Can someone explain to me the purpose of a dividend?

Quote from Nofear777:

Now the next part of my post goes to the other more civilized posters on elitetrader.com.

Lets say a stock never changes in price for 10 years and there are no trades in it. It has a perfect flat line for the stock price not counting the dividend.

It does have a dividend. From what I understand the stock price would decline with respect to the dividend, that is, if the dividend is 30 cents per quarter the stock price in this theoreticaly otherwise flat price would decline by 30 cents a quarter?
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I'll cut you some slack.

Let's change your question slightly. Let's say the stock constantly trades at cash value and has a dividend. So each time the stock goes ex-dividend the price would drop by the amount of the dividend. But between that time and the next dividend date the price would gradually increase as cash is accumulated again.

In the real world, stocks do the same thing, but it isn't as obvious because of all the market noise and because they don't trade at cash value.
 
Quote from Nofear777:

No i understand that. What I am saying here is, if ALL THINGS REMAIN THE SAME, the stock price will fall by 1 dollar. So again, what is the purpose of a dividend? Without the dividend the stock price should the thoereticaly 1 dollar higher that day, wether its down 100 dollars (instead of 101) or up a 100 dollars(instead of 99).

So far the only benefit I can think of is liquidity issue, where you need no liquidity to collect the dividend ,

I am still confused about the tax implications , other than that they are worse off when selecting dividends.
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I was just goofing on you before about the tax aspects... though that's what actually happens.

When a corporation has net earnings, they pay corporate income tax. What's left after tax are "retained earnings", and carried on the balance sheet as an asset. They can either continue to carry that asset as-is, or distribute it to shareholders (who of course get hosed on the tax aspect).

So, when a corporation takes $1 off of it's balance sheet to send it to shareholders as a dividend, the company's worth has been reduced by the amount of the reduction in "retained earnings"... so, the stock value is accordingly reduced.

The PURPOSE of a dividend is to distribute net profits to the owners (shareholders).... that's part of their reward for taking the risk of owning the company.
 
Divdends are important. I'll pose this another way:


Company X has a simple balance sheet, holding only $100/share equivalent in cash, but they only really need less than half that to fund ongoing operations.

Their earnings are also consistent and very predictable: They will earn $2.5/share in the coming year.

Would you buy this stock for $100 knowing you would only earn 2.5% on your money ... and the money would be retained at that?? Obviously not.

Instead this company would best pay a dividend of $50/share. Shareholders get their cash, and the ensuing year Company X earns ~5% on its invested capital ($2.5/50). Not great, but certainly better than 2.5%.

Hopefully that illustrates in a simple manner why shareholders would press a company to pay dividends.

Corporate raiders like Icahn and the rest often target companies that retain too much capital. The raider will often acquire one or more board seats and otherwise pressure the company to pay a big dividend in some form or another. In the end it is better for companies to pay regular dividends than in big lumps.
 
Lets say someone asked you to partner with someone and put in 25K for part ownership of a restaurant. Wont you expect to get part of the earnings in your pocket 4 times a year or just have your money tied up and the only way to recover or make a profit is to find someone else who is willing to pay more for that share of the restaurant than you just did.


What would you prefer to do when you retire, live off the dividends and care less about what Mr. Market or hope that when you retire you can sell your stocks at a rate where you do not do reverse cost averaging and end up outliving your nestegg.

During times like this having safe dividend stocks are the way to go. As long as you have a diversified portfolio of good solid dividend paying stocks with a good history of cashflow, safe dividend payouts %'s etc.. you are good to go. Just do the dividend reinvest and you dollar cost average more shares cheaper, increasing your yield and your equity stake.

And if you are smart you can live off the dividends when you retire and not destroy your nestegg. You will then actually have something that you can pass on to your children, ownership a stake of several good companies.
 
Who the hell will guarantee you that stock price must always go up or remain in theory value or whatever else if the company is making money.

Can I return this question to you. Then you will figure out why stable money-making company is giving dividend.

Why banks are giving GIC (Guaranteed Investment Certificate) rate to their investors? Why don't they just take your money and return back full amount without interest?

Think like this if you put your money in:
Bank - They pay interest + capital.
Company - They pay dividend (not always) ± stock price.

PS: This thread should be one page long. The more it extends its pages, the more confused you are and tell about your ability to decipher information. They have explained you well in many ways.

Quote from Nofear777:

ALL THINGS REMAIN THE SAME, the stock price will fall by 1 dollar. So again, what is the purpose of a dividend? Without the dividend the stock price should the thoereticaly 1 dollar higher that day, wether its down 100 dollars (instead of 101) or up a 100 dollars(instead of 99).
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Quote from yayt:

Yep.

Dividends are important to investors, among other reasons cited above, because they may be able to find a better use for the money than the CEO.

And after all, the money IS theirs.
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I've been pondering this question and have come to the same conclusion as well. The dividends give you the option to take it or reinvest. Downside though is that dividends are usually taxed greater than capital gains.

The second part of the equation is what the company can return on the money if they kept it versus you investing yourself. That's why growth companies should not payout distrubutions whereas blue chip firms which face diseconmies of scale are better off paying out dividends...generaly speaking of course.
 
Quote from oatmeals:

I've been pondering this question and have come to the same conclusion as well. The dividends give you the option to take it or reinvest.
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Tax consequences are the same whether you receive a check or additional shares purchased by the dividend.
 
Quote from gnome:

Tax consequences are the same whether you receive a check or additional shares purchased by the dividend.
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I was referring to your return on the stock either by dividends or by stock appreciation (capitial gains).
 
Quote from oatmeals:

I was referring to your return on the stock either by dividends or by stock appreciation (capitial gains).
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Separate issues...
 
LOL. You really think I listen to stocktrader's calls? That's funny!

Quote from Nofear777:

So wait.. Someone makes a bad call and he is a bad guy in these forums??


HAHAHAHAHAHHAHAHA


Now for some reality .

You are responsible for your own fucking trades.

If you listened to some other fagget than you and ONLY you are responsible for your losses (or gains).

Stop looking for fuckin handouts and make your own cash..

I have never once depended on any bullshit I read off this board to make money in the market (thoe I read it and I do admit there are some very smart people here).

That said, when I made MY call it was wrong. The money YOU lost however is YOUR fault. So fuck you. And fuck you triple for listening to the other calls by stock_trader. And if you didnt listen, well what the fuck are you complaining about?

The truth is calls are impossible to give success to other people unless the original poster has the time or the patience to tell you exit points on losers...

But even if he does have that time, you still pay the spread... And that spread over time will make 99% of the calls completely worthless.

I tried it once. And that will be my last call ever. Still embarasses me to this day I made it.

If you want REAL help trading, well then ask me. It aint calls.
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