Marc Cuniberti: Got dividends?
Dividends are payments by companies to stock holders and many companies pay them and many do not.
For those companies not paying them, the general thinking by the company may be that any extra money will instead be used to grow the company through acquisition, research and development, and any other means the company may deem successful.
Companies paying dividends however may see their growth possibilities more limited perhaps due to the maturity of the company or market they are in, or just want to encourage new shareholders and reward existing ones. Keep in mind since any shareholder receives any and all dividend payments, board members who hold shares also receive them, making the decision to keep paying them a bit easier by this same board.
No matter what the reason, quarterly, semi-annually or annual payments showing up in your mailbox or brokerage account can make holding a particular stock that much more palatable in up and down markets alike.
Some companies have paid dividends for years, others for decades and some have steadily increased them. Depending on the screening method, an investor can even find companies that have paid and increased their dividend consistently, never missing a payment or increase for literally many decades. Talk about having a great history!
Dividend paying stocks used to be more popular years back, but a new mindset preferring explosive company growth over steady payments may have been adopted by at least some investors in recent times. It is thought dividend payers don’t have the growth possibilities of other types of stocks and the word “boring” has been used more than a few times whenever dividend stocks are mentioned.
Dividends are listed in dollar amounts rather than percentages making their yields easier for companies to track and pay them.
For example, suppose company XYZ decides to pay a ten dollar annual dividend and its stock sells for $100 a share. Since most dividends are paid quarterly, the company says it will pay $2.50 every quarter for each share an investor might hold. If the investor holds 1 share, the investor will get $10 a year ($2.50 every three months). Since he paid $100 for the share, his yield will be 10%.
Now suppose the market crashes and the stock drops to $50 bucks a share. If the company continues to pay the dividend in the stated amount, the new buyer who bought the stock at the reduced post-crash price of $50 will let the $10 annual dividend. The yield of a $10 dividend on a share costing $50 is 20%. Presto-chango. The new investor is making 20%.
Keeping this in mind, crashing markets may not always mean bad news. For fans of dividend paying stocks, market routs can mean higher payout percentages.
Although dividends are paid in the form of a cash equivalent to the investor, dividend re-investment programs (DRIPS) when offered, will use that cash to buy more shares of the company paying the dividend. Over time this dollar cost averaging may lower the overall cost of the total shares purchased which may help minimize the risk from market fluctuations.
One interesting and possibly confusing fact that many investors may not know is that when a company pays the dividend, the stock price of the company drops by the amount of the dividend.
Suppose our company above pays its $2.50 quarterly dividend on May 1. On that day if the stock was $50 the day before, when it opens up on dividend day, all things remaining (and this is not absolute) the stock price will be $47.50.
So the question would be: how does one benefit from a dividend if the stock drops by the same amount?
The answer is many fold. Dividend paying stocks can be favored by investors and therefore stay in demand in hopes of more dividends in the future. Buyers may also drive up the stock price prior to the dividend in order to receive it. Another often seldom realized but offsetting consideration of the drop in stock price is the basic economic premise that the lower the price is of an item, the more people will enter the market and buy it.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Dividends are not guaranteed and can be decreased, increased or eliminated at any time. Dividends do not guarantee against losses. Dividends may be taxable in certain types of accounts and stocks which pay dividends does not mean losses, either partial or total are avoidable. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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