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No, that’s pretty much the number one reason someone would purchase equity in a company. I don’t know where the concept of dividends dropping the value of a co

No, that’s pretty much the number one reason someone would purchase equity in a company. I don’t know where the concept of dividends dropping the value of a company came from, but from a transactional point of view it doesn’t make sense. Sure, there are more earnings that have not been retained for increasing future earnings, but the value does not drop correspondingly. That’s just not how companies are valued. 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. Companies are valued in a number of different ways, but not one of them is based on a 1:1 proportion of earnings. Earnings multiples, yes, but what you’re suggesting is companies drop equivalent to being valued at a P/E ratio of 1. A company making 1 billion in earnings is not worth 1 billion dollars. Certainly not a majority of the time, at least. I am well aware of this myth, but not from where it originates. Yes, certainly cash on hand drops which affects valuations, but not by as much as you’re suggesting. I don’t understand your comment about stocks not producing cash flow. You’re buying part of a company. You’re not buying the certificate.

ur-whale 6y ago
>I don’t know where the concept of dividends dropping the value of a company came from, Well, there's taxes for example.
- andrewmcwatters 6y ago
  I should have been more clear in that first line. I don’t understand where the concept of a valuation of a company dropping 1:1 proportionally with its dividend payment came from.
  - dmoy 6y ago
    Because it's roughly what happens, absent other factors on the ex div day. https://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp https://www.investopedia.com/articles/investing/091015/how-d... https://finance.zacks.com/stock-price-change-dividend-paid-3571.html https://finance.zacks.com/stock-price-change-dividend-paid-3... It's not 100% true, but it's a fair bit better approximation than the other end of the spectrum which is roughly "dividends create free money out of thin air".
im3w1l 6y ago
Basically companies have an optimal cash reserve. Below that optimum a dollar in the company increases future discounted cashflow of company by more than a dollar -> They should raise money. Above that optimum a dollar in the company increases the future discounted cashflows of the company by less than a dollar -> They should hand out money. Because of transaction costs there is in practice a zone where they should neither raise nor give dividends. Close to the optimum a dollar in dividend will change the value of the company by approximately one dollar.
thedufer 6y ago
> 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. But this is not what's being claimed. Dividends are measured relative to stock price, not earnings. And a 3% dividend - that is, a per-share dividend equal to 3% of the share price - absolutely does cause the price to decrease by 3%. It's pretty clear why this must be the case - it's one of the weakest possible forms of the efficient-markets hypothesis. If it wasn't the case, people would buy (sell) the stock just before the dividend and sell (buy) just after for a nearly guaranteed profit.

ur-whale 6y ago

>I don’t know where the concept of dividends dropping the value of a company came from, Well, there's taxes for example.

andrewmcwatters 6y ago
I should have been more clear in that first line. I don’t understand where the concept of a valuation of a company dropping 1:1 proportionally with its dividend payment came from.
- dmoy 6y ago
  Because it's roughly what happens, absent other factors on the ex div day. https://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp https://www.investopedia.com/articles/investing/091015/how-d... https://finance.zacks.com/stock-price-change-dividend-paid-3571.html https://finance.zacks.com/stock-price-change-dividend-paid-3... It's not 100% true, but it's a fair bit better approximation than the other end of the spectrum which is roughly "dividends create free money out of thin air".

im3w1l 6y ago

Basically companies have an optimal cash reserve. Below that optimum a dollar in the company increases future discounted cashflow of company by more than a dollar -> They should raise money. Above that optimum a dollar in the company increases the future discounted cashflows of the company by less than a dollar -> They should hand out money. Because of transaction costs there is in practice a zone where they should neither raise nor give dividends. Close to the optimum a dollar in dividend will change the value of the company by approximately one dollar.

thedufer 6y ago

> 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. But this is not what's being claimed. Dividends are measured relative to stock price, not earnings. And a 3% dividend - that is, a per-share dividend equal to 3% of the share price - absolutely does cause the price to decrease by 3%. It's pretty clear why this must be the case - it's one of the weakest possible forms of the efficient-markets hypothesis. If it wasn't the case, people would buy (sell) the stock just before the dividend and sell (buy) just after for a nearly guaranteed profit.