I’m trying to understand the benefits of dividend stocks. I usually hear they generate “passive income” but from what I can tell, the dividend you receive is a tiny fraction of what you paid for the stock itself, and would take decades to recoup what you paid for the stock. Setting aside the possibility of stock price appreciation, how is receiving a small dividend better than keeping the lump sum you would have paid for the stock to begin with. What am I missing?
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“How is receiving a small dividend better than keeping the lump sum you would have paid for the stock to begin with. What am I missing?”
A key concept in economics is opportunity cost, meaning the profits/benefits/decisions one had to forgo in order to make a certain economic choice like spending. Using the example of a $10 stock with a 1% dividend, if you had a different way to spend the $10 that would provide you with greater than a $0.10 return by the end of that year (e.g., lend a friend the $10 and get paid back $12 by year-end), then you’d be right that the small dividend was not worth spending that $10 on the stock purchase. In the example above, we’d say that the opportunity cost of buying the stock was $2-$0.10 = $1.90.
If however, your only alternative to buying the $10 stock was to ‘keep a lump sum’ and do nothing with it, in which case you’d be generating a $0 return on the $10 instead of the $0.10, then you’re still better off buying the stock.
In reality, these decisions also need to factor in risk (e.g., high probability of making 10% on a dividend stock vs. low probability of making 50% on a value stock), inflation (e.g., that tiny 10% return can still negate inflation that would otherwise cause your $10 to be worth less after a year if you just held onto it).
“How is receiving a small dividend better than keeping the lump sum you would have paid for the stock to begin with. What am I missing?”
A key concept in economics is opportunity cost, meaning the profits/benefits/decisions one had to forgo in order to make a certain economic choice like spending. Using the example of a $10 stock with a 1% dividend, if you had a different way to spend the $10 that would provide you with greater than a $0.10 return by the end of that year (e.g., lend a friend the $10 and get paid back $12 by year-end), then you’d be right that the small dividend was not worth spending that $10 on the stock purchase. In the example above, we’d say that the opportunity cost of buying the stock was $2-$0.10 = $1.90.
If however, your only alternative to buying the $10 stock was to ‘keep a lump sum’ and do nothing with it, in which case you’d be generating a $0 return on the $10 instead of the $0.10, then you’re still better off buying the stock.
In reality, these decisions also need to factor in risk (e.g., high probability of making 10% on a dividend stock vs. low probability of making 50% on a value stock), inflation (e.g., that tiny 10% return can still negate inflation that would otherwise cause your $10 to be worth less after a year if you just held onto it).
“How is receiving a small dividend better than keeping the lump sum you would have paid for the stock to begin with. What am I missing?”
A key concept in economics is opportunity cost, meaning the profits/benefits/decisions one had to forgo in order to make a certain economic choice like spending. Using the example of a $10 stock with a 1% dividend, if you had a different way to spend the $10 that would provide you with greater than a $0.10 return by the end of that year (e.g., lend a friend the $10 and get paid back $12 by year-end), then you’d be right that the small dividend was not worth spending that $10 on the stock purchase. In the example above, we’d say that the opportunity cost of buying the stock was $2-$0.10 = $1.90.
If however, your only alternative to buying the $10 stock was to ‘keep a lump sum’ and do nothing with it, in which case you’d be generating a $0 return on the $10 instead of the $0.10, then you’re still better off buying the stock.
In reality, these decisions also need to factor in risk (e.g., high probability of making 10% on a dividend stock vs. low probability of making 50% on a value stock), inflation (e.g., that tiny 10% return can still negate inflation that would otherwise cause your $10 to be worth less after a year if you just held onto it).
If the company increases profits, it might also rise dividends. There are even “dividend kings” that have increased the dividend payment every year for several decades. Of course this normally also means that the stock price also increased by a similar rate.
A stock with maybe 3% dividend yield from today’s price might correspond to more than 10% if you have bought the stock 10 years ago.
If the company increases profits, it might also rise dividends. There are even “dividend kings” that have increased the dividend payment every year for several decades. Of course this normally also means that the stock price also increased by a similar rate.
A stock with maybe 3% dividend yield from today’s price might correspond to more than 10% if you have bought the stock 10 years ago.
If the company increases profits, it might also rise dividends. There are even “dividend kings” that have increased the dividend payment every year for several decades. Of course this normally also means that the stock price also increased by a similar rate.
A stock with maybe 3% dividend yield from today’s price might correspond to more than 10% if you have bought the stock 10 years ago.
There’s lots of things that need to be considered when investing in dividend stock – but if it is indeed a solid company then it is essentially a cash cow.
Recouping is a bit of a moot point because you’ve made profit as soon as you receive your first dividend. If that dividend is reinvested then essentially compounding effect comes into play.
You could say you’d make greater gains with growth stocks, but essentially with these stocks they’re reinvesting in order to take on greater risk e.g. diversification or change in marketing strategy. And it’s easy to get survivorship bias when judging them against dividend stocks.
Many would say (stable) dividend companies are good for wealth preservation and stability, whilst growth is riskier but potentially more profitable – and so is good for those with a larger risk appetite (or those who are younger and so have more flexibility to recover from a bad outcome).
There’s lots of things that need to be considered when investing in dividend stock – but if it is indeed a solid company then it is essentially a cash cow.
Recouping is a bit of a moot point because you’ve made profit as soon as you receive your first dividend. If that dividend is reinvested then essentially compounding effect comes into play.
You could say you’d make greater gains with growth stocks, but essentially with these stocks they’re reinvesting in order to take on greater risk e.g. diversification or change in marketing strategy. And it’s easy to get survivorship bias when judging them against dividend stocks.
Many would say (stable) dividend companies are good for wealth preservation and stability, whilst growth is riskier but potentially more profitable – and so is good for those with a larger risk appetite (or those who are younger and so have more flexibility to recover from a bad outcome).
There’s lots of things that need to be considered when investing in dividend stock – but if it is indeed a solid company then it is essentially a cash cow.
Recouping is a bit of a moot point because you’ve made profit as soon as you receive your first dividend. If that dividend is reinvested then essentially compounding effect comes into play.
You could say you’d make greater gains with growth stocks, but essentially with these stocks they’re reinvesting in order to take on greater risk e.g. diversification or change in marketing strategy. And it’s easy to get survivorship bias when judging them against dividend stocks.
Many would say (stable) dividend companies are good for wealth preservation and stability, whilst growth is riskier but potentially more profitable – and so is good for those with a larger risk appetite (or those who are younger and so have more flexibility to recover from a bad outcome).
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