for stock prices to float higher, which brings up the price to mask the immediately decline due to ex div.

This is why, as is often said but generally ignored, you cannot make an instant profit by buying a stock immediately before the ex div. However in a bull market, people may think it works.


----------



## james4beach (Nov 15, 2012)

Conversely, in a bear market you will be surprised to find that the share price declines _more_ than the dividend amount on the ex dividend day. It's still the same effect: direct subtraction of dividend on the ex date + general stock market movement.

Trust me though, the dividend itself is a null operation. It does not create or destroy value, it's just a cash transfer.


----------



## donald (Apr 18, 2011)

You got to look at from a longer range
Market doesn't factor in dividend growth ex div date
If you bought Telus stock in 2004 (250 shares say,which would be a A typical of dividend company a dividend investor would hold)
The dividend payment is prob 3 fold up compared to the first dividend cheque to today
Doesn't that matter!
The dividend growth!
Investor hasn't done a thing since his initial 250 share purchase


----------



## james4beach (Nov 15, 2012)

Dividend growth matters but I think not in the way you're thinking.

You have to think of what would happen if Telus was not paying out that cash dividend. They would be reinvesting that cash internally, and it would grow at their internal growth rate. Especially if you're DRIPing shares, you'd end up in the same place as today. Because they've been a successful company, that internal reinvestment of retained earnings would have done wonders for the equity value.

The dividend growth does matter in that
a) it helps filter for solid companies. A company capable of growing its dividend like this is likely a well run company with an established track record
b) it increases your cashflow if you hold the stock and want to get paid out in cash -- and automatically, which is great

So it helps those practical aspects. These are good things. But the dividend (and dividend growth) does not enhance the total return. Again you're just shifting money from one bucket to another.

For instance if you're a wealthy person with millions $ in stock holdings, (b) is a wonderful thing. You sit there and your investments pay out increasing amounts of cash that you can live off. All of that is great, but dividends are not creating a greater total return.


----------



## OnlyMyOpinion (Sep 1, 2013)

andrewf said:


> It is entirely an artifact of your mind. When the share price is low, the share drops by the dividend amount on the ex-div date, just like always. So it drops by x%, you reinvest the x% and get the same share value back as if there had not been a dividend issued (other than the DRIP discount, if any).


I think we are talking about different things. Here's an example:
> dollar cost averaging - more shares get bought when price is lower
> compounding - dividend paid increases as additional shares accumulate, which eventually allows more shares to be purchased. Rinse repeat... 
Jul-2014 1,401 BCE shares paid a dividend of $865.12, DRIP bought 17 shares at $48.67. 
Oct-2014 1,418 BCE shares paid a dividend of $875.62, DRIP bought 18 shares at $47.91 - extra share bought due to lower price. 
Jan-2015 1,436 BCE shares paid a dividend of $886.73, DRIP bought 16 shares at $55.02 - fewer shares bought due to higher price.
Apr-2015 1,452 BCE shares paid a dividend of $943.80, DRIP bought 17 shares at $55.19. - dividend increase, extra share bought in spite of same price.

Added: The main point is that DRIP'ing a quality company over time is a very effective way to grow your portfolio and dividend income. We paid $29k for BCE, it has paid $17k in dividends, all DRIP'd for a total investment of $46k and a current market value of ~$80k. In less than 10 years.


----------



## peterk (May 16, 2010)

OnlyMyOpinion said:


> I think we are taking about different things. Here's an example:
> > dollar cost averaging - more shares get bought when price is lower
> > compounding - dividend paid increases as additional shares accumulate, which eventually allows more shares to be purchased. Rinse repeat...
> Jul-2014 1,401 BCE shares paid a dividend of $865.12, DRIP bought 17 shares at $48.67.
> ...


Nope, you are talking the same thing. DRIPing isn't the same as DCAing, as andrewf is trying to explain. With dripping you are _not_ infusing new money into the investment, just taking money out and then immediately putting it back in. The thing to understand is that all the perceived benefit of the DRIP when the stock price is low is simply cancelled out by the fact that the stock will drop by the same dollar amount on the Ex-date whether the stock is high or low. When it is low, that price drop in % is higher, so there is no benefit.


----------



## Pluto (Sep 12, 2013)

james4beach said:


> Not necessarily, true, but that's a general stock market movement.
> 
> The share price at the opening is adjusted by market makers to exactly reflect the dividend being paid out, it's a direct subtraction -- part of stock market mechanics.


I believe the market makers do that, but it doesn't prove that the actual trading price will be lower. 
The value of the company is lower, but not necessarily the share price. The value of the company + the dividend received should equal the value had the Co. not paid a dividend. But that value is not necessarily accurately reflected in the share price. 

I'd rather invest in dividend paying companies, and trade non-dividend paying companies.


----------



## OnlyMyOpinion (Sep 1, 2013)

peterk said:


> Nope, you are talking the same thing. DRIPing isn't the same as DCAing, as andrewf is trying to explain. With dripping you are _not_ infusing new money into the investment, just taking money out and then immediately putting it back in. The thing to understand is that all the perceived benefit of the DRIP when the stock price is low is simply cancelled out by the fact that the stock will drop by the same dollar amount on the Ex-date whether the stock is high or low. When it is low, that price drop in % is higher, so there is no benefit.


Not to flog a dead horse here, but the "payable" date that my quarterly BCE dividend is paid into my account and DRIP'd occurs about 32 days after the ex-div date. The DRIP price is based on the market price on the payable date . The ex-div adjustment is long gone. The share price on the payable date is sometimes higher/sometimes lower depending on the whims of the market. 
Within the constraints of a synthetic DRIP (i.e. buys only whole shares) the dividend buys more shares when the market price is lower and fewer shares when the price is higher. Not DCA?


----------



## My Own Advisor (Sep 24, 2012)

You folks are losing me...

..since when is dollar cost averaging THE SAME as compounding?

DCA = buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares may be purchased when prices are low, and fewer shares are bought when prices are high.

Compounding =how an asset can generate earnings, those earnings are reinvested in order to generate their own earnings.

DRIPping is therefore a form of compounding.

Personally, I'd rather have the money myself (dividends) then assume it will be always invested by the company for equal or greater value (capital gains). Last time I checked capital gains are not guaranteed. A dividend is real cash.


----------



## james4beach (Nov 15, 2012)

My Own Advisor said:


> Personally, I'd rather have the money myself (dividends) then assume it will be always invested by the company for equal or greater value (capital gains). Last time I checked capital gains are not guaranteed. A dividend is real cash.


I agree the "real cash" aspect of dividends is the main appeal of them. I have never DRIP'ed shares. If you DRIP everything, you're banking it all on a capital gain because selling shares will be the only way to extract value.


----------



## Karlhungus (Oct 4, 2013)

james4beach said:


> I agree the "real cash" aspect of dividends is the main appeal of them. I have never DRIP'ed shares. If you DRIP everything, you're banking it all on a capital gain because selling shares will be the only way to extract value.


Thank you for sharing all the info in this thread, I'm starting to understand a bit better. A couple points though. Surely you would be further ahead if you would have dripped those shares as opposed to that money just sitting in a bank account right? 

When you say the company would just re invest the dividends as opposed to paying them out to you, how do you know the money would be spent wisely ? What if the company just pays the CEO more money? Wouldn't it be better if the money was in your pocket ?


----------



## james4beach (Nov 15, 2012)

> Surely you would be further ahead if you would have dripped those shares as opposed to that money just sitting in a bank account right?


If the company continues to perform well, yes you would be further ahead if you dripped.



> When you say the company would just re invest the dividends as opposed to paying them out to you, how do you know the money would be spent wisely ?


It only makes sense to hold stock in a company that you think _does wisely_ reinvest their own money at high rates of return. Buffett makes this point with Berkshire Hathaway. We shareholders (including myself) trust that Berkshire will find very good uses for its own money. Thus by keeping retained earnings and paying zero dividend, I expect to get a good return in the form of increasing equity value, or increasing book value.

If I thought a company is incapable of reinvesting its earnings for high return, then I wouldn't hold the stock. The point of holding a stock is to make money through strong corporate earnings.



> What if the company just pays the CEO more money? Wouldn't it be better if the money was in your pocket ?


Well I think that's one reason people like cash dividends. It's somewhat of a risk hedge. On one hand, yes, you experience less total return over time by taking the cash dividend. On the other hand, instead of waiting for the "very end" when you sell your shares, you are tapping into the company's value because -- as you say -- they could do something very irresponsible at some point. Someone demanding a cash dividend is saying: sure I like your company, but just in case something goes wrong down the line, let's get some of those earnings as cash right now.

Let's say Berkshire loses its edge and starts to do very badly, e.g. I'm close to retirement and the share price plummets. Now I'm in trouble, I put all my faith in the future value of the Berkshire equity. If Berkshire had been paying out dividends all this time, I could have taken some of those profits home.

OTOH -- if I then DRIP'ed those hypothetical dividends, I've gone back to essentially reinvesting and putting my faith entirely in the future value of the equity.


----------



## Karlhungus (Oct 4, 2013)

james4beach said:


> If the company continues to perform well, yes you would be further ahead if you dripped.
> 
> 
> 
> ...


Ah i see. Makes sense thanks. I guess after reading a few finance books (wealthy barber etc.) where they all kind of talk about looking for strong dividend paying companies, its doesnt really matter that they pay dividends. A lot of those books have compounding calculations showing that your money grows at an exponential rate when you reinvest your money. Compounding interest is the 8th wonder of the world blah blah blah. Are you saying would be just as far ahead if you ignored all the advice about compounding interest and just focused on strong companies?


----------



## james4beach (Nov 15, 2012)

Well even a savings account paying 1% will enjoy compound interest, so that's just a general concept and not specifically about stocks.



> Are you saying would be just as far ahead if you ignored all the advice about compounding interest and just focused on strong companies?


Hard for me to say without understanding exactly what the book's advice is. Let's get more input from others on this, but I'd say that's right -- you could be just as far ahead if you stopped _specifically_ tracking down dividend companies due their high dividend, and instead bought generic stocks... say the TSX Composite Index using an ETF like XIC or ZCN.

The TSX Composite happens to pay a healthy dividend anyway. You can reinvest the TSX's dividend to effectively give yourself an investment that produces the TSX's total return.

If you wanted that dividend cashflow, then you wouldn't reinvest the cash that XIC pays out. As a result, your total return would be a bit lower over time.

Overall, my process would be (1) find solid investments, ignoring whether it pays dividends or not and (2) if it happens to pay dividends, then reinvest them, or not, depending on whether you want to extract that cashflow or leave it inside the equity.

What I would not do, personally, is go out and find the highest dividend yielding stocks and invest in those. I bet you that XIC will do better over a long period


----------



## cainvest (May 1, 2013)

james4beach said:


> What I would not do, personally, is go out and find the highest dividend yielding stocks and invest in those. I bet you that XIC will do better over a long period


I wonder if XIC (or XIU) would do better over a long period given what the CDN market is. I would tend to believe that on the US S&P500 side capital gains would outperform general dividend payers but that's just a guess.


----------



## humble_pie (Jun 7, 2009)

Pluto said:


> I believe the market makers do that, but it doesn't prove that the actual trading price will be lower.
> The value of the company is lower, but not necessarily the share price. The value of the company + the dividend received should equal the value had the Co. not paid a dividend. But that value is not necessarily accurately reflected in the share price.




a stock's share price almost never opens for trading on the morning its stock goes X a dividend, with a price that is lower by the exact amount of the dividend. Repeat, in reality this does *not* happen, although unfortunately it's an urban legend around cmf forum that it does happen.

it's therefore true, as Pluto says, that a company's market cap when it first trades X a dividend is not the same as it was immediately prior to the X date.

this is because many hours of events & news swirl in prior to a newly X stock opening for trading at 9:30 am on an organized exchange. These news events change the share price long before opening.

if it's a US stock it normally trades pre-market. By 9:30 am overnight news could have/will have moved the share price far away from [previous close minus dividend amount].

it it's a canadian interlisted, same pre-market action applies.

in canada, the market makers spend half-an-hour or more - sometimes several hours, if major overnight news has broken - matching up overnight bids & asks. They internally "adjust" the stock price as they work, although these continuous adjustments don't show. One could say that the specialists run a kind of private pre-market on each stock they're handling, as they work to match the B/As & establish a new price for each stock.

thus, it's very common to see, at 9:30 am on the morning a stock goes X, that the share price of that stock has actually risen. Not fallen, as the urban legend theorists would have you believe, but risen.

me i watch a lot of dividends because markets are extremely volatile these days & i have many in-the-money options. These risk to be assigned early. The trigger for early assignment is nearly always a dividend X date, so it's necessary to monitor these events closely.

truth to say, on dividend X dates i have *never* actually seen a stock open lower by the exact amount of its dividend. In recent years i've more often witnessed a stock opening higher.


----------



## james4beach (Nov 15, 2012)

humble yes not by the exact amount, but is it not true that the price change seen on the ex day (let's call it Change_ex) is a superposition, a sum, of two effects

Change_ex = Change_div + Change_mkt

So there are two effects which are being summed together. Change_div is a known quantity, the dividend amount. Change_mkt is a random variable, highly unpredictable, but which has a mean of zero or (in a bull market) a mean of slightly greater than zero?


----------



## humble_pie (Jun 7, 2009)

i'd say that change_mkt is totally unpredictable each:


----------



## humble_pie (Jun 7, 2009)

i also believe there are dimensions to the dividend/no dividend debate that are not quantifiable because they are psychosocial in nature. For example, i subjectively "like" companies that pay dividends because - rightly or wrongly - i believe that the discipline of answering to shareholders every dividend date makes a company somewhat more transparent.

rightly or wrongly, i find myself believing that there might be slightly better opportunities to cook the books for companies that never pay dividends.

valeant, for example. I have not seen any analyst who can get an accurate handle on its debt. Payment of regular quarterly dividends would not cure this anomaly, but it might give some analysts a slightly better tool to measure, say, cash flow in the company.


----------



## humble_pie (Jun 7, 2009)

james4 do u suppose that one might see a more accurate price drop - somewhat closer to a price drop by the amount of a dividend - if the rules were to decree that all dividends must go X at precisely 11 am on their X dates, instead of overnight?

it's those long overnight hours of news that are causing the big deviations

recently i observed a stunning rise in a canadian bank stock, i think it was BMO, on the morning it went X. i was thinking of the debate in cmf & it occurred to me to post the data ... next time i see this, i'll post it ok?


----------



## james4beach (Nov 15, 2012)

Yes there is a random stock market fluctuation, but it doesn't invalidate the _known_ other quantity. There are two separate changes happening on the ex dividend day: one known precisely, the other random.

I can prove it

I pulled up yahoo price history on CM. Here are the last 20 dividends (1st column), previous day's close (2nd column), and ex dividend day's close (3rd column). Finally, the single day price change (4th column) in absolute terms.

1.09,	95.92	94.59	-1.33
1.06,	93.82	92.00	-1.82
1.03,	100.76	100.71	-0.05
1.00,	104.96	101.53	-3.43
1.00,	97.52	95.99	-1.53
0.98,	96.16	94.20	-1.96
0.96,	90.46	89.60	-0.86
0.96,	83.72	82.30	-1.42
0.96,	76.09	75.03	-1.06
0.94,	80.96	79.43	-1.53
0.94,	82.49	81.36	-1.13
0.94,	77.85	76.60	-1.25
0.90,	71.87	70.91	-0.96
0.90,	78.00	77.14	-0.86
0.90,	73.64	73.38	-0.26
0.90,	71.16	72.18	1.02
0.87,	77.62	76.22	-1.40
0.87,	85.49	83.40	-2.09
0.87,	79.65	78.84	-0.81
0.87,	73.91	73.52	-0.39

Notice anything? Virtually *every* daily price change here is negative. Now I'm going to apply some theory that says single day stock movements are quite random. So if we average them out, we'll more or less remove the daily fluctuation noise.

The average of the daily movements works out to $-1.16. If we then remove two points that look like unusually bad days (two and three dollar drops), the *average becomes $-0.98*

_Now that's quite something_: this is telling us that if we remove the daily market noise, we see that the CIBC stock price dropped, on average, about $1 on its ex dividend day by closing time. Exactly the amount of the dividend payout.

Are you now convinced that dividend payments directly reduce the equity value by the same amount?


----------



## james4beach (Nov 15, 2012)

^ I'm really excited by how easy that was to prove, by the way. It would be even stronger to do the same analysis using a stock with a more constant dividend, and more samples. Can anyone suggest such a stock?

This is yet another illustration of the income illusion of dividends. The "income" is already embedded inside the stock value. The only thing that happens on ex dividend date is that this cash is removed from the stock. i.e. CIBC's $1 dividend, illustrated above, directly comes out of the stock price once you average away the noise.

You don't make any money when you receive the dividend payment. The CIBC case illustrates it's a zero sum: $1 gets paid out, and the stock drops by $1


----------



## humble_pie (Jun 7, 2009)

gah it's far too early in the am to think about such a daunting array of numbers each:

but they look like too many negatives to me. You sure you picked you data accurately? where you getting this medley of data so fast?

or maybe we should summon lonewolf to tell us that cibc is unlucky, it's under an ancient assyrian hex, a body should stay away from commerce bank.

besides, it's not the closing price of a stock on its X date we're after. It's the opening price we want. That's what's supposed to reflect an X date drop.


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> ^ I'm really excited by how easy that was to prove, by the way. It would be even stronger to do the same analysis using a stock with a more constant dividend, and more samples. Can anyone suggest such a stock?



ooh. now he's going to be insufferable each:

but put into the picture that it's the *opening* price of the stock at 9:30 am we're after, not the closing price.

if you'll tell me how to quickly obtain dividend X date, amount, price of stock at opening bell, i'll search for BMO & RY for their august/15 dividend data. Canadian market only please.


----------



## james4beach (Nov 15, 2012)

I used these historical prices from yahoo. Here's BMO in CAD
http://finance.yahoo.com/q/hp?s=BMO.TO+Historical+Prices

I used the close columns and analyzed the 1-day change. You can also use the open and close columns!

For example, from link above, July 28 close was 72.31. The next day's open was at 71.51 (a decline of $-0.80). The dividend was $0.82.

One thing that might be confusing people is that quote systems at brokerages will automatically adjust for the ex dividend day by adjusting for the dividend amount. On your quote, that morning, you would not see the 80 cent drop.


----------



## james4beach (Nov 15, 2012)

humble_pie said:


> besides, it's not the closing price of a stock on its X date we're after. It's the opening price we want. That's what's supposed to reflect an X date drop.


Yes it's a lot of negatives, but it's because value is being removed when the dividend gets paid out  Skimming BMO, I see the same thing. All negative.

I also confirmed that CIBC data against my own personal data, which is separate from yahoo. I spot checked a few values and yes, those were the successive closing values.

I think you'd see the same thing either looking at close-to-open, or close-to-close. I didn't even think of using the open column. My brain just went to the idea that we know that single day movements are random and average to zero.


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> One thing that might be confusing people is that quote systems at brokerages will automatically adjust for the ex dividend day by adjusting for the dividend amount. On your quote, that morning, you would not see the 80 cent drop.



ok i'll go to your bmo link but in the meantime i'm not confused at all. 

those are realtime live quotes streaming every second. Where are you getting this absurd idea that brokers fake up quotes on X dividend days?

here's another reason why you can't be right: if your theory worked & every stock does close lower on its X date by roughly the amount of its dividend, every option trader in the world would have long since gone there. Like, couple hundred years ago. Long before organized options exchanges opened in amsterdam & chicago in the 1960s.

trading divvie drops would be a no-brainer since the amount of every divvie is known. Sell calls & buy puts the night before. Then just before close on the day of X, take all positions off & pocket the huge profits.

good-bye clever iron condors on earnings. farewell butterflies on bottom lines. The new It in options is simple. Just trade the divvies like king midas james4 has shown. 

think of it! for more than half a century, millions of option traders have been fooled silly by black scholes & binomial theorists into trading earnings! how stupid were they! but fortunately for cmffers, king midas has now shown the royal divvie route to gold.


----------



## humble_pie (Jun 7, 2009)

ps like i say i'll look for bmo & ry but please accept this notice that if i don't like what i'll see, i intend to revert to my unquantifiable psychosocial argument that dividends do impose an extra discipline upon publicly traded companies :biggrin:


----------



## HaroldCrump (Jun 10, 2009)

humble_pie said:


> recently i observed a stunning rise in a canadian bank stock, i think it was BMO, on the morning it went X. i was thinking of the debate in cmf & it occurred to me to post the data ... next time i see this, i'll post it ok?


That was due to its US acquisition (GE's commercial transport lending division, if I recall).

In general, for the vast majority of stocks, dividend X date is a non event.
Price goes up/down based on other factors - news, global events, general market direction, etc.

For a very small number of high yield, illiquid, small cap, thinly traded stocks, it may be true that they drop by the amount of the distribution on the X date.
These could be high yields like MICs, some low volume REITs, other financially engineered high yield stocks.
In my (limited) experience, dividend X date is a non event.


----------



## CPA Candidate (Dec 15, 2013)

All other things being equal, the dividend should be more or less be subtracted from the stock price when it is declared.

Often, all other things are not equal, though. The relationship is not going to be perfect.


----------



## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> This is yet another illustration of the income illusion of dividends. The "income" is already embedded inside the stock value. The only thing that happens on ex dividend date is that this cash is removed from the stock. You don't make any money when you receive the dividend payment.


I didn't think the x-div reduction was in question. What I thought you had said earlier was that DRIP'ing the stock simply puts it back in at that price - and that is not true. The date you receive the dividend and DRIP is the 'payable' date which is about 32 days after the x-div date. The share value may be up or down by then. 

The fact remains that reinvesting the dividends regularly with a DRIP is a DCA approach to adding shares, and those added shares compound the dividend income paid over time, thus buying more shares, and on and on.
If you want to grow your position in company over time, a DRIP is more efficient than taking the dividends and buying more shares once a year or so. Mostly because of the issues of human inertia, trying to time the market, lost compounding, purchase costs, etc.


----------



## HaroldCrump (Jun 10, 2009)

HaroldCrump said:


> For a very small number of high yield, illiquid, small cap, thinly traded stocks, it may be true that they drop by the amount of the distribution on the X date.
> These could be high yields like MICs, some low volume REITs, other financially engineered high yield stocks.
> In my (limited) experience, dividend X date is a non event.


On second thoughts, I have actually observed this behavior for some thinly traded preferred shares.
They drop by several % points on the X-date, depending on their yield.
Also a couple of high yield MLPs come to mind.

But for the vast majority of stocks, X-dates are usually non events.


----------



## peterk (May 16, 2010)

OnlyMyOpinion said:


> I didn't think the x-div reduction was in question. What I thought you had said earlier was that DRIP'ing the stock simply puts it back in at that price - and that is not true. The date you receive the dividend and DRIP is the 'payable' date which is about 32 days after the x-div date. The share value may be up or down by then.
> 
> The fact remains that reinvesting the dividends regularly with a DRIP is a DCA approach to adding shares, and those added shares compound the dividend income paid over time, thus buying more shares, and on and on.
> If you want to grow your position in company over time, a DRIP is more efficient than taking the dividends and buying more shares once a year or so. Mostly because of the issues of human inertia, trying to time the market, lost compounding, purchase costs, etc.


Sure, that's right, but it's still not DCAing. It would be same as buying a stock that pays no dividend, holding it through a downturn and selling after the subsequent recovery. You haven't infused any new money into the investment since the original purchase, so even though you are increasing the numbers of shares you own through DRIP, you aren't DCAing and taking advantage of what a DCA is meant for (investing more money during a downturn).


----------



## peterk (May 16, 2010)

humble_pie said:


> here's another reason why you can't be right: if your theory worked & every stock does close lower on its X date by roughly the amount of its dividend, every option trader in the world would have long since gone there. Like, couple hundred years ago. Long before organized options exchanges opened in amsterdam & chicago in the 1960s.
> 
> trading divvie drops would be a no-brainer since the amount of every divvie is known. Sell calls & buy puts the night before. Then just before close on the day of X, take all positions off & pocket the huge profits.
> 
> ...


I'm not sure how to argue against this, it sounds good though. Still, James has got to be right. I thought it was a fairly basic stock market "law", like gravity, that all other considerations taken into account, the price of the stock will drop by the dividend payment.

Won't the options traders know this, and adjust the premiums just before and after the Ex-date in anticipation of this price change? I don't know enough (anything) about options to answer that question...

...Quit making me question my fundamental understanding of the universe! :biggrin:


----------



## james4beach (Nov 15, 2012)

I'm pretty sure it's a stock market law as well. I am pretty sure the options market already considers this effect in its pricing.


----------



## james4beach (Nov 15, 2012)

CBOE mentions this automatic adjustment: "On the ex-dividend date the underlying stock will open less the dividend amount, but by that point the marketplace will generally have adjusted the prices of calls and puts to account for this."

http://www.cboe.com/learncenter/concepts/beyond/general.aspx

The dividends theme is very interesting to me, because it took me a long time to fully grasp the real story on them. I think there's a lot of wrong assumptions out there and they're guiding some odd investment behaviours that are somewhat misguided. Up until a year ago, I saw this totally differently. It's really difficult to shake the idea that dividends are "free money"!

I must thank my parent's advisor at RBC for all his misinformation. If he had not made me suspicious about his wild claims, I would have never learned all this.


----------



## humble_pie (Jun 7, 2009)

james4beach said:


> I am pretty sure the options market already considers this effect in its pricing.




& i'm pretty sure you are right. It would be a one-off between the stock price at the close on the eve of X day & the dividend amount. Since everybody would be in the know, the options market makers would likely widen their spreads until no profit would be possible. 

come to think of it, that is exactly what they do. From time to time here in cmf forum, i've mentioned to other option traders not to get caught in last-minute markets where the only counterparty is going to be the one-eyed market maker.

one classic instance is the days before option expiration, but other classic instances are the days before dividend X dates for options that are DITM (deep in the money). In these instances, especially in the last 2 days of trading, we always see the MMs widening their spreads horrifically. Me i make a point of skipping out of the way long before. A good week or 2 before those gaping spreads appear.

now, thanks to james4, i have a better understanding of why it's wise to skip out early.


----------

