Is the concept of dividends pointless for the sake of investing?

lonewolf123

Hi

I was looking up on google the idea of investing just before an ex dividend date to benefit from the dividend pay out coming up which I naively thought could be an easy quick investment boost.

However I found out that the market actually adjusts itself to the declared dividend and the share price will actually fall to factor in the payment of dividends and investing before the ex dividend date doesn't actually work.

Therefore this raises the question, why do investors get so excited by dividend payments? They don't really mean anything as all it essentially is is that someone took a slice of your share price and put it in another pot called dividends and if you add them up they equal back to before the dividend was paid.

Am I missing something here?

economic

lonewolf123 wrote: »

Hi

I was looking up on google the idea of investing just before an ex dividend date to benefit from the dividend pay out coming up which I naively thought could be an easy quick investment boost.

However I found out that the market actually adjusts itself to the declared dividend and the share price will actually fall to factor in the payment of dividends and investing before the ex dividend date doesn't actually work.

Therefore this raises the question, why do investors get so excited by dividend payments? They don't really mean anything as all it essentially is is that someone took a slice of your share price and put it in another pot called dividends and if you add them up they equal back to before the dividend was paid.

Am I missing something here?

maybe some people dont want the profits of a company to be reinvested by the company. they want the cash as dividends so they can spend it (or even reinvest in the same stock or other stock). thats why people buy dividend stocks.

Thrugelmir

lonewolf123 wrote: »

However I found out that the market actually adjusts itself to the declared dividend and the share price will actually fall to factor in the payment of dividends and investing before the ex dividend date doesn't actually work.


Am I missing something here?

Buy the shares when they go ex-div.

bigfreddiel

Yes you are missing perhaps the key point of investing and dividends, dividend reinvestment!

Over time this will massively increase your returns

Cheers fj

bigfreddiel

Thrugelmir wrote: »

Buy the shares when they go ex-div.

Buy the shares just prior to ex-div and reinvest the divi - more shares than buying ex-div.

And more shares is good fj

lonewolf123

economic wrote: »

maybe some people dont want the profits of a company to be reinvested by the company. they want the cash as dividends so they can spend it (or even reinvest in the same stock or other stock). thats why people buy dividend stocks.

I understand this however people can also generate their own dividend by selling their investment had the concept of dividends not existed.

Thrugelmir wrote: »

Buy the shares when they go ex-div.

I read up this alternative as well. This doesn't work as yes you have taken advantage of the drop in share price but you missed out on the dividend had you invested before the ex div date. Overall the conclusion was that you can't time the market otherwise everyone would do it. However this isn't the point of this thread it was more whether the concept of dividends is pointless or not.

bigfreddiel wrote: »

Yes you are missing perhaps the key point of investing and dividends, dividend reinvestment!

Over time this will massively increase your returns

Cheers fj

Yes I understand the idea of compound interest, but the only reason why your investment grows massively isn't because your newly paid out dividend pushed up your investment it's because you chose to reinvest your dividends which if taken out actually brings your total investment value down.

bowlhead99

Companies exist to make profits for their owners and use the owners' capital (perhaps along with other borrowings) to do it.

A company's core business does not usually require the ongoing reinvestment of all profits generated from that business. Sure, some reinvestment by the company in its ongoing operations, or even in expansion, is good - but at some point, the company has cash that's surplus to the business plan which would be a drag on performance if simply sitting idle in a bank... and the owners want to reap the rewards of investing without having to sell up and dilute their ownership share of the successful business.

The business which holds cash which is surplus to its requirements has some options. They can go and invest that cash in some non-core activities which may not be so profitable (doesn't sound like a great idea), or they can invest it in some entirely unrelated profitable activities like a big conglomerate would (which gives diversification of income but is arguably nothing more than what the owners could do with the money themselves if they had it back in their hands), or they can give it to the owners of the business to thank them for letting the business use their capital.

Some businesses like Amazon don't pay dividends as they don't make huge profits, aggressively trying to grow their market share. But from most mature business it is expected. When investors see their companies are making enough profits to sustainably pay good dividends, it is a positive sign. It is also very positive for lenders who are more willing to provide cheap finance in situations where the company is making more than enough profits to service their debts, retain some profit in the business, and pay good dividends on top. So a special one-off, or a permanent uptick, in dividends is welcomed by all as a healthy sign.

Thrugelmir

lonewolf123 wrote: »

However this isn't the point of this thread it was more whether the concept of dividends is pointless or not.

Dividends are a distribution of profit. A return of excess capital. A measurement by which the management of the Company can be judged.

TheTracker

There is an excellent chapter (appendix) on dividend investing in Swedroe and Berkin's recent "Complete guide to factor based investing" that explains most myths around dividends including those in the posts above. They conclude "neither financial theory nor research evidence provides any support for using dividends as a factor in portfolio construction". There are some tax characteristics that are significant to some, but primarily it's behavioural and psychological reasons that are the only justification for using them. Any suggestion that high dividend shares are useful signals for company quality can be countered by investing in other vehicles that better and more directly target quality.

Pincher

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/HSBA/13070898.html

HSBC Holdings plc (the Company) announces that it has purchased the following number of its ordinary shares of US$0.50 each on the London Stock Exchange from Goldman Sachs International (Goldman Sachs) as part of its buyback programme announced on 4 August 2016.


You don't have to have dividend to make money.

The strange thing is, of course, that the share price keeps shooting up, AND it pays handsome dividend too.

It's a wet dream of a share.

bigfreddiel

lonewolf123 wrote: »

I understand this however people can also generate their own dividend by selling their investment had the concept of dividends not existed.



I read up this alternative as well. This doesn't work as yes you have taken advantage of the drop in share price but you missed out on the dividend had you invested before the ex div date. Overall the conclusion was that you can't time the market otherwise everyone would do it. However this isn't the point of this thread it was more whether the concept of dividends is pointless or not.



Yes I understand the idea of compound interest, but the only reason why your investment grows massively isn't because your newly paid out dividend pushed up your investment it's because you chose to reinvest your dividends which if taken out actually brings your total investment value down.

Reinvestment isn't compound interest as such, similar but maybe you don't realise the power of compounding, so here are a few examples

£100 invested in equities in 1899, would be worth £160 now, but with dividend reinvestment you would have £22,239 not too bad is it

The same reinvestment starting with £100 in 1945 would be worth £227 now, but reinvest the divis you have £4,027

Good luck fj