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Finance: What are dividends, and how do they affect stock prices? 4 Views
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What are dividends, and how do they affect stock prices? Dividends are a portion of retained earnings that are remitted back to shareholders pro rata in the form of cash or additional shares. Dividends are a sign that a company is profitable, and income based investors who want a capital appreciation component will seek dividend paying stocks. As a result, these investors tend to buy and hold, which gives these stocks firmer price stability and less volatility than pure growth oriented stocks.
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Transcript
- 00:00
Finance Allah shmoop what our dividends and how do they
- 00:05
affect stock prices Well guess what People they help That's
- 00:12
how they affect stock prices Well what are they What
- 00:15
are dividends Well they're usually paid in cash to shareholders
- 00:19
of record I legally if you own the stock than
Full Transcript
- 00:23
you're entitled to the dividend that is if you were
- 00:25
In fact according to the brokerage where you held these
- 00:28
shares the owner of record as of say June fifteenth
- 00:32
then you too will receive a dividend of twelve cents
- 00:35
for each share you own payable on July twenty eighth
- 00:39
or something like that So dividends are declared at will
- 00:42
by the board of the company and are usually the
- 00:45
domain of well heeled already established large companies with so
- 00:49
much excess cash profits that the more or less don't
- 00:52
know what else to do with it A T and
- 00:54
T Coke Disney Apple They all pay huge dollar amounts
- 00:58
in aggregate total dividends Some have done so for a
- 01:01
hundred years or more like a T Others like Apple
- 01:05
just started Apple had just passed one hundred billion dollars
- 01:08
in cash on their balance sheet when finally shareholders said
- 01:13
Hey what about some of that cash for me So
- 01:16
they're at least two logical ways to think about dividends
- 01:18
offense and defense from an offensive perspective And you know
- 01:22
we love being offensive here It shmoop central dividends Add
- 01:26
to the compound ing of stock returns like Tongue Guards
- 01:29
Inc has grown in share price six percent a year
- 01:32
kind of meth performance flood It has had a three
- 01:34
percent dividend and it keeps raising that dividend each year
- 01:38
So combined that stock is delivering total return of nine
- 01:43
percent better than in ten years The six percent compound
- 01:47
ER would grow to one point Owe six to the
- 01:50
tenth power or about one point eight acts Not quite
- 01:52
double But if it compounded at one point o nine
- 01:56
to the tenth power well it is grown to two
- 01:59
point four acts like before two and a half times
- 02:01
as much money as you started with a decade earlier
- 02:04
right or in an initial thousand dollar investment What you'd
- 02:07
have twenty four hundred dollars minus the eighteen hundred dollars
- 02:10
or six hundred dollars Mohr with dividends in there and
- 02:13
gas were rounding dramatically and the dividends get raised each
- 02:16
year Bottom line Just dividends are good they add to
- 02:18
your total return We're ignoring taxes also here and we're
- 02:21
ignoring the possibility that you could directly reinvest those dividends
- 02:25
Taub I'm or shares of that stock which would then
- 02:27
have even Mohr Power incom pounding All right But that's
- 02:31
offense What about defense Like your young you want to
- 02:34
own stocks for thirty years but you're afraid of the
- 02:37
downside The dark side the century stocks right That's one
- 02:41
of stock goes down one hundred percent Yeah well stocks
- 02:43
that pay a dividend rarely if ever go fully bust
- 02:46
for them to have gotten to that happy place where
- 02:48
they pay a divvy They're probably a pretty well established
- 02:51
domain owner or at least one point had enough excess
- 02:54
cash to distribute back to its owners in the form
- 02:56
of a dividend But there's another even better defensive thing
- 02:59
that dividend paying stocks offer That is they are cushions
- 03:03
in a bad market And the number of feathers in
- 03:05
that cushion is metered or measured by what's called the
- 03:08
payout ratio which is the percentage of earnings that a
- 03:11
company is paying out in dividends That is if the
- 03:15
company is earning a dollar a share in his paying
- 03:17
out thirty cents a share in DV dollars while their
- 03:20
payout ratio is only thirty percent So their earnings could
- 03:24
drop a lot and they'd still easily be ableto pay
- 03:27
their thirty cent dividend But if they're ratio was more
- 03:30
like eighty percent like they earned a dollar and they're
- 03:33
paying eighty cents in dividend dough than Ooh that's tight
- 03:37
If earnings dropped well even a quarter the company would
- 03:40
be paying out Maurin dividend payments than they have earnings
- 03:43
And this has happened in spades with modern day oil
- 03:46
industry who had to borrow money to be able to
- 03:49
continue to pay its dividend and not cut it Why
- 03:51
such a stretch and all the effort to not cut
- 03:54
the divvy Well because Wall Street views a dividend is
- 03:57
a kind of commitment like a promise ring It means
- 03:59
you are fully off tinder and match and J date
- 04:03
So if you ever cut or do away with your
- 04:05
divvy the management is usually all fired with their careers
- 04:09
pretty much oriented toward the uber you know driving them
- 04:12
not running a company like Doria Well look at what
- 04:14
happened to G E in the modern era when they
- 04:17
cut their dividend Yeah Ouch But let's say the whole
- 04:20
market craps out you know bad economic cycle or whatever
- 04:23
and our company goes from earning a dollars shared only
- 04:25
seventy cents and the stock goes from twenty bucks a
- 04:28
share to ten Well then it's payout ratio in that
- 04:31
thirty cent dividend world is now thirty over seventy or
- 04:35
forty three percent payout ratio It's higher payout ratio than
- 04:38
it wass but still presumably really safe to continue going
- 04:42
Maybe they won't raise it again this year but it's
- 04:44
not going away And on twenty bucks a share A
- 04:46
thirty cents of Devi well then was only yielding one
- 04:49
point five percent Pretty small Davey But now at ten
- 04:52
bucks a share and thirty of Debbie Well it's yielding
- 04:55
thirty cents over ten dollars or three percent Well with
- 04:58
Treasury Bills yielding about the same amount they quote on
- 05:01
ly unquote bet you have to make and buying that
- 05:04
stock is if it won't cut The dividend comes up
- 05:06
You get more money and dividends that air pretty safe
- 05:09
Well you feel pretty good about buying stock if you're
- 05:11
gonna hold it along And if they don't cut the
- 05:13
Davy well you not only get a low price to
- 05:15
earnings multiple stock likely with a lot of price appreciation
- 05:19
in the future but you get a more tax efficient
- 05:21
cash piece coming back to you How our dividends Mohr
- 05:24
tax efficient Well bonds or tax as ordinary income think
- 05:29
forty or fifty percent for hire Taxpayers in blue states
- 05:32
while qualified equity dividends are tax that much lower rates
- 05:37
like half that rate in twenty twenty five percent Something
- 05:39
like that So three percent on bonds nets the big
- 05:42
taxpayers one point five percent and three percent on Davies
- 05:45
And that's more like two and a quarter percent something
- 05:48
like that Seventy five more basis points toe like you
- 05:51
know buy a lot with anyway Dividends They're good They
- 05:54
cushion stocks in the bad times and they add your
- 05:56
compound returns and you want to come pound at a
- 05:59
really high rate Kind of like you're compounding your lock 00:06:03.527 --> [endTime] Yeah Yeah
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