Why Companies Pay Dividends

Status
Not open for further replies.
O

oldmontana

Senior Member
Location
Montana
https://www.thebalance.com/why-do-companies-pay-dividends-5185975

Part of link..

Why Do Companies Pay Dividends?​

Dividends are one of two primary ways that investors earn money through stock investing; the other being capital gains. And while dividends can be enticing to investors, not all companies pay them. Let’s discuss why companies pay dividends, as well as a couple of reasons why a company might not.

Sharing Profits With Investors​

Simply put, dividends are a way for companies to share their profits with investors. Companies can use dividends to reward investors and entice them to stick around. But for a company to share profits with investors, it must actually have profits to share. As a result, dividends are most common from well-established companies that generate consistent revenue. Stocks of such companies are usually known as income stocks and pay regular dividends.

Why Companies Don’t Pay Dividends​

So, if dividends help to attract and maintain investors, why don’t all companies pay them? While there are solid reasons that companies choose to pay dividends, there are also good reasons why some don’t.


First, when companies pass their profits on to the shareholders, they aren’t reinvesting them back into the company. And ultimately, those reinvestments can help the company to grow, thereby increasing the stock price.


Dividends are less common among startups and other growing companies that must reinvest in the company to grow. These stocks, known as growth stocks, are often considered a good trade-off for investors because they expect significant capital gains.


=====================================================================

For me Dividends are a great way to invest in good or great companies. They keep paying during good or bad times. During the down market we are in you do not need to sell stocks that are down and you can wait for the market to re-bond. No need to sell stocks were you have big gains and pay income taxes on the gains.
 

The problem is that dividends have nothing to do with sharing profits .

dividends are paid by companies losing money right up until they fail .

dividends may come from profits , they may come from the sale of assets whether at a profit or a loss .

they may even come from money that is borrowed like Apple hospitality reits did .

they didn’t want to risk suspending the dividends when business was bad so they borrowed money and also used the money that was supposed to be buying more property .

rising dividends were once taken as a sign of good financial health ..a company that could keep giving you back more and more of your own money was looked at favorably by investors but that hasn’t been true for a long time .

many like the oil companies had pathetic returns for 15 years until just recently.however their long term returns still suck .

dividends are a forced withdrawal of your own money ..

they are handed back you and before that stock can trade are taken off the value of what you had the night before so it is no different then a new investor buying in with that much less money working for them .


.
 

good article for those who want to learn​

https://www.chicagobooth.edu/review...ney-though-lots-investors-seem-think-they-are

​

Dividends Are Not Free Money (Though Lots of Investors Seem to Think They Are)​


The Free Dividend Fallacy Could Be Costing You​


Investors should be indifferent to sources of return, after accounting for frictions such as taxes and trading costs. A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid. But Chicago Booth’s Samuel Hartzmark and University of Southern California’s David H. Solomon demonstrate that, in practice, many investors see a stock’s dividend as an income stream, separate from the price appreciation of the stock. The researchers call this the “free-dividends fallacy.”

A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid.

Investors caught up in the free-dividends fallacy mistakenly view dividend-paying stocks as bond coupons that produces small, stable gains over time. When investors trade based on a stock’s performance, they focus on whether the stock has gained or lost money relative to the purchase price. Ignoring the impact of dividends, they focus on price changes, not total return. However, investors who want to receive a dividend stream need to hold on to the stock until it pays out its regular dividend, and Hartzmark and Solomon find that investors tend to hang on to dividend-paying stocks for longer periods of time, regardless of performance.
 

IMO there is absolutely nothing wrong with investing in mature companies that have a solid track record of paying dividends, as opposed to investing in companies primarily focused on growth.

Some people believe that is the difference between investing and speculating.

I choose to do a little of both.

The important thing is that we invest in things we understand and are comfortable with.

“A cow for her milk
A hen for her eggs,
And a stock, by heck,
For her dividends.” - John Burr Williams
 
Last edited:
with 80% of all S&P stocks and 100% of all dow stocks paying them we all own them .

but it is import’s to understand that a div payment is not adding anything you already didn’t have pre ex div as far as more invested dollars .

there is a fallacy in believing that it is like interest and you suddenly have more when paid , or the most popular myth that in a down market you are being paid to wait or reinvesting in a down market is adding some benefit you didn’t have the night before …it is not
 
mathjak107 said:

good article for those who want to learn​

https://www.chicagobooth.edu/review...ney-though-lots-investors-seem-think-they-are

​

Dividends Are Not Free Money (Though Lots of Investors Seem to Think They Are)​


The Free Dividend Fallacy Could Be Costing You​


Investors should be indifferent to sources of return, after accounting for frictions such as taxes and trading costs. A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid. But Chicago Booth’s Samuel Hartzmark and University of Southern California’s David H. Solomon demonstrate that, in practice, many investors see a stock’s dividend as an income stream, separate from the price appreciation of the stock. The researchers call this the “free-dividends fallacy.”

A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid.

Investors caught up in the free-dividends fallacy mistakenly view dividend-paying stocks as bond coupons that produces small, stable gains over time. When investors trade based on a stock’s performance, they focus on whether the stock has gained or lost money relative to the purchase price. Ignoring the impact of dividends, they focus on price changes, not total return. However, investors who want to receive a dividend stream need to hold on to the stock until it pays out its regular dividend, and Hartzmark and Solomon find that investors tend to hang on to dividend-paying stocks for longer periods of time, regardless of performance.
Click to expand...
A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid.

I see you are back to that which is true but in the long run does not mean the price of the stock will stay down.

I know this because every dividend paying stock I have owned has gone up over the years.

Not sure why you are so negative about dividends and the amount of time you put into trying to put they down.
 
I am not negative about dividends at all.

I am negative on the financial misinformation that posters have or spew about them .

There is a difference between correcting the myths about them vs not liking them .

I never said I don’t like them
 
Doesn't it depend on the behavior of a particular company though? Such as Berkshire Hathaway doesn't pay dividend but reinvests in its business, so that would be an example of being good to not get the dividend, but I suspect a lot of companies if they were not paying the dividend might just distribute the extra profits to the top managers instead of reinvesting in the company, and also the business of the company needs to be able to actually use the profit wisely, just spending the money into the company doesn't mean it will really lead to more growth for that company.

Now that I'm retired and need money to live on, I don't mind if the growth of a dividend paying company is less than a non-dividend, if it all equals out in the long run anyway I might as well not have to agonize over what to sell.

To me the dividend paying stock act like what I expected Bonds to do, they grow slow while providing income, but my bond funds are a huge disappointment, I don't understand why we are supposed to allocate a lot of our portfolio to bonds because the bond funds drop just like the equities but they don't rise ever much at all.
 
Stocks are stocks and they all carry risk .

whoever thought AT&T , GE , GM , ETC , WOULD TAKE THE HITS THEY DID .

exxon has been beaten by bonds for 15 years .

So stocks are no sub for bonds .

every asset has there day in and out of the sun .

for the last 40 years we only knew bonds to be in a bull market with only a few speed bumps .

no one saw a bear market in bonds for decades .

as far as owning bond funds , you need to know why you want to own bonds ….

people buy bond funds blindly .

Bonds or bond funds need to be bought the same way you would ladder CDs If they are for income .cor if it is for the recession / depression side of the cycle you need long term treasuries

that means very short term funds and some intermediate funds if for income and long term treasuries for protection .

i think we will see a recession within a year and the fed will have no choice but to reverse course or risk being a Japan .

i just put the finishing touches on my long term bonds so they can fly fighter cover
 
Last edited:
oldmontana said:
A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid.

I see you are back to that which is true but in the long run does not mean the price of the stock will stay down.

I know this because every dividend paying stock I have owned has gone up over the years.

Not sure why you are so negative about dividends and the amount of time you put into trying to put they down.
Click to expand...
just think of a mutual fund dividend which is the same thing .

you have 10k when you go to bed , the fund pays out 10% ..

if you reinvested the div you have the same 10k you had invested when you went to sleep.

if you take the dividend you have 1k in hand and 9k growing .

you made a withdrawal .

it is a simple concept yet few understand the dividend is a withdrawal from their already existing balance .

dollar wise it’s a wash .

that doesnt mean your invested dollars don’t grow. ,they certainly grow but if you didn’t reinvest the dividend money back in you have a smaller portfolio growing for you .

far to many think they are being handed something they didn’t already have in invested dollars and that is false thinking .

no different then a stock split is giving you nothing additional …more shares at a lower price is the same dollars working for you
 
Last edited:
Yeah, yeah, yeah, Math...think you've made your point over and over and over again.

What's new, already?! How about giving us some great "stock tips" instead of beating the same
old dividend ain't whatever drum?
 
I don’t advise people what to do … I can only talk in terms of what I do .

but I do find that dividends is one of the biggest misunderstood things in investing and it is so fundamentally important for others to understand and be able to sort facts from these myths
 
mathjak107 said:
I don’t advise people what to do … I can only talk in terms of what I do .

but I do find that this is one of the biggest misunderstood things in investing and it is so fundamentally important for others to understand and be able to sort facts from these myths
Click to expand...
Ok, guy...over and over and over again. Its your opinion and I think even those here in the financial bleachers have even heard it. Big yawn...time to move on...lol.
 
as long as people keep posting myths and misinformation I will dispute and correct it .

as far as it being my opinion , you are wrong ..it is fact and a finra requirement that every invested dollar be reduced by the payout before it can trade .

if you think that is my opinion , spin again.


It is a finra requirement..

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01)


Exchange computers must knock everything down by an equal amount .

So effectively you have less dollars invested compounding then you had .

If you reinvest you simply have the same dollars compounding again
 
mathjak107 said:
for those who do care to learn , here is an excellent video on how things work

Click to expand...
Who is this person? Who is paying him?

FYI...He says. when a stock like say Walmart pays a div of $1 the stock price will go down that amount and STAY down that amount. T That is not true. Walmart and most dividend paying stocks go up. One just has to look at the stock price of a stock over the years, the prices AFTER they pay out their dividends.

There are many reasons why stocks that pay dividends are a good thing and I am happy that I have much of my portfolio in div paying stocks that have gone up over the years.
 
oldmontana said:
Who is this person? Who is paying him?

FYI...He says. when a stock like say Walmart pays a div of $1 the stock price will go down that amount and STAY down that amount. T That is not true. Walmart and most dividend paying stocks go up. One just has to look at the stock price of a stock over the years, the prices AFTER they pay out their dividends.

There are many reasons why stocks that pay dividends are a good thing and I am happy that I have much of my portfolio in div paying stocks that have gone up over the years.
Click to expand...
Evidently you don’t understand either

Let’s pretend you have 100k in Walmart
It pays out a 10% dividend to make the numbers easy

It goes ex div so you have 90k invested after the exchange adjustment in price so it can trade again and 10k in hand from the payment

next morning they released great news and markets doubled your stock
So you have 180k invested now and 10k in hand

that is 190k

had the stock not paid out you would have 200k not 190k

if you reinvested the 10k you have the same 200k as if it never paid out and went ex div .

it is a wash

your interpretation of that video couldn’t be more off base..

where did you ever come up with this Walmart wont recover the ex div drop ?


That is as much nonsense as saying if you pulled the same dollars out of a portfolio the portfolio can never recover .

that is not what is said at all in the video.

the video is saying the same thing I am and that is you get no added invested value from the div .
it can’t be any different .. you are only moving THE SAME money around different pockets
 
Last edited:
oldmontana said:
Who is this person? Who is paying him?

FYI...He says. when a stock like say Walmart pays a div of $1 the stock price will go down that amount and STAY down that amount. T That is not true. Walmart and most dividend paying stocks go up. One just has to look at the stock price of a stock over the years, the prices AFTER they pay out their dividends.

There are many reasons why stocks that pay dividends are a good thing and I am happy that I have much of my portfolio in div paying stocks that have gone up over the years.
Click to expand...
----------------------------------------------

Who is this person? Who is paying him to misinform investers?
 
oldmontana said:
----------------------------------------------

Who is this person? Who is paying him to misinform investers?
Click to expand...
I can’t help it if you don’t understand simple math and constantly try to raise stupid contradictions that make zero sense.

perhaps it’s a learning dis function but you just make no sense in what you ask or say.

he is spot on regardless who is paying him and you are way out in left field based on your Walmart comment .
 
Last edited:
oldmontana said:
. One just has to look at the stock price of a stock over the years, the prices AFTER they pay out their dividends.
Click to expand...
More nonsense .no one said a stock doesn’t go up because it pays a dividend .

if you understood the basics you would realize how ridiculous you saying but my stocks are higher over the years is .

it has nothing to do with the mechanics of a dividend and that by itself IT IS A WASH
 
mathjak107 said:
More nonsense .no one said a stock doesn’t go up because it pays a dividend .

if you understood the basics you would realize how ridiculous you saying but my stocks are higher over the years is .

it has nothing to do with the mechanics of a dividend and that by itself IT IS A WASH
Click to expand...
You posted.."More nonsense .no one said a stock doesn’t go up because it pays a dividend ."
==============================

No, but your link does not mention that FACT, and you as far as I have read in your posts do not mention that. You just go on and on about why div's are not good.

---------------------------

You posted.."if you understood the basics you would realize how ridiculous you saying but my stocks are higher over the years is ."

That is a fact. Call it what you want. By doing so its telling.

Enough is enough.

Bye!
 

Status
Not open for further replies.

Back
Top