 Gold Customer
Joined: 1/18/2008
Posts: 209
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Hi,
Where am i going wrong.....
I own a stock that pays 5% yield (divs). At ex-div day, the share price of the stock raises or drops as it normally would, MINUS, the exact price of the dividend for that period. A few days or weeks later, i get the div for that period times the number of shares i own. My interpretion which must be wrong.........
The company, at ex div day, simply sells a part of MY stock, and then gives the money to ME at pay date, My real yield is 0% less any taxes i have to pay on that div which makes my real yield 0%. and the cost to the comapny is nothing, or quite possibly a profit to the company since i woud assume that large chunk of cash they just freed up from 1000's of shareholders sits in an interest bearing account for a couple of weeks.
Where am i going wrong??
Thanx
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Registered User
Joined: 7/1/2008
Posts: 889
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you lost me on the second paragraph. You are completely off in your understanding of dividends. Why don't you do a little homework on the subject.
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Registered User
Joined: 2/5/2006
Posts: 1,148
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the bottom line is, there is no free money. it all comes from somewhere.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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QUOTE (funnymony) the bottom line is, there is no free money.
Have you been to the government?
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Gold Customer
Joined: 1/18/2008
Posts: 209
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thanx for your replies,
Ben2k. I AM doing some homework here by asking a group of stock professionals. Not trying to be disrespectful, but they are not helping to explain how a company can advertise 5% yield by simply knocking 5% off of the value of MY stock and converting it to cash. You will notice the 'where am i going wrong' question on my original post.
Funny money..Yes, the 5% comes from MY property, not the companies. (or so it seems)
Diceman..i agree, but still, no help in finding my way with dividend investing and how much i really gain with a company that advertises a 5% yield.
So, if anybody has more direct reply, that would be appreciated. as for now I just cant see how a guy comes out ahead dividend investing??
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Registered User
Joined: 7/1/2008
Posts: 889
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http://en.wikipedia.org/wiki/Dividend
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Company ABC has 1 million shares of common stock. The company has five investors who each own 200,000 shares. The stock currently trades at $100 per share, giving the business a market cap.of $100 million.
Management decides to issue a 20% stock dividend. It prints up an additional 200,000 shares of common stock (20% of 1 million) and sends these to the shareholders based on their current ownership. All of the investors own 200,000, or 1/5 of the company, so they each receive 40,000 of the new shares (1/5 of the 200,000 new shares issued).
Now, the company has 1.2 million shares outstanding; each investor owns 240,000 shares of common stock. The 20% dilution in value of each share, however, results in the stock price falling to $83.33. Here’s the important part: the company (and our investors) are still in the exact same position. Instead of owning 200,000 shares at $100, they now own 240,000 shares at $83.33. The company’s market capitalization is still $100 million.
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Registered User
Joined: 2/5/2006
Posts: 1,148
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......or company abc makes a cash payout of 20%, or $20 million, and the companys stock price falls from 100 to 80, and market cap goes from $100 million to $80 million.
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Gold Customer
Joined: 1/18/2008
Posts: 209
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Thnx guys,
I think i will avoid dividend investing still, as it just doesnt make any damm sense to me.
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Registered User
Joined: 12/2/2004
Posts: 1,775
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QUOTE (sharppolly) Thnx guys,
I think i will avoid dividend investing still, as it just doesnt make any damm sense to me.
You're in good company. IBD founder William O'Neil basically agrees with you: "...our research of successful stocks consistently proves that P/Es and dividend yields have little to do with what makes a stock a winner." "In many cases, the more a company pays in dividends, the weaker it may be." "Better performing companies will typically not issue dividends."
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Gold Customer
Joined: 1/18/2008
Posts: 209
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hi ben2k,
Of course the definition of a dividend is easy to come by. And the supposed benifit, although seemingly obvious to everyone else, is not to me. I guess i was expecting a few dividend investors to step up and it would all make sense.
Let me explain why i am confused..If I leave 10k in my cash account and it pays 4% per year, I have $10400 after 1 year. If I invest $10000 in a stock that pays 4% annual yield and the stock has traded exactly flat all year (hypothetical) but still owns up to its dividend obligations I have $400 in dividends, but due to ex-div days, my stock value is now $9,600 but i do have the $400 (minus taxes) to square things. The net result of a cash account is 4% as advertised, the net result of a 4% yield xyz company is 0% minus the taxes charged for the divs. I have to choose the cash account over the stock (not considering the growth potential of the stock) . Also, who devalues the stock? shouldnt the price be determined by the traders? A 4% hit in the profit may cause some traders to sell, but a solid 4% yield would cause others to buy. Seems like a casino shell game to me, but thats what i am trying to iron out here.
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Registered User
Joined: 7/1/2008
Posts: 889
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No, you've got it all wrong sharpolly.
If you've got $100,000 in a stock that pays a 5% dividend rate, and the stock price goes exactly nowhere by the end of the year, you've got $100,000 in stock and $5,000 in cash from the dividends, totaling $105,000.
Companies pay dividends in cash, it's completely your choice if you wish to reinvest that cash back into the stock.
The cash dividend is simply distributed to shareholders of record, and does not change the number of shares outstanding or dilute anyone. Its simply a company distributing profits to shareholders.
These dividends are paid quarterly, and on a certain date,(x-dividend) anyone holding shares earns the dividend. This is why the price changes....isn't a stock worth more if you buy it and then earn the dividend on the very next day? Likewise, all things being equal wouldn't it be a little less valuable if the dividend had just been paid and now you have to wait a whole new quarter for the dividend? Its kind of like the concept of accrued interest in bonds. As to who devalues the stock, its just like any other price move of a stock....determined by supply and demand in the market, and the collective opinion of thousands or millions of traders. No one officially controls the price, as it seems like you have it confused.
Does this help?
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Gold Customer
Joined: 1/18/2008
Posts: 209
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Ahh,
Thnx for the reply Ben2k. I knew i was missing something. Its crazy. One of those things that are simple to everyone else, but somehow gets stuck in the gears. Really appreciate the breakdown.
It does help indeed.
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Registered User
Joined: 1/10/2005
Posts: 8
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Believe it or not he has a point! I've been trading for 30 years and can never quite grasp the removal of equity from the shares (of the dividend) on the ex-div date? WHY? at that moment your total return is ZERO he is correct.. But the theory is that the stock 'lost' that payout to NEW traders so the stock is Market minus Div... on the Bid...soooooooo the other side says.. the stock didn't truly lose that % of value that the market forced out of it on ex-div day... DID we always do this??? I don't remember...
Dean
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