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Actually, no: the whole point is the net present value (NPV) of future dividend payments. The stock rises if there is a collective expectation that the discount
by qubex 11y ago
Actually, no: the whole point is the net present value (NPV) of future dividend payments. The stock rises if there is a collective expectation that the discounted cashflows will rise. That this creates an opportunity to sell the stock at a higher price (foregoing those heightened dividend payments) is largely secondary. Bubbles occur when investors loose track of the fundamentals and focus on the second aspect you mentioned.
- klipt 11y agoDividends aren't strictly necessary - stock buybacks have the same effect of returning money to those who want it, while being superior (in terms of taxes) for those who would just reinvest dividends anyway.
- walshemj 11y agoBut its not real money in the share owners hands buy backs are bad you need to reform taxation of dividends make scrip dividends taxfree if reinvested. Of course the IB make a nice chunk of change for arranging the buy back
- TeMPOraL 11y agoIsn't it the other way around? I.e. sure, dividends are cool in principle but the actual reason people buy stocks is to sell it later, because it's a faster way to make money?
- eru 11y agoBut why would the next fool buy the shares at a higher price?
- dylanjermiah 11y agoBy this line of logic it would be a mistake to buy Microsoft shares on day 2 of trading, Apple shares on day 2, 'insert any successful company' shares when they're higher. People buy shares because they think it will be worth more in the future, they think the company will be worth more than it currently is. People buy Google at it's current market cap because they think it's going to be worth more.
- eru 11y agoAnd the ultimate value of any company is the stream of dividends it generates discounted to the present value.