3 ms·

I could collect dividends for a time and then sell the share for what I paid.

Kranar 5y ago
Dividends have no net effect on how much you earn from a share. If a stock is currently priced at X and then pays out a dividend of Y, the price of the stock decreases by Y so that there is no overall effect on the value. The reason for this can be understood in many different ways, but one way I like to look at it is if paying a dividend had no effect on the price of a stock, then one could in principle buy a share of the stock at a price of X just before the dividend is paid and then sell the stock at a price of X just after the dividend is paid just as you describe, effectively pocketing the dividend and earning an almost risk free return. Of course in practice we know that on average the price of a stock drops by the exact amount of the dividend paid, and hence collecting a dividend has no overall effect on the value of a stock.
- minitoar 5y ago
  That isn’t what I’ve described. I said “for a time” and you chose to interpret it as something very specific.
  - Kranar 5y ago
    It is exactly what you described and my explanation focuses on a specific scenario to make it very clear why your reasoning is flawed. You can't just assert that it's possible to sell a stock in the future for the same price that you bought it for and that will magically come true, you have to observe what actually happens in reality and whether reality is consistent with your beliefs. To better familiarize yourself with the literature, perhaps you can start with this seminal paper produced by the Federal Reserve: https://www.jstor.org/stable/2962249 https://www.jstor.org/stable/2962249 It looks at both the short term and long term impact of dividends and shows precisely that the marginal price of a stock drops by the amount of the dividend, meaning your premise that you can simply just sell the stock at a future date for the same price you bought it for is just not supported by the facts. Whether you hold the stock and collect multiple dividends for 10 years or 10 days, the fundamental principle is the same: a stock with a marginal price of X that pays a dividend of Y will on average decrease in price by Y. Dividends produce no change in the overall net value of a portfolio, all a dividend does is convert one form of value into another, but no increase in value is ever produced.
    - minitoar 5y ago
      Please provide an example of a stock that has a price that behaves the way you’ve described. That paper is talking specifically about ex-dividend dates, not long term behavior.
      - Kranar 5y ago
        Every stock publicly listed across all stock exchanges across the world. If you want one as a reference, you may use IBM which is listed on NYSE: https://finance.yahoo.com/quote/IBM?p=IBM https://finance.yahoo.com/quote/IBM?p=IBM
        minitoar 5y ago
        I’ve actually held ibm stock for years, and it has paid dividends and stayed above my initial purchase price nearly the whole time. That seems to fly in the face of your claims.

Dividends have no net effect on how much you earn from a share. If a stock is currently priced at X and then pays out a dividend of Y, the price of the stock decreases by Y so that there is no overall effect on the value. The reason for this can be understood in many different ways, but one way I like to look at it is if paying a dividend had no effect on the price of a stock, then one could in principle buy a share of the stock at a price of X just before the dividend is paid and then sell the stock at a price of X just after the dividend is paid just as you describe, effectively pocketing the dividend and earning an almost risk free return. Of course in practice we know that on average the price of a stock drops by the exact amount of the dividend paid, and hence collecting a dividend has no overall effect on the value of a stock.

minitoar 5y ago
That isn’t what I’ve described. I said “for a time” and you chose to interpret it as something very specific.
- Kranar 5y ago
  It is exactly what you described and my explanation focuses on a specific scenario to make it very clear why your reasoning is flawed. You can't just assert that it's possible to sell a stock in the future for the same price that you bought it for and that will magically come true, you have to observe what actually happens in reality and whether reality is consistent with your beliefs. To better familiarize yourself with the literature, perhaps you can start with this seminal paper produced by the Federal Reserve: https://www.jstor.org/stable/2962249 https://www.jstor.org/stable/2962249 It looks at both the short term and long term impact of dividends and shows precisely that the marginal price of a stock drops by the amount of the dividend, meaning your premise that you can simply just sell the stock at a future date for the same price you bought it for is just not supported by the facts. Whether you hold the stock and collect multiple dividends for 10 years or 10 days, the fundamental principle is the same: a stock with a marginal price of X that pays a dividend of Y will on average decrease in price by Y. Dividends produce no change in the overall net value of a portfolio, all a dividend does is convert one form of value into another, but no increase in value is ever produced.
  - minitoar 5y ago
    Please provide an example of a stock that has a price that behaves the way you’ve described. That paper is talking specifically about ex-dividend dates, not long term behavior.
    - Kranar 5y ago
      Every stock publicly listed across all stock exchanges across the world. If you want one as a reference, you may use IBM which is listed on NYSE: https://finance.yahoo.com/quote/IBM?p=IBM https://finance.yahoo.com/quote/IBM?p=IBM
      - minitoar 5y ago
        I’ve actually held ibm stock for years, and it has paid dividends and stayed above my initial purchase price nearly the whole time. That seems to fly in the face of your claims.