Author Topic: Best resources for understanding Dividends?  (Read 1179 times)

deek

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Best resources for understanding Dividends?
« on: October 03, 2018, 07:45:43 AM »
I'm 26, currently reading a lot about investing and one of the many things I'm having trouble grasping is understanding how dividends relate to stock rises and falls. Anyone have any go to resources for me??

rubybeth

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Re: Best resources for understanding Dividends?
« Reply #1 on: October 03, 2018, 07:55:27 AM »
https://www.investopedia.com/terms/d/dividend.asp

You may also want to read an investment book like one of Bogle's.

Basically, a company can decide to offer a dividend on stock and could change it at some point. For example, for a long time, Apple didn't pay dividends. But then they started to. And then they increased it. If things went badly, they could decide to decrease it.

deek

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Re: Best resources for understanding Dividends?
« Reply #2 on: October 03, 2018, 09:05:37 AM »
https://www.investopedia.com/terms/d/dividend.asp

You may also want to read an investment book like one of Bogle's.

Basically, a company can decide to offer a dividend on stock and could change it at some point. For example, for a long time, Apple didn't pay dividends. But then they started to. And then they increased it. If things went badly, they could decide to decrease it.

What is the reason or reasons for offering a dividend? If a company lowered a dividend, is it likely that would result in a lot of investors selling their stock?

Proud Foot

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Re: Best resources for understanding Dividends?
« Reply #3 on: October 03, 2018, 09:24:44 AM »
What is the reason or reasons for offering a dividend? If a company lowered a dividend, is it likely that would result in a lot of investors selling their stock?

The reason for offering a dividend depends upon the company and the structure of the organization. For example, a REIT is required by law to pay dividends of at least 90% of its taxable income. A lot of the large companies who pay dividends do so because the dividend is small compared to the total size of the company and does not make much of an impact on the growth of the company. On the other side, Warren Buffett is famous for Berkshire Hathaway not paying a dividend and he states they will not pay a dividend as long as there are better investment opportunities for that money.

For the lowering of the dividend, there is a whole sub-set of investors called Dividend Growth Investors (DGI). Their investment strategy is to purchase companies who have consistently paid a dividend with consistent increases in the dividend paid. GE cut their dividend in half this past year and a lot of the DGI's sold their stock as it no longer met their criteria.

rubybeth

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Re: Best resources for understanding Dividends?
« Reply #4 on: October 03, 2018, 12:47:24 PM »
https://www.investopedia.com/terms/d/dividend.asp

You may also want to read an investment book like one of Bogle's.

Basically, a company can decide to offer a dividend on stock and could change it at some point. For example, for a long time, Apple didn't pay dividends. But then they started to. And then they increased it. If things went badly, they could decide to decrease it.

What is the reason or reasons for offering a dividend? If a company lowered a dividend, is it likely that would result in a lot of investors selling their stock?

Again, Investopedia has your answer: https://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-a-dividend.asp

PizzaSteve

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Re: Best resources for understanding Dividends?
« Reply #5 on: October 03, 2018, 01:04:43 PM »
One can think of a dividend as the company selling a tiny portion of your holdings to give you cash now, along with an income tax liability.

Why do it?  Sometimes companies have excess cash or investors who desire income. Alternative is usually their management buying back and retiring stock, which should proportionately increase your share value.  Many modern investors prefer this because they then control when to take the gains and can better manage tax liabilities.

gaja

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Re: Best resources for understanding Dividends?
« Reply #6 on: October 03, 2018, 01:06:44 PM »
What is the reason or reasons for offering a dividend? If a company lowered a dividend, is it likely that would result in a lot of investors selling their stock?

The reason for offering a dividend depends upon the company and the structure of the organization. For example, a REIT is required by law to pay dividends of at least 90% of its taxable income. A lot of the large companies who pay dividends do so because the dividend is small compared to the total size of the company and does not make much of an impact on the growth of the company. On the other side, Warren Buffett is famous for Berkshire Hathaway not paying a dividend and he states they will not pay a dividend as long as there are better investment opportunities for that money.

Some companies pay dividends because their largest owners want the income. Equinor (formerly Statoil) and Kongsberggruppen are a couple of examples that will continue to pay dividends because the public owners want their money.

BDWW

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Re: Best resources for understanding Dividends?
« Reply #7 on: October 03, 2018, 01:25:21 PM »
One can think of a dividend as the company selling a tiny portion of your holdings to give you cash now, along with an income tax liability.

You could think of it that way, but you would be wrong by accepted definitions. Dividends* come from free cash flow.

To the OPs question, a better but imprecise way to think about it would be that the companies is paying owners (shareholders) a portion of profits/earnings directly rather than holding them or reinvesting in the company.

*If the company doesn't have adequate FCF, the dividends will be reclassified as Return of Capital. In that case Pizza Steve's definition is correct. But this is relatively rare, and generally a warning sign in regards to a company.

Pizza Steve's second point is correct though. In the current tax situation of the US, share buybacks are a more tax-efficient use of money for a company.

Edit: There may be some utility in thinking about it the way PS does, but it's not technically correct.
« Last Edit: October 03, 2018, 01:30:07 PM by BDWW »

PizzaSteve

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Re: Best resources for understanding Dividends?
« Reply #8 on: October 20, 2018, 06:09:15 PM »
One can think of a dividend as the company selling a tiny portion of your holdings to give you cash now, along with an income tax liability.

You could think of it that way, but you would be wrong by accepted definitions. Dividends* come from free cash flow.

To the OPs question, a better but imprecise way to think about it would be that the companies is paying owners (shareholders) a portion of profits/earnings directly rather than holding them or reinvesting in the company.

*If the company doesn't have adequate FCF, the dividends will be reclassified as Return of Capital. In that case Pizza Steve's definition is correct. But this is relatively rare, and generally a warning sign in regards to a company.

Pizza Steve's second point is correct though. In the current tax situation of the US, share buybacks are a more tax-efficient use of money for a company.

Edit: There may be some utility in thinking about it the way PS does, but it's not technically correct.

I was simplifying the definition to illustrate the impact of dividends on stock prices, obviously.  That is why I said ' you can think of them as..." and not 'dividends are....'   

Many companies simultaneously borrow money and also pay dividends from this 'free cash flow' (sometime borrowing at short term rates to pay dividends), so while technically correct in theory, the ideas about free cash vs return of capital treatment are easily manipulated by saavy accounting teams.