Understanding Dividends (Part 2)

I now believe dividends are bona fide income that may or may not come at the cost of capital appreciation.

Hypothetically speaking, suppose I did the study and found dividends are future capital appreciation realized now. I cannot emphasize enough [to myself] that this is not necessarily the case.

Nevertheless, I think understanding whether investors realize a decrease in stock price offsets the dividend would be very important for determining whether it’s a bunch of financial hocus-pocus.

I asked a former director of a NYSE-listed utility company. He said yes: most savvy investors know this.

He continued on: “sometimes the stock price falls some but sometimes it doesn’t. The stock usually falls less than 1%. Investors like the stability. They get the dividend checks in the mail and they feel good about that.”

I corrected him by saying the stock falls by exactly the amount of the dividend and that is cumulative over all dividend payments (a claim I now know to be theoretical). I said total return is equal whether or not a dividend would be paid.

He said, “most investors don’t know the term ‘total return.’ People want their dividend and their cash now and that’s it.”

I argued, “we could do a study to determine whether dividend payers are more stable than non-dividend payers. It’s a hypothetical claim that we don’t know the answer to.”

He said, “stock splits are the same way and stock splits are just like dividends. Companies with stocks that split are more healthy than those that don’t. Stock splits and dividends are both signs of corporate health.”

At the very least, I came away from this discussion thinking dividends are a marketing tactic by corporate boards of directors to make a stock more appealing to a particular segment of investors. Stock splits are the same way: neither change the total value of the investment. What a crock, then, for the industry to emphasize so strongly the illusory difference between capital appreciation vs. income!

Since the conclusion is based on a hypothetical premise, though, an enthusiastic “FAHGETTABOUDIT!” is in order.