1Tg
Rarely have I read such utter nonsense on dividends. You call out "hundreds of YouTube videos by mathematical dyslexics on this topic." but fail to understand dividends yourself and deliver a readable post on it. I would re-read your text and revalidate your findings, if I were you.
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@ThePower please give us the magical words to utter making dividends anything else then a deinvestment strategy.
I am sorry to disrupt your illusions about dividends.
I am sorry to disrupt your illusions about dividends.
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1Tg
@Madhatter5566 IT works as follows. Company makes money by selling products. These generate profit. Company can allocate the profit how they see fit: in case of dividend a portion of the profit is distributed among share holders. Easy does it. The company could also allocate part of these profits in share buyback programs resulting in support of stockprice and/or increase in stock price - the same company value with less stock would result in higher price per share.
The flaw in your example is: 1000 euro per share, with a distribution of 1% would result in a shareprice of 990 EURO. If you have 101 shares, total investment would be 100.000 EUR, and you would receive 1010 EUR worth of dividends. When reinvesting this - via DRIP for example - this would result in 102 shares. The company will continue to sell products and make a profit. Indeed directly after ex-dividend date, the company would have a lower share price. The value of the dividend has to be subtracted from the company. However, share price will bump back up and next round of dividends, you will now receive 102x10 = 1020 EUR worth of dividend. Do note: this is applicable when the dividend remains stable and the same. If the company has a dividend growth policy, they could increase the dividend to 1.1% you would receive 1122 EUR worth of dividend, as the dividend per share no longer is 10 EUR but 11 EUR and you now own 102 shares - instead of 101.
This then results in growth of the dividend and adds to the total return - which is further composed of share price growth. You are correct that there could be tax implications, but your hypothesis that you will loose money when receiving dividends doesn't make sense. Furthermore, there could be - depending on where you are - tax implications like capital growth tax on your growth stocks.
Hence, your story on dividends is very much too summarized and too full of assumptions. Apologies for disrupting your growth illusions ;)
The flaw in your example is: 1000 euro per share, with a distribution of 1% would result in a shareprice of 990 EURO. If you have 101 shares, total investment would be 100.000 EUR, and you would receive 1010 EUR worth of dividends. When reinvesting this - via DRIP for example - this would result in 102 shares. The company will continue to sell products and make a profit. Indeed directly after ex-dividend date, the company would have a lower share price. The value of the dividend has to be subtracted from the company. However, share price will bump back up and next round of dividends, you will now receive 102x10 = 1020 EUR worth of dividend. Do note: this is applicable when the dividend remains stable and the same. If the company has a dividend growth policy, they could increase the dividend to 1.1% you would receive 1122 EUR worth of dividend, as the dividend per share no longer is 10 EUR but 11 EUR and you now own 102 shares - instead of 101.
This then results in growth of the dividend and adds to the total return - which is further composed of share price growth. You are correct that there could be tax implications, but your hypothesis that you will loose money when receiving dividends doesn't make sense. Furthermore, there could be - depending on where you are - tax implications like capital growth tax on your growth stocks.
Hence, your story on dividends is very much too summarized and too full of assumptions. Apologies for disrupting your growth illusions ;)
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•@ThePower As dividends lower the share price equal to the amount of the dividend there is no benefit at all for the share holder.
You gained nothing.
You describe the effect of growth, not the effect of dividends. Please try again. What are the magical words to utter that there is a difference between selling shares or dividends?!
You gained nothing.
You describe the effect of growth, not the effect of dividends. Please try again. What are the magical words to utter that there is a difference between selling shares or dividends?!
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1Tg
@Madhatter5566 Did you even read what I wrote?
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@ThePower Yes. You confused a effect of growth with the effect of dividends.
You said it yourself: The stock will bump back after you drained the value per dividend, not bc of the dividend nor you buying shares, but bc it grows. You have not more invested money after you reinvested the dividend, you have less bc of Tax and trade costs.
So there was no benefit of the dividend even if you reinvest. It was just a short De-Investment lowering the share price, getting you a share more yet didnt change the investment sum at all. So it also cant change your gains. Getting 1% growth out of 1 share worth a million is the same as getting 1% growth Out of 1 Million 1 Euro Stocks.
As I said, you confusing the effect of growth with the nonexistent effect of getting a dividend and re-investing it. Just calculate your gains If your stock doesnt grow at all. You would just deflate your investment with the dividends and re-investing them bc of tax and trade costs. There is no benefit of you getting dividends at all.
You said it yourself: The stock will bump back after you drained the value per dividend, not bc of the dividend nor you buying shares, but bc it grows. You have not more invested money after you reinvested the dividend, you have less bc of Tax and trade costs.
So there was no benefit of the dividend even if you reinvest. It was just a short De-Investment lowering the share price, getting you a share more yet didnt change the investment sum at all. So it also cant change your gains. Getting 1% growth out of 1 share worth a million is the same as getting 1% growth Out of 1 Million 1 Euro Stocks.
As I said, you confusing the effect of growth with the nonexistent effect of getting a dividend and re-investing it. Just calculate your gains If your stock doesnt grow at all. You would just deflate your investment with the dividends and re-investing them bc of tax and trade costs. There is no benefit of you getting dividends at all.
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15Std.
@Madhatter5566 Let me explain again the difference, as people have pointed out
There are two people, let's call them John and Joe. Both of them will invest for a 3 year period with a 1000 EUR total investment.
In the below example, we leave tax and trading cost out of the eqation, but will add that on later :).
John owns 100 shares, each worth 30 euro.
The company has a dividend yield of 4%, paying John 1.2 EUR per share per year, which equals 120 EUR yearly.
Total amount of invested money by John is 3000 EUR.
After the first year, John still has 3000 EUR invested.
Next year, John still has 3000 EUR invested and has recieved another 120 EUR.
Then we have Joe. Joe also has 100 shares, each worth 30 EUR.
The company Joe owns does not pay a dividend.
In order for Joe to recieve 120 EUR per year he has to sell 4 shares each year(4x30=120).
Total amount of invested money by Joe is 3000 EUR.
After the first year, Joe has 3000 - 120 = 2880 EUR. In order for Joe to compensate for the shares sold (4) the share price has to increase to 31.25 EUR per share.
Anything below 31.25 EUR per share would mean Joe is losing money. Anything above it would mean Joe is making additional money. Joe has 96 shares remaining.
The next year (assuming 31.25 EUR per share) Joe needs to sell 3.84 shares to meet the 120 EUR.
Joe now has 92.16 shares remaining. The price per share needs to grow to at least 32.55 EUR a share for Joe to equal.
Now a crash occurs, not a big crash, just like a 15% drop, however as Joe has growth stock, it on average drops more then the stable dividend stock that John owns.
Therefore, Johns stock will drop from 30 to 25.50 EUR per share. However, Joe's stock will drop 23% (vs 15% for John) resulting in 27.19 EUR per share.
Joe's investment is now worth ~2506.35 EUR as he has 92.16 shares remaining.
That year is a bad year for stocks. However, John recieves his regular dividend (120 EUR). In order to ensure Joe also recieves 120 EUR, he has to sell 4.412 shares, which would now result in 87.7 shares remaining.
At the end of year 3, John's investment is worth 2550 EUR, he has recieved a total of 360 EUR from dividends and still owns 100 shares. In 3 years, John still has 2,910 EUR (2550+360 in dividend) out of initial investment of 3000 EUR.
Joe's investment at the end of year 3 is worth: ~2,384 EUR. He only owns 87.7 shares of the company and he has cashed out 360 EUR, similar to the dividend. In 3 years he has 2,744 EUR (360 cashed out, rest in stock) of his initial 3000 EUR investment.
Ofcourse you are going to say "yeah but how about tax on dividend!!" Tax on dividends is based on the country of residence, country of the company and tax treaties between these countries. Hence, you can't make any assumption on them.
Dutch people for example pay 15% tax, but if you have it invested in a Dutch company, you can deduct it from you income tax (e.g. you get it back, resulting in 0% dividend tax). However, in Germany it is ~26% - not sure how much you could get back.
In France this is 30%. However, selling shares you could need to pay capital gains tax, also this differs per country.
Next argument "You have to pay trading fees". You don't have to pay trading fees when you receive dividend. You do have to pay trading fees when you are selling shares. All of these parameters have been left out in the above example, but in that case Joe would incur costs (trading fees for selling, capital gains tax) while John would incure only dividend tax.
All of these cost depend on the countries (residence, tax treaties, etc) except for the trading fees: Joe has to pay these, otherwise he cannot sell his shares. John is not selling any shares, so he doesn't have to pay any trading fees.
Lastly you will say "Yeah but the growth from the growth stock is too low, needs to be much higher", that could be, however the dividend stock has no growth (capital gains) nor any dividend growth either. Furthermore, the 4% yield is nothing special (e.g. not 10%+ or higher).
In short: there are perfectly fine arguments for people to invest in dividend paying stocks. In general these companies are well established companies that have great cashflow which enables them to pay for dividends.
My guess is that you got confused with ETFs like JEPI that pay "dividends" that are not dividend at all, but simply money coming from covert call option trading.
There you go, simple story on dividends.
There are two people, let's call them John and Joe. Both of them will invest for a 3 year period with a 1000 EUR total investment.
In the below example, we leave tax and trading cost out of the eqation, but will add that on later :).
John owns 100 shares, each worth 30 euro.
The company has a dividend yield of 4%, paying John 1.2 EUR per share per year, which equals 120 EUR yearly.
Total amount of invested money by John is 3000 EUR.
After the first year, John still has 3000 EUR invested.
Next year, John still has 3000 EUR invested and has recieved another 120 EUR.
Then we have Joe. Joe also has 100 shares, each worth 30 EUR.
The company Joe owns does not pay a dividend.
In order for Joe to recieve 120 EUR per year he has to sell 4 shares each year(4x30=120).
Total amount of invested money by Joe is 3000 EUR.
After the first year, Joe has 3000 - 120 = 2880 EUR. In order for Joe to compensate for the shares sold (4) the share price has to increase to 31.25 EUR per share.
Anything below 31.25 EUR per share would mean Joe is losing money. Anything above it would mean Joe is making additional money. Joe has 96 shares remaining.
The next year (assuming 31.25 EUR per share) Joe needs to sell 3.84 shares to meet the 120 EUR.
Joe now has 92.16 shares remaining. The price per share needs to grow to at least 32.55 EUR a share for Joe to equal.
Now a crash occurs, not a big crash, just like a 15% drop, however as Joe has growth stock, it on average drops more then the stable dividend stock that John owns.
Therefore, Johns stock will drop from 30 to 25.50 EUR per share. However, Joe's stock will drop 23% (vs 15% for John) resulting in 27.19 EUR per share.
Joe's investment is now worth ~2506.35 EUR as he has 92.16 shares remaining.
That year is a bad year for stocks. However, John recieves his regular dividend (120 EUR). In order to ensure Joe also recieves 120 EUR, he has to sell 4.412 shares, which would now result in 87.7 shares remaining.
At the end of year 3, John's investment is worth 2550 EUR, he has recieved a total of 360 EUR from dividends and still owns 100 shares. In 3 years, John still has 2,910 EUR (2550+360 in dividend) out of initial investment of 3000 EUR.
Joe's investment at the end of year 3 is worth: ~2,384 EUR. He only owns 87.7 shares of the company and he has cashed out 360 EUR, similar to the dividend. In 3 years he has 2,744 EUR (360 cashed out, rest in stock) of his initial 3000 EUR investment.
Ofcourse you are going to say "yeah but how about tax on dividend!!" Tax on dividends is based on the country of residence, country of the company and tax treaties between these countries. Hence, you can't make any assumption on them.
Dutch people for example pay 15% tax, but if you have it invested in a Dutch company, you can deduct it from you income tax (e.g. you get it back, resulting in 0% dividend tax). However, in Germany it is ~26% - not sure how much you could get back.
In France this is 30%. However, selling shares you could need to pay capital gains tax, also this differs per country.
Next argument "You have to pay trading fees". You don't have to pay trading fees when you receive dividend. You do have to pay trading fees when you are selling shares. All of these parameters have been left out in the above example, but in that case Joe would incur costs (trading fees for selling, capital gains tax) while John would incure only dividend tax.
All of these cost depend on the countries (residence, tax treaties, etc) except for the trading fees: Joe has to pay these, otherwise he cannot sell his shares. John is not selling any shares, so he doesn't have to pay any trading fees.
Lastly you will say "Yeah but the growth from the growth stock is too low, needs to be much higher", that could be, however the dividend stock has no growth (capital gains) nor any dividend growth either. Furthermore, the 4% yield is nothing special (e.g. not 10%+ or higher).
In short: there are perfectly fine arguments for people to invest in dividend paying stocks. In general these companies are well established companies that have great cashflow which enables them to pay for dividends.
My guess is that you got confused with ETFs like JEPI that pay "dividends" that are not dividend at all, but simply money coming from covert call option trading.
There you go, simple story on dividends.
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15Std.
@ThePower Wtf. If John gets 4 % Dividend the company looses 4% of it worth when it pays out. He receives 120 Euro and has 2880 Euro worth of Stock. Your whole calculation is wrong.
Good grievance... A long post Just to show that you dont understand dividends at all. Or Mathematic.
Try again.
To have 3000 Euro after the dividend the company would need to grow 4% per year. You could also let it grow and sell 120 Euro worth of Stock and have 3000 Euro in the company left.
Good grievance... A long post Just to show that you dont understand dividends at all. Or Mathematic.
Try again.
To have 3000 Euro after the dividend the company would need to grow 4% per year. You could also let it grow and sell 120 Euro worth of Stock and have 3000 Euro in the company left.
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14Std.
@Madhatter5566 Again, you are making assumptions. You assume the company has to grow 4%. That's not the case. The dividend is there to reflect the company has stable cashflow and is generating profit. The share price of the company drops on ex-dividend date because dividends (value) is leaving the company. However, the company is making profits and has stable cash flow, so it bumps back up. This remains the same in equal market conditions. The fact that you think it goes down to 2880 and remains there with same market condition is simply put... the reason why you don't understand dividends in the first place. So please try again.
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13Std.
@ThePower as I said you confuse growth with dividends. You smuggle in growth for the dividend Stock and deny it for the nondividend stock. Thats grossly misinterpreting reality and what a dividend is. You dont autogrow Back the Money you taken out for the dividend. You miscalculated.
Without growth you take out 4 % and left with 120 Euro Dividende and 2880 Euro Stock. There is no Magic Money. And here lies the whole Problem. You thinking that a Dividend is magically restored inside the company and you get 120 Euro free Money. Thats quite the illusion
Without growth you take out 4 % and left with 120 Euro Dividende and 2880 Euro Stock. There is no Magic Money. And here lies the whole Problem. You thinking that a Dividend is magically restored inside the company and you get 120 Euro free Money. Thats quite the illusion
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13Std.
@Madhatter5566 actually, this is indeed the problem. Only the issue is that you don't understand it. The company is healthy and generates profit. Part of this profit is distributed to investors. That is called dividend. So yes indeed, the dividend is "magically restored" as you call it. I'd call it cashflow. However you name it, the value flows back into the company making it worth more (value increases). You believe this process (making profit and distributing it) is called growth, however it is called a positive cashflow. Furthermore, as I pointed out there are other flaws in your hypothesis that " dividend = selling of shares". As I pointed out to you, there are differences in taxation: some countries have little to no tax on dividends, some countries have capital gains tax. Furthermore if you sell shares you have to pay transaction fees, while if you receive dividend you do not have to pay any transaction fee. The thing you call "magic money" that "restores" the value inside the company is called positive cashflow.
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