Are Dividends Income? (Part 2)
Posted by Mark on October 21, 2015 at 06:43 | Last modified: October 26, 2015 11:46Since it’s 3-0, I’m not categorizing this as optionScam.com anymore. Nevertheless, I still have a problem with the dividend concept so I’m going to approach this debate from a different angle.
The financial industry is focused heavily on “the suitability standard.” When I pay someone for financial advice, the investment professional must make recommendations tailored to my personal situation. This is a Rule (2111) of the Financial Industry Regulatory Authority. For this reason, advisers compile an investment profile that includes:
- Client age
- Other investments
- Financial situation and needs, which includes questions about annual income and net worth
- Investment objectives (e.g. generating income, preserving wealth, or market speculation)
- Investment experience
- Investment time horizon
- Liquidity needs (i.e. withdrawal of cash to fund living expenses without incurring significant loss)
- Risk tolerance (discussed here)
Investment objectives may include growth and/or income.
Growth means capital appreciation, which according to Investopedia is:
> A rise in the value of an asset based on a rise in market price.
In other words, the positive difference between current stock price and the price of the stock when I bought it. Reading on:
> Capital appreciation is one of the two main sources of investment
> returns, with the other being dividend or interest income.
The kicker to all this is what happens to the share price when a dividend is paid.
Do you know? This is not a secret but I suspect it is not common knowledge especially to the layperson. I went to a presentation on dividends the other night and it was not even mentioned until I asked about it.
When a dividend is paid, the price of the stock decreases by the dividend amount.
From an accounting standpoint this makes complete sense. If stock XYZ pays out $100M as a dividend then it would make no sense for the market capitalization to be unchanged. The number of outstanding shares does not change so the loss is reflected in a lower share price.
Sleep on this for a night or two because I’m going to come with this pretty hard in the next installment.
Categories: Financial Literacy | Comments (1) | Permalink