Author Topic: Realizing Earnings (Side thread from "Investment returns are real!")  (Read 1927 times)

dougules

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Side thread from "Investment returns are real!"



Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

If a company's paying out $4 in dividends a quarter, then their stock price isn't going to be $0.   It should be somewhere in the $200-$300 range plus or minus health of the company, the rest of the market, forecasts, etc. etc. 

In a perfect world, the price would dip $4 before the dividend, but go right back up once it's paid out. 

If the share price drops by $20 after paying out the dividend, it's because something else is going on with the company or the market, or investors are just in a mood that day.  If the company is making $10/share earnings and paying $10/share in dividends, then the stock price will track inflation -over the long run- and -all else being equal- (which it never is).


frugalnacho

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Side thread from "Investment returns are real!"



Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

If a company's paying out $4 in dividends a quarter, then their stock price isn't going to be $0.   It should be somewhere in the $200-$300 range plus or minus health of the company, the rest of the market, forecasts, etc. etc. 

In a perfect world, the price would dip $4 before the dividend, but go right back up once it's paid out. 

If the share price drops by $20 after paying out the dividend, it's because something else is going on with the company or the market, or investors are just in a mood that day.  If the company is making $10/share earnings and paying $10/share in dividends, then the stock price will track inflation -over the long run- and -all else being equal- (which it never is).

No it doesn't.  It drops $4 immediately because they paid that dividend out, and that dividend is included in the total price.  When they pay out a dividend the companies capital decreases by the exact amount they paid out and their stock price is adjusted accordingly.  A dividend is not a free lunch.

TornWonder

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Side thread from "Investment returns are real!"



Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

If a company's paying out $4 in dividends a quarter, then their stock price isn't going to be $0.   It should be somewhere in the $200-$300 range plus or minus health of the company, the rest of the market, forecasts, etc. etc. 

In a perfect world, the price would dip $4 before the dividend, but go right back up once it's paid out. 

If the share price drops by $20 after paying out the dividend, it's because something else is going on with the company or the market, or investors are just in a mood that day.  If the company is making $10/share earnings and paying $10/share in dividends, then the stock price will track inflation -over the long run- and -all else being equal- (which it never is).

No it doesn't.  It drops $4 immediately because they paid that dividend out, and that dividend is included in the total price.  When they pay out a dividend the companies capital decreases by the exact amount they paid out and their stock price is adjusted accordingly.  A dividend is not a free lunch.

This is correct.  The growth back to the price before the dividend payout should take the entirety of the period until the next dividend payout, during which profits are generated for the next dividend, and the cycle repeats.  It's very similar to how accrued interest changes the pricing of a bond, and it is why many financial analysts may value some portion of dividend paying stocks as though they are actually bonds.

aspiringnomad

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It's very similar to how accrued interest changes the pricing of a bond, and it is why many financial analysts may value some portion of dividend paying stocks as though they are actually bonds.

If true, then many financial analysts are foolish. Unlike bond payments, dividends paid out to common shareholders can be cut, suspended, or fully terminated at any time and for any reason by the board of directors. One needn't go back too far for empirical evidence of this happening en masse. And returns on dividend paying stocks more closely correlate with the broader equity market than with the bond market.

dougules

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Side thread from "Investment returns are real!"



Except getting a dividend literally is getting a piece of the profit.  That's where 99% of qualified dividends come from.  Most companies have a dividend rate that is a percentage of earnings that will be paid out in dividends.  So you can see that the bolded statements are demonstrably false.

But you aren't getting anything. You get $4 in dividend per their example but share price is -$4.

You get $0, which is effectively less than $0 because you must pay tax on the dividend.

If you own a stock and you get a $10 dividend but the share price drops by $20, have you made any money? (please don't say yes)

If a company's paying out $4 in dividends a quarter, then their stock price isn't going to be $0.   It should be somewhere in the $200-$300 range plus or minus health of the company, the rest of the market, forecasts, etc. etc. 

In a perfect world, the price would dip $4 before the dividend, but go right back up once it's paid out. 

If the share price drops by $20 after paying out the dividend, it's because something else is going on with the company or the market, or investors are just in a mood that day.  If the company is making $10/share earnings and paying $10/share in dividends, then the stock price will track inflation -over the long run- and -all else being equal- (which it never is).

No it doesn't.  It drops $4 immediately because they paid that dividend out, and that dividend is included in the total price.  When they pay out a dividend the companies capital decreases by the exact amount they paid out and their stock price is adjusted accordingly.  A dividend is not a free lunch.

Yes, got that turned around.  Fighting a headache today. 

TornWonder

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It's very similar to how accrued interest changes the pricing of a bond, and it is why many financial analysts may value some portion of dividend paying stocks as though they are actually bonds.

If true, then many financial analysts are foolish. Unlike bond payments, dividends paid out to common shareholders can be cut, suspended, or fully terminated at any time and for any reason by the board of directors. One needn't go back too far for empirical evidence of this happening en masse. And returns on dividend paying stocks more closely correlate with the broader equity market than with the bond market.

That's why only a portion of the stock would be valued as a bond, not the entire stock, because that would make no sense, and nobody would do that.

aspiringnomad

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It's very similar to how accrued interest changes the pricing of a bond, and it is why many financial analysts may value some portion of dividend paying stocks as though they are actually bonds.

If true, then many financial analysts are foolish. Unlike bond payments, dividends paid out to common shareholders can be cut, suspended, or fully terminated at any time and for any reason by the board of directors. One needn't go back too far for empirical evidence of this happening en masse. And returns on dividend paying stocks more closely correlate with the broader equity market than with the bond market.

That's why only a portion of the stock would be valued as a bond, not the entire stock, because that would make no sense, and nobody would do that.

Genuinely curious as to how that valuation works.