How Dividends Can Cost You Money - Forbes

[Vincenzo]

I'm interested in hearing reactions to this Forbes article, "How Dividends Can Cost You Money".

https://www.forbes.com/sites/alexverkhiv...-you-money

[NilesMike]

(03-29-2017, 02:28 AM)Vincenzo Wrote: I'm interested in hearing reactions to this Forbes article, "How Dividends Can Cost You Money".

https://www.forbes.com/sites/alexverkhiv...-you-money

The article while mathematically correct doesn't account for the very large emotional side of investing. For example their passage 

"In other words, if an investor buys two stocks at $5, they view the stocks differently if one goes to a price of $7 with no dividend and one goes to a price of $6 with a dollar dividend. Income seeking investors prefer the latter, even though they receive the same amount of total value. Hartzmark and Solomon call this mistake the free dividend fallacy –


all true except one must know when to sell at $7 in order to be equal to the other scenario. Miss $7 and the math doesn't work.



The dividend style doesn't require market timing as the other method does. Additionally, dividend portfolio size grows over time while buy/sell shrinks over time.

The math is correct however real life ain't math.

[Dividend Watcher]

Agree with NilesMike!

Let's use an example. In this case, my own investment in CVX. Chevron pays a quarterly dividend of $1.08 for each share you own. It's impossible to find a comparably priced stock that trades the same as CVX so we'll use a hypothetical stock that actually does but without a dividend.
    
I looked at this month's scrumptious dividend payment. According to my broker's web site, CVX's dividend schedule was as follows:
   
On March 10th, I received $70 and some change. I'll use an even $70 for my example to make the numbers easier to follow in this discussion.

According to Yahoo Finance, the price of CVX around the time of the dividend payment fluctuated as follows:
   
On March 10th, I got my $70 and still had the same number of shares as I did on the 9th but the shares I owned were worth $0.57 more for each share I owned at the end of the day. The guy who doesn't care about the dividend and owns the hypothetical stock had to sell approximately 0.63 shares to get the same amount of cash.

Now let's look at what happened on the ex-dividend date.
   
From the closing of Feb 13 to the opening bell the next morning, the quoted price dropped a total of $1.23; much more than the $1.08 dividend you were entitled to receive at the open on Feb 14. So why the difference? By the end of the trading day, you would have lost another 16 cents. A couple days later, on Feb 16, CVX closed at $110.69. This is $3.23 less than before the ex-dividend date on Feb 13. Can anyone tell me that the price of CVX would have been $1.08 higher at the close on the 16th if CVX didn't pay me a dividend?

If you carry that out for the next 3 quarters, the dividend-ignorer would have the same cash in hand ($280) as me but would have 2.5 shares less than me. Ten years from now, even if CVX never raises the dividend again, I would have 25 more shares, about 65 shares versus 40, than the dividend-ignorer even though we both pocketed the same amount of cash ($2,800). That is more than I would've paid for gas in my car and still had money to pay for regular oil changes along the way and STILL had all my shares to continue paying me every quarter.

Conversely, I could've found a stock in my portfolio that went UP in price on the ex-dividend date versus Chevron's decline. I chose instead to use the example I thought would appear more ominous to the person dependent on selling shares while I can sit back and collect my "free dividends".

Even worse, if the price of CVX dropped significantly during the time frame, the dividend-ignorer would have had to sell even more shares to net the same $70 that Chevron's board would have generously shared with me over that time frame.

To address some parts of the Forbes article . . .

Quote:In times when markets are volatile the dividend payout is not a safe bet by any definition, and the fact that investors want that payout and perceive it as safe is evidence that most investors simply don’t understand the tradeoff with the price.

As if in volatile times you're not at risk of a significant loss of capital either to a large price decline or even bankruptcy. At least the bankruptcy would put us on equal footing as far as future income is concerned.

Quote:During the tech boom, investors all but forgot about dividends, focusing aggressively on price appreciation alone.

Yup, I sure did. I held MSFT, CSCO & YHOO through that period. When it was all over, I had significant losses for the next 10 years with no way to make up for it other than buying more shares. Maybe everyone was smarter than me.

From my point of view, it's not a "dividend fallacy" but a "capital asset fallacy".

[Caversham]

David Van Knapp has a fabulous series of articles on SA that address the fallacies presented in this article, Myths 3, 17, 18 are especially relevant.
https://seekingalpha.com/article/4054400...21minus-25