Are Dividends Income? (Part 3)

When a dividend is paid, a commensurate drop in stock price immediately takes place. And just like that, I’m back to categorizing this as optionScam.com because many people give props to dividends as if they come at no cost.

As I discussed, objectives recognized by the industry to personalize financial advice include growth (capital appreciation) and income (e.g. dividends).

With that commensurate drop in stock price, though, capital appreciation and dividend payment become two sides of the same coin!

How can that be?

If I buy a stock at $100 that has a 4% dividend yield, I will make $4/year in dividends. Suppose the stock appreciates 4% per year and the dividend remains unchanged.

After 25 years, I can sell the stock for exactly what I bought it for: $100. I also collected $100 in dividends. Had the stock paid no dividend then, assuming everything else remained constant, the stock would have been worth $200: twice what I bought it for! Whether “income” or “capital appreciation,” total return is equal: I make $100/share either way.

Some people will argue that were the dividend not paid, the company would be in a better position to grow the business. Perhaps they could buy out competitors and improve operating efficiency to make more money. Perhaps they could go into new areas or fill an untapped niche. Either way, they could boost profitability and generate more capital appreciation than they could otherwise with dividend payments. These are just theoretical arguments, however.

In a sense, income vs. capital appreciation is “pay me now or pay me later.” With income, I receive dividend checks along the way. With capital appreciation, I receive nothing until I sell the stock at the end. At that point, I receive at least the sum of all those dividend payments never made.

I could easily simulate a dividend stock by simply selling some shares on a periodic basis. This means the “pay me now or pay me later” may not even be a material difference because I can make “pay me now” out of “pay me later.”