Dividends

Doug Henwood dhenwood at panix.com
Mon Jan 6 12:25:15 PST 2003


Jordan Hayes wrote:


> > You're buying a capital asset with the assumption that
>> it will return income for a long time, maybe foreever.
>
>(you know what happens when you assume!)
>
>I actually doubt that this figures much into the purchase of most
>stocks.

To the frequent detriment of people who buy stocks.


> Many stocks don't pay dividends; the ones that do often
>underperform equivalent risk-adjusted investments.

Do they really? Is this an impression or something more rigorously proved?


> There's very few
>reasons to buy a stock other than "because you think it will
>appreciate" -- i.e., generate a capital gain.

A significant portion of the historical return from stocks comes from dividends. I'm not giving a precise number, becuase it all depends on when you start measuring, but over the long term, it's something like a quarter to a third of total return.


> > You can sell it if you like and get your capital back (and
>> often at a higher price)
>
>Are you saying that, on average, stocks go up? :-)

Many do. But, if I'm remembering the finance literature correctly, there's not enough of a history to say so with statistical certainty.


>I thought I read recently that the net gain in the entire NASDAQ over
>the last N (7?) years was $0.

Ah, but if only all those Nasdaq buyers had bought stodgy dividend-payers!


> > it's not like the dividend reduces the asset's intrinsic value.
>
>It doesn't? The balance sheet goes down. I'd call that as 'intrinsic'
>as it gets.

It's a deduction from income, but that doesn't mean the balance sheet goes down. It could just mean that assets grow at a slower rate. And what if retained earnings are invested in dumb stuff? That could ravage the balance sheet too.


> When a stock goes ex-dividend, the price drops
>instantaneously. You're, by definition, dividing the investment into
>two pieces: 1) the 'productive' part that stays with the company and 2)
>the cash part that goes elsewhere.

That's just because you're accounting for an imminent dividend payment, not unlike paying accrued interest on a bond.


> > And where do the profits come from to pay dividends? From
>> uncompensated labor, of course. Why not get a bit back from the
>> rentiers?
>
>Well sure, but that's back to my "because they can" ...?
>
>Has anyone seen the actual proposal?

I think it's not out until tomorrow.

Doug



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