Was just doing a bit of reading to form a view on dividends, in particular for my interest in AKE. This is some I found of interest, some here might too.
In support of this theory, we know empirically that stocks with the same exposure to factors like size, value, profitability, and investment have the same average expected returns, whether they pay dividends or not. Unless you believe that the market is irreparably broken, or that capital can be created out of thin air, there is no way to argue against the fact that the distribution of a dividend results in a reduction in share value. That must be true. There is no way around it.
Dividend investors will tell you that theory does not extend to reality, and that dividend stocks do indeed do better than the market. I am not denying that dividend growth stocks have beat the market on average. But the dividends are not the reason why. Dividend stocks, particularly dividend growth stocks, have excess exposure to the value, profitability, and investment factors. That is what explains performance differences, which means the outperformance still doesn’t justify trying to pick individual stocks.
Dividend investors will also tell you that dividend-paying company managers are positively affected by their dividend policy, which spurs them to produce better long-term results. There is no basis to believe this. For this idea to generate premium returns, the whole market would need to think the company isn’t going to do well, while you believe otherwise. Then you would have to be right. Everything comes back to pricing. All else equal, for future returns to be higher, the current price needs to be “too low,” meaning that the market is mispricing stocks with good dividend policies. There is no basis to believe this is systematically happening across the stock market.
With this in mind, let’s walk through some math, starting with an example we will return to later. Let’s say you own 10,000 shares each of two companies: Company 1 pays dividends. Company 2 does not.
To keep things simple, we will assume both companies trade at their beginning book value of $10 per share. Keep in mind, following valuation theory, the market price is based on the company’s book value plus the value of its discounted future profits, discounted at some discount rate.
This needs to be crystal clear: If two companies have the same expected future profits, and the market is discounting those profits at the same rate, the two companies would be expected to have the same price relative to book value. Similarly, if two companies have the same profitability and the same relative price, they must also have the same discount rate. The discount rate is the investor’s expected return on the stock.
This relationship holds true whether or not the companies pay dividends. It is crucial to understand that we are assuming that Company 1 and Company 2 are the same size, have the same profitability, reinvest at the same rate, and trade at the same price relative to book value. To keep it simple, we also are assuming the price equals the book value.
If all of this is true, then these two companies have the same expected return.
So far, so good. Next, let’s assume the two companies, with a starting book value of $10 per share, each earned $2 per share. Your Company 1 paid a $1 per share dividend, while my Company 2 paid no dividend.
- Your Company 1: You’d still own 10,000 shares, and have received $10,000 in dividends. Your shares are now worth $11 each: the $10 starting value plus $2 in earnings minus the $1 dividend. Your total portfolio consists of $110,000 in stock, and $10,000 in cash.
- My Company 2: I’d also still own 10,000 shares, but they’d now be worth $120,000. If I needed some cash, I could sell some shares. Maybe I would create my own “dividend” equal to yours – but I don’t have to. I could sell more or less shares as needed. I am not allowing the company’s dividend policy to dictate my spending.
All of this is true whether the stock market is up or down. If the market is down and a dividend is paid, the value of the company still falls by the amount of the dividend. It has to. This is not up for discussion, unless you don’t believe in mathematics. Receiving a dividend in a down market is exactly – and I mean exactly – the same as personally selling off some shares in the same down market.
https://www.google.com/amp/s/ration...e-of-dividends-still-a-non-starter?format=amp
From my own understanding, many factors can still make dividends pros and cons for any investor.
Tax implications are a big factor. Capital gains tax and deductions are possible.
Will the Company you have shares in re-invest the profit (possible dividend payments) in a way that adds more value. I think Warren Buffet says something like, if you are being paid a dividend of $1 or the company re-invested $1, as long as the market value of the company, after, increased by more then the dollar, ie $1.10 more, it's better being re-invested.
It's important to know, again according to Buffet, he doesn't believe all companies have the ability to re-invest dividends in a way that will increase the market value by more. So some companies might be better off paying out profits.
So many factors can come into play. These are just a couple.
For the record I'm not against Dividends. Nor am I against dividend shares. But, I don't always think its wise to want them from every company. For me personally this one is one I feel wouldnt benifit me personally by paying dividends. I believe my money would grow more re-invested by this company.
This is just my opinion of course,
Gltah
