For instance, Volkswagen announced a special dividend payment of €19 in December per share. The share price dropped the next day by €19 as well. So as an investor, I didn’t gain anything (at least in the short term)? I received the dividend but my equity share is worth less that amount.
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You don’t get anything *extra*, yes. Only about 50% of stocks pay dividends, which means investors can see the profits of their investments go into increases in the stock price or get paid out directly in the form of dividends. A stock represents a share of ownership of the company which includes the bank account from which dividends are paid, so paying dividends reduces the value of the company. In essence it is just converting something a stockholder already owns into cash in their hand.
You don’t get anything *extra*, yes. Only about 50% of stocks pay dividends, which means investors can see the profits of their investments go into increases in the stock price or get paid out directly in the form of dividends. A stock represents a share of ownership of the company which includes the bank account from which dividends are paid, so paying dividends reduces the value of the company. In essence it is just converting something a stockholder already owns into cash in their hand.
Simplifying, the value of a company is the cash it has on had plus the present value of all the future cash it is going to earn. When the company pays out a dividend that money has to come from somewhere, and it comes from the company’s checking account. The company is simply worth less after the dividend. You are worth more. There is nothing about dividends that magically creates value, they just transfer cash from company to stockholder.
So why do they pay it? Because some investors prefer to receive dividends rather than sell a few shares anytime they need cash. Not all companies choose to pay dividends, for various reasons including the tax treatment, but they are very popular especially among older folks with lots of stocks in their retirement accounts.
You don’t get anything *extra*, yes. Only about 50% of stocks pay dividends, which means investors can see the profits of their investments go into increases in the stock price or get paid out directly in the form of dividends. A stock represents a share of ownership of the company which includes the bank account from which dividends are paid, so paying dividends reduces the value of the company. In essence it is just converting something a stockholder already owns into cash in their hand.
Simplifying, the value of a company is the cash it has on had plus the present value of all the future cash it is going to earn. When the company pays out a dividend that money has to come from somewhere, and it comes from the company’s checking account. The company is simply worth less after the dividend. You are worth more. There is nothing about dividends that magically creates value, they just transfer cash from company to stockholder.
So why do they pay it? Because some investors prefer to receive dividends rather than sell a few shares anytime they need cash. Not all companies choose to pay dividends, for various reasons including the tax treatment, but they are very popular especially among older folks with lots of stocks in their retirement accounts.
Simplifying, the value of a company is the cash it has on had plus the present value of all the future cash it is going to earn. When the company pays out a dividend that money has to come from somewhere, and it comes from the company’s checking account. The company is simply worth less after the dividend. You are worth more. There is nothing about dividends that magically creates value, they just transfer cash from company to stockholder.
So why do they pay it? Because some investors prefer to receive dividends rather than sell a few shares anytime they need cash. Not all companies choose to pay dividends, for various reasons including the tax treatment, but they are very popular especially among older folks with lots of stocks in their retirement accounts.
If a company is making a steady profit, but otherwise everything is remaining the same then one of two things should happen:
1. The company keeps its profits in the company, meaning that the company gets more valuable over time since as well as the profitable business it now has cash in the bank
2. The share price increases slightly each year and then falls when it pays the dividend, repeating a constant cycle each year
The shareholders see the same return either way, either in cash or an increased stock price
If a company is making a steady profit, but otherwise everything is remaining the same then one of two things should happen:
1. The company keeps its profits in the company, meaning that the company gets more valuable over time since as well as the profitable business it now has cash in the bank
2. The share price increases slightly each year and then falls when it pays the dividend, repeating a constant cycle each year
The shareholders see the same return either way, either in cash or an increased stock price
You’ve noticed that the share price drops by the dividend amount on the ex dividend date. Naturally, because a share that’s going to guarantee you $5 if you own it tomorrow is less valuable than one where you have to wait for a year to get the $5.
What you don’t see is the gentle pressure pushing the share price up as the year goes by, and next year’s dividend date gets closer and closer. A share that guarantees you $5 in a six month’s time is worth more than a share that guarantees you $5 in a year’s time. When the ex dividend date is only 3 months away it’s worth even more.
You won’t notice that and can’t notice that effect for ordinary shares, because there are so many other factors that affect the share price much more strongly. But you will see this exact effect if you look at the price of exchange-traded fixed income instruments: these are tradable on the exchange but give you literally a fixed amount of cash regularly. The price drops on the ex date, then slowly climbs until the next ex date. You earn the same amount per day no matter how many ex dates you cross.
You’ve noticed that the share price drops by the dividend amount on the ex dividend date. Naturally, because a share that’s going to guarantee you $5 if you own it tomorrow is less valuable than one where you have to wait for a year to get the $5.
What you don’t see is the gentle pressure pushing the share price up as the year goes by, and next year’s dividend date gets closer and closer. A share that guarantees you $5 in a six month’s time is worth more than a share that guarantees you $5 in a year’s time. When the ex dividend date is only 3 months away it’s worth even more.
You won’t notice that and can’t notice that effect for ordinary shares, because there are so many other factors that affect the share price much more strongly. But you will see this exact effect if you look at the price of exchange-traded fixed income instruments: these are tradable on the exchange but give you literally a fixed amount of cash regularly. The price drops on the ex date, then slowly climbs until the next ex date. You earn the same amount per day no matter how many ex dates you cross.
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