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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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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

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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