How Dividends Work?

[Indiana]

Exactly how do dividends work? When a company issues a dividend on a stock, doesn't this come out of the stock price? In other words, doesnt the stock automatically fall when the $ is issued to shareholders? If this is the case then why the uproar over dividends when you really do not get anything?

Indy

[buffett]

As for your first three questions, I really think Google will be able to point you in a few good directions so that you can educate yourself.
As for your last question....if the company sends you a dividend then the money is in your pocket, and the company can't piss it away doing stupid stuff like (picking on Coke here) buy a shrimp farm or introduce a newer and crappier-tasting flagship beverage.

Dividends are also a concrete sign that the company is making money. If they're paying dividends, they're in good enough financial shape to be sending away cash, which is a good thing. Also, dividends, unlike earnings and everything else on financial statements, can't be fudged with accounting tricks.

[MaxPower]

No, it doesn't come out of the stock price, it comes out of the companies earnings.

You own part of the company so the company gives you a certain percentage of their earnings.

The company can either give their earnings to you or re-invest it in the business. Smaller fast growing companies tend to re-invest profits into the business, bigger more established companies tend to pay dividends. In my opinion dividends are usually better since most of the money that a company reinvest will be wasted and not generate growth (for big companies). Also if a company pays dividends it will be more difficult for them to fudge their earnings.

An excellent book on dividends is The Future for Investors by Jeremey Siegel.

[jively]

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No, it doesn't come out of the stock price, it comes out of the companies earnings.

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You're both right. The dividends are paid from the company's earnings. However, the market makers do lower the first trade by the amount of the dividend the first trading day after shareholders are eligible for the dividend.

If there was a boring stock that traded at $20 every day, and there was a $1 dividend eligible to shareholders today, tomorrow the stock would open at $19. Normal market fluctuations move this, of course.

-Tom

[adios]

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Dividends are also a concrete sign that the company is making money. If they're paying dividends, they're in good enough financial shape to be sending away cash, which is a good thing. Also, dividends, unlike earnings and everything else on financial statements, can't be fudged with accounting tricks.

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Not necessarily. There have been companys in the past have issued more stock and/or issued bonds and used the proceeds to cover dividends. Also I'd point out that GM continues to pay a dividend despite their financial and economic problems.

[adios]

According to finance theory the investment returns for shareholders is independent of whether or not a company pays a dividend. It may surprise some on this forum but I actually prefer to invest in companys that invest their profits in growing the business although I own almost all dividend paying stocks. From 2001-2005 when "growth" was out (it never really is, just have to find the right ones methinks) I started learning about income stocks and I've been trading those ever since. I've just found them easier to analyze so that's why I own them. However, I still prefer "growth" type investments. I recommended VLO awhile back even though they pay a paltry dividend and they're widely held. I don't think the U.S. is going to build a lot of new refining capacity in the future but it seems obvious that the U.S. will need more as the years go by. I think this put VLO in a great position and I think they're being prudent by not paying a big dividend. Not trying to hijack the thread just pointing out one consideration regarding whether or not a company should pay a dividend. IMO whether or not a company should pay a dividend is a fairly complex issue. REITs and BDCs (buisness development companys) are required to pay out 90% of their taxable income as dividends in order to maintain REIT status and BDC status respectively. They're taxable income is not taxed at the corporate level. Perhaps I'm wrong but it seems like buying REITs and BDCs in a Roth IRA account would mean that taxes would never be paid on the profits of REITs and BDCs for the shares owned in Roth IRAs.

[buffett]

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I actually prefer to invest in companys that invest their profits in growing the business

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I own almost all dividend paying stocks

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Huh?

[adios]

As long at the price is right /images/graemlins/smile.gif. Also I stated why I own the income oriented stocks. I find them easier to analyze.

[BradleyT]

Indiana,

You may want to start small and get into a DRP.

from yahoo finance:
Dividend Reinvestment Plan (DRP)
Automatic reinvestment of shareholder dividends in more shares of a company's stock, often without commissions. Some plans provide for the purchase of additional shares at a discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the long term using dollar cost averaging. The DRP is usually administered by the company without charges to the holder.



For instance I have one through WE Energies (my states major power provider). I put in $50 a month and every quarter when they issue a dividend that automatically buys me more shares (or fractions of a share depending on price of stock and dividend amount). I don't miss the money each month (it's taken directly out of my checking) and now after a few years I have $5,000 worth of this particular stock. Note I did start at $20/shr and it's at $39 now so that helped more than the dividends did.