Author Topic: If you were to buy 5-10 sector-specific ETFs today . . .  (Read 16753 times)

skyrefuge

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #50 on: June 25, 2015, 12:00:31 PM »
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

milesdividendmd

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #51 on: June 25, 2015, 12:03:16 PM »
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

Bingo!  100% correct.

bdbrooks

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #52 on: June 25, 2015, 12:08:08 PM »
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

As pointed out by others. This is A) a useless strategy in a tax sheltered account and B) a dumb strategy in a taxable account.

I just wish that we could have had someone refute this back on the previous page for the sake of readers that only care enough to read the first page.

sol

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #53 on: June 25, 2015, 01:06:36 PM »
I just wish that we could have had someone refute this back on the previous page for the sake of readers that only care enough to read the first page.

Skyrefuge has been on the HUNT recently, seeking out bad investment advice on the forums and then putting the smack down.

If we had like three more of him around, we could keep this place pretty tidy.

forummm

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #54 on: June 25, 2015, 05:18:44 PM »
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

Buying the dividend doesn't make any sense. A dividend is just depletion of your capital.

Jeremy E.

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #55 on: June 25, 2015, 05:23:27 PM »
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015
If this was true, wouldn't it make sense to sell today and rebuy after dividends come in and price drops?

milesdividendmd

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #56 on: June 25, 2015, 05:37:38 PM »
In a taxable account, and in rare circumstances maybe, but then there would be the cost of taking capital gains, the friction of trading costs, etc. which would far outweigh any benefit.

skyrefuge

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #57 on: June 25, 2015, 05:53:48 PM »
If this was true, wouldn't it make sense to sell today and rebuy after dividends come in and price drops?

No. The general principle here is that you want to delay any "selling" for as long as possible, because it's "selling" that triggers taxable events, and to maximize your wealth you generally prefer to pay taxes as late as possible (and ideally, never).

A dividend is a forced form of selling, and as such, it triggers a taxable event whether you want it or not. Thus, if you can easily avoid a dividend payment by buying a couple days later, that's probably a good idea.

On the other hand, selling your already-existing holding in order to avoid a dividend will generally not avoid the taxable event. It will simply replace a dividend tax with a capital-gains tax. If your shares have been held for several years and appreciated significantly, this will be much worse for you than simply holding and paying the dividend tax. And even in the case where the only appreciation you've seen is the bulge in NAV due to the accumulated-but-undistributed dividends since the last dividend payment, the short-term capital gains tax on that bulge you'd pay when selling will likely exceed the dividend tax you'd pay while holding.

mrpercentage

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #58 on: June 25, 2015, 08:47:45 PM »
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

What funds are you referring to?
When Apple paid me a dividend, it just paid me, the same with Mattel, Ford, and Boeing. AMECX's share price does not drop when it pays me either. In fact the only ones I have seen do that are extremely high yield REIT's. Those drop by about the exact price of the dividend. Of course you would have more value if you could reinvest it, but sometimes that Ford dividend belongs in NM, or BA, or DIS, or whatever the best deal is at the time.


skyrefuge

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #59 on: June 25, 2015, 09:06:43 PM »
What funds are you referring to?
When Apple paid me a dividend, it just paid me, the same with Mattel, Ford, and Boeing. AMECX's share price does not drop when it pays me either.

I'm referring to all funds. Including AMECX. Its NAV is most definitely adjusted downward by the amount of the dividend.

Please see for yourself by looking at its price history and see what happens on the dividend dates.

mrpercentage

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #60 on: June 25, 2015, 11:06:10 PM »
interesting.. another reason to pick stocks myself and remove all middlemen and commissions with Robinhood.

although with a little thought all companies are paying them dividends at various times, so they must be holding it (increasing the share price) then universally distributing various dividend dates on the same date for the fund(hence the drop in price)

milesdividendmd

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #61 on: June 25, 2015, 11:18:20 PM »

Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

What funds are you referring to?
When Apple paid me a dividend, it just paid me, the same with Mattel, Ford, and Boeing. AMECX's share price does not drop when it pays me either. In fact the only ones I have seen do that are extremely high yield REIT's. Those drop by about the exact price of the dividend. Of course you would have more value if you could reinvest it, but sometimes that Ford dividend belongs in NM, or BA, or DIS, or whatever the best deal is at the time.

I'm no stock picker but my guess is that when any of those companies paid you a dividend the price per share was adjusted down by the exact same proportion as the dividend. You may not have noticed it but that is almost certainly the case. There is no difference in the relationship of the NAV to the stock price in an individual stock and an index share. The NAV is decreased in both by the amount of the dividend.

From this article:

http://www.investopedia.com/articles/stocks/07/dividend_implications.asp

"When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34."




Aphalite

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #62 on: June 26, 2015, 07:31:22 AM »
What miles said - no free lunch with dividends, companies can use their cash in a few different ways

1) distribute as a dividend - owners get cash, cash is lost to the company forever
2) buyback stock on the open market - owners get a pop in their share price and a higher share of future profits, cash is lost to company forever
3) reinvest into the company by either paying down debt, building new infrastructure to produce goods, spending on advertising to get more customers and thus more sales - when you invest in a stock, you're hoping that the company is getting a better return on this invested capital than you could if it paid you cash

As you can see, dividends decrease the intrinsic value of a company, because the profit has been distributed to owners, so don't look at dividends as a free handout - there might be instances where companies that pay dividends as a GROUP is better than companies that don't, but that's because most dividend paying companies are mature and profitable (can't fake cash), where non-dividend paying companies are usually newer/startups or have to reinvest heavily into operations to maintain its profit (less free cash flow)

sb_NoVA

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #63 on: June 26, 2015, 07:40:28 AM »
if you believe the Fama and French academic research that small does better than large, and value does better than growth, following is a list of ETFs recommended by Paul Merriman. 

http://portal.paulmerriman.com/home/mutual-fund-etf-recommendations/

Fund   Symbol   Aggressive   Moderate   Conservative
Schwab U.S. Large Cap   SCHX   11%   6%   4%
Vanguard Value   VTV   11%   7%   5%
Schwab U.S. Small Cap   SCHA   11%   6%   4%
Vanguard Small Cap Value   VBR   12%   7%   5%
Vanguard REIT Index   VNQ   5%   3%   2%
Schwab International Equity   SCHF   9%   5%   3%
iShares MSCI EAFE Value Index   EFV   9%   6%   4%
Vanguard FTSE All‐Wld ex‐US SmCp Idx   VSS   9%   5%   3%
WisdomTree International SmallCap Div   DLS   9%   6%   4%
Schwab Emerging Markets Equity   SCHE   9%   6%   4%
Vanguard Global ex‐US Real Estate   VNQI   5%   3%   2%
iShares Barclays 1‐3 Year Treasury Bond   SHY   0%   12%   18%
iShares Barclays 3‐7 Year Treasury Bond   IEI   0%   20%   30%
iShares Barclays TIPS Bond   TIP   0%   8%   12%

bermudasq

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #64 on: June 26, 2015, 08:40:12 AM »
Thanks for the comments!

skyrefuge

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #65 on: June 26, 2015, 08:40:45 AM »
interesting.. another reason to pick stocks myself and remove all middlemen and commissions

No. That's like saying "the high amount of potassium in bananas is another reason for me to reformat my hard drive". One does not follow from the other.

although with a little thought all companies are paying them dividends at various times, so they must be holding it (increasing the share price) then universally distributing various dividend dates on the same date for the fund(hence the drop in price)

Yes, that's correct. And you can think of individual stocks the same way: a company gets cash paid to it at various times as different customers pay their bills, so it holds it (increasing the share price) then universally distributes those various profits to the shareholder on a single date (hence the drop in price).

mrpercentage

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #66 on: June 26, 2015, 07:00:21 PM »
I'm watching. I will see what happens with NM, JPM, and DIS. I doubt they will drop but I have been wrong before. I do think dividend capture is responsible for some drops. If you watch the ex-date you can see it happen.
I think stocks are different because they pay you. It doesn't get trapped in the fund until a later distribution date.
Share price is increased by demand not company cash. A sell after a dividend capture would drop the price but not the dividend paid. Funds are different as cash is part of the portfolio dropping the total value at payout. I don't see how a stock could be the same unless that stock was like a fund, etf, reit ect

NM's distribution date is today. Its dividend is $0.06 and its share price is up $0.11
I really think the drop in price you refer to is the release of the cash in a portfolio of a fund-- nothing to do with stocks as they are just one part of the total value of the portfolio
« Last Edit: June 26, 2015, 07:34:42 PM by mrpercentage »

milesdividendmd

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #67 on: June 26, 2015, 07:37:13 PM »

I'm watching. I will see what happens with NM, JPM, and DIS. I doubt they will drop but I have been wrong before. I do think dividend capture is responsible for some drops. If you watch the ex-date you can see it happen.
I think stocks are different because they pay you. It doesn't get trapped in the fund until a later distribution date.
Share price is increased by demand not company cash. A sell after a dividend capture would drop the price but not the dividend paid. Funds are different as cash is part of the portfolio dropping the total value at payout. I don't see how a stock could be the same unless that stock was like a fund, etf, reit ect

Where do you imagine the dividend from a fund comes from?  It is nothing more the cumulative dividends of the companies present within the fund minus the expense ratio.

A share in a company is nothing more than a fractional ownership stake in a company. So when a company distributes its cash to shareholders the cumulative value of the company drops by the total amount of the cash distributed, which means that the value of each share must drop proportionally.

The only possible advantage of owning a share in a company as opposed to a share in an index fund is if the individual company happens to outperform the index and the absence of an expense ratio.

The disadvantage is that 2/3 of individual shares will underperform the broad index (bad odds), increased transaction costs, and the idiosyncratic risk of not being diversified. (Idiosyncratic risk is the type of risk that you do not get paid for when investing.)

mrpercentage

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #68 on: June 26, 2015, 08:36:17 PM »
There is one problem with that argument. I have seen many stocks with more value in assets than in share price. Based on your argument that should be impossible but it is clearly not. An asset play is one of Peter Lynchs investment strategies.

A fund must also calculate the cash it holds into share price. Stocks do not. That is just a way to tell if they are valued correctly.

A fund might hold ten percent cash so it doesn't have to liquidate every time someone takes a payment. That cash is part of the funds value -only demand is part of a stocks explaining why stocks in the depression were often pennies on the dollar even though the company may have been worth much more. The whole value philosophy proves that stock price is not married to assets. You just recognize that a valuable company is not currently in demand and wait for the demand to return.

So when a fund pays out dividends that it has been holding as cash-- one of its assets (it's cash) just decreased in value but the stocks that paid them just go where demand does. Some up, some down, some dip with traders capturing dividends.
Remember science is repeatable and NM is up today so what does that tell you?
« Last Edit: June 26, 2015, 08:39:09 PM by mrpercentage »

skyrefuge

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #69 on: June 26, 2015, 09:10:14 PM »
NM is up today so what does that tell you?

It tells me that, if it hadn't paid its $0.06 dividend, it would have been up $0.17 instead of merely up $0.11.

Say I weigh myself in the morning, and then take satisfying 1 lb. shit. Later that night I weigh myself again, and find that I have gained a pound over my morning weigh-in. By your logic, you would say "holy anti-matter shit! His weight went up, so that means he must shit shit with a negative mass!" You'd be digging in my toilet to collect pieces of my magical, physics-defying shit (while everyone else would realize that my shit is perfectly ordinary, and my weight gain came from unrelated factors, like eating 3 lbs. of food that day). Do you really want to become a shit-collector?  If not, please just listen to miles.

mrpercentage

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #70 on: June 26, 2015, 09:32:15 PM »
The cash held by a company is not a fixed anchor point for a stock price. It's does effect a fund price because cash is one of the holdings. They hold the dividends with their cash pool. So they collect January and February driving up one of the funds holdings (cash) and lose what they distribute on March. A stock doesn't work the same way. It pays you sometimes when it can't afford it and cancels paying sometimes when it can. That will piss off share holders and they will effect the price but the payment of dividends does not effect a regular stocks price.

Your shit story didn't sell me. I could be wrong but I just finished reading one up on wallstreet and he talks about running funds-- so I don't think so

milesdividendmd

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #71 on: June 26, 2015, 11:23:52 PM »
The cash held by a company is not a fixed anchor point for a stock price. It's does effect a fund price because cash is one of the holdings. They hold the dividends with their cash pool. So they collect January and February driving up one of the funds holdings (cash) and lose what they distribute on March. A stock doesn't work the same way. It pays you sometimes when it can't afford it and cancels paying sometimes when it can. That will piss off share holders and they will effect the price but the payment of dividends does not effect a regular stocks price.

Your shit story didn't sell me. I could be wrong but I just finished reading one up on wallstreet and he talks about running funds-- so I don't think so

Since stock prices reflect the discounted cash value of anticipated future earnings it is certainly true that the cap weighted value of a company can rarely drop below it's net current asset value (as in Ben Graham's net/nets.) This does not mean that the stock price is not automatically adjusted down by the amount of the dividend by the exchange.  Dividends are expressed as "dividends per share" and the share price is adjusted down by the exact amount of the dividend.

If you can find a reference otherwise, please share it. I would be interested to learn that my understanding of this was flawed, which is certainly possible, since my investing focus has always been on locost index funds as my investment vehicle of choice.  but I am honestly aware of no instance where your conception of the stock price not being adjusted down by the amount of the dividend is the case.

sol

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #72 on: June 26, 2015, 11:29:35 PM »
A share in a company is nothing more than a fractional ownership stake in a company. So when a company distributes its cash to shareholders the cumulative value of the company drops by the total amount of the cash distributed, which means that the value of each share must drop proportionally.

The unfortunate flaw in this argument is that the price of a share and the value of a share are not necessarily the same.  The market is not perfectly efficient.  The price is whatever the masses say it is, so they might decide that the price should stay the same as the value is depleted by a dividend payment.  In that case, MrP is right and the dividends would be "free money".  It shouldn't happen, but it totally could.

I'm actually kind of surprised to see miles here arguing so strongly in favor of the EMH, given his previous forays into technical trading schemes that rely on violating it.

milesdividendmd

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Re: If you were to buy 5-10 sector-specific ETFs today . . .
« Reply #73 on: June 26, 2015, 11:46:48 PM »
A share in a company is nothing more than a fractional ownership stake in a company. So when a company distributes its cash to shareholders the cumulative value of the company drops by the total amount of the cash distributed, which means that the value of each share must drop proportionally.

The unfortunate flaw in this argument is that the price of a share and the value of a share are not necessarily the same.  The market is not perfectly efficient.  The price is whatever the masses say it is, so they might decide that the price should stay the same as the value is depleted by a dividend payment.  In that case, MrP is right and the dividends would be "free money".  It shouldn't happen, but it totally could.

I'm actually kind of surprised to see miles here arguing so strongly in favor of the EMH, given his previous forays into technical trading schemes that rely on violating it.

You should be suprised because I'm not arguing for EMH at all, Sol.  You've misread my statement.

I'm arguing that the exchange upon which a stock is traded automatically adjusts the stock price down by the amount of the dividend.  That's all.  The price can certainly be bid up the next traded second after the price is adjusted.  And this movement can be rational or not.

See above where I said as much:

"it is certainly true that the cap weighted value of a company can rarely drop below it's net current asset value (as in Ben Graham's net/nets.)"

Any instance where a company drops below its liquidation value is an arbitrage opportunity, because your worst case scenario is liquidation.  This happens, and is a perfect example of an inefficient market.  All I'm saying is that if such a company pays a dividend, its price per share will be reduced by the exact amount as the dividend per share.  It's a mechanical argument, not really a philosophical one.