Hello!
I'm /u/lykosen11 and recently, I've seen tons of comment talking about the strength & profitability of dividend stocks. Comments recommending someone to buy dividend stocks to get results from their investments. It'll be a simple text to make the situation clear. To discuss this, we first have to set a few things straight.
What is a stock in a company
This might look trivial, however, might not be as clear as new people think. When you buy a stock, you buy a slice of the company. With 1 stock in a company with 100 stocks outstanding, you own 1% of the company. However this is also ambiguous. What does that really mean?
Well, it means 1% of the company is yours. If the company doubles in value, your share double in value. If a company buys a building, you own 1% of that building. If the company hires a person, you employ 1% of that worker. If the company makes 100 dollars, you get 1 dollar. This would be very complex to keep track off, giving you strange fractional ownerships. It becomes even weird if you get that dollar, and the company has to contact you to get that dollar when they want to pay their costs of revenue. It is solved with stocks. Instead of you getting ownership of each of these things, the company holds everything, and you hold a piece of paper saying you own 1% of everything. If the company earns 1000 dollars, 10 of those dollars are owned by you, no matter what they are spent on. If the company turns those dollars into product to sell, your value and ownership is just converted from cash into product. When the 1000 dollars are earned, instead of you getting 10 dollars from your 1% ownership, the company holds those 10 dollars, and your stock raise in value by 10 dollars.
Then what is dividend?
Great question. Dividends are simply put cash that the company give back to its shareholders in the weird fractional way described above. A growing company needs its cash to finance its growth, and usually doesn't give a divided. They need the money to buy buildings, hire people, buy machines, buy product, everything. A non growing company however usually make more money than they need to run their business, and the cash starts piling up year after year. It can't profitably buy more things because their market is saturated, and it would give a shitty return to investment. So what do they do? If the overflow of capital would risk give a negative return on capital, they might as well give the capital out, securing a 0% return on overflowing capital. Technically a company could simply acquire another company or buy stocks. However this is all included in attempting in creating growth, and most companies aren't Intrested in acquiring random companies (Birkshire Hathaway is the great exception, where the company employs capital in many businesses, and becoming a form of holding conglomerate)
There is a third scenario for the company to employ unemployable cash is to do stock buybacks. Buybacks are done when the company stock value is believed to grow, creating growth that way. It's a company investing it itself. If done while the company is overvalued it's a horrible investment, and if done when the company is fair or undervalued its a great investment. If our company has 100 shares of a dollar each buys back 50 shares, it becomes a company with 50 shares, each worth 2 dollars. The action itself means nothing, it only means that if the company intrinsic value raises, the owners (you) is rewarded.
So, do you want dividends?
Well, it depends like most things. A company that gives dividends from earnings is a company that has realized it can't use its capital to grow. Note that a dividend company doesn't return more or less value to each shareholder. It's exactly equal, each Share gains the earnings per share each year. You do not get more cash from a dividend than a company without a dividend, the capital is simply allocated differently. There are also risks. If a company gives out a dividend while not earning enough, they have to pay the dividend in another way, usually though debt or stop giving a dividend. Also worth noting is that dividends are taxed when you get them, which severely hurts compound interest gains from the companys earnings.
This means that if a company gives out a dividend, they shrink in book & intrinsic value equal to the dividend given away at that time.
Ending
A short finish. There is nothing intrinsically good about dividends. You get the money either way, either through dividends or appriciation of company value, which in line should appricate your share value. So TLDR it doesn't matter. Dividend giving stocks tend to be companies that is more matured, unable to grow but is still generating real cash flow. This in some cases makes the company stable. A great example of this is Tele providers. They can't grow, but generate tons of cash, giving large amount to its owners. In the opposite, a company that uses its earnings for growth still give its shareholders it's earnings, except they convert the cash into whatever the company needs to grow. A great example of these are any tech startups, or growth companies generally.
There is no intrinsical difference. You still get the money.
Submitted May 08, 2018 at 03:17PM by lykosen11 https://ift.tt/2K3pFDj
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