Greg Loehr

Greg Loehr
Contributor since: 2012
Company: Options Buzz
Stop it Pete. You're hurting my feelings.
Hey! Where's my 'guaranteed' 12% yield??
"There is no profit or loss until you sell."
I disagree with that statement. If you have an "unrealized" gain or loss, then it's only you and your account that haven't realized it yet. If a stock goes down, so do your profits.
By your logic then a lot of billionaires on the Forbes list aren't really billionaires if their wealth is still held in the company's stock.
And if your house lost value over the past few years, then your net worth has dropped as well. Even though you haven't sold your house yet. Don't believe it? Then ask the bank to loan you money against your house at a value higher than what it is currently worth. They probably won't do it.
NV_Gary,
Gotcha. Thanks for clarifying.
Again, if you believe that a dividend does not reduce the value of the stock, then there are plenty of trades that you can do to lock in money - risk free. If you can make money risk free, why would you bother with anything else?
The point being that people believe that dividends make one wealthier - and the AOL article goes to the extent of "guaranteeing" a profit. Such information is not only wrong, but dangerous, to investors.
Therefore, articles like mine which show dividends for what they really are - a zero sum game - are necessary.
Once again, I'm saying that the dividend does not increase your wealth.
Every example that people use to show that dividends DO increase one's net worth comes from the stock appreciating - not from the dividend itself.
Garthilk,
No, it just won't drop when it pays out the dividend.
David,
If you suddenly got back money that you paid out years ago, wouldn't your net worth rise?
TTYL
Hmmmmm.....seems to make my point. Thank you.
Of course, it's directly related to stocks because the fund is made up of stocks, and the fund dividend comes from company dividends.
First, stocks popping on dividend announcements mean nothing. For example you find of one stocking jumping on such news, I'll bet I can find one that doesn't. It means nothing to you (or me, or anyone) unless you owned the stock going into the big "pop".
Second, large, previously unannounced dividends may prompt the OCC to adjust the strike prices lower by the amount of the dividend to keep one-half of the options market from a windfall at the expense of the other half. This adjustment has been declared in this case.
I have yet to see any of the pro-dividend commentators react to the following comments from a recent SA article:
"AOL (AOL) has been on fire the last two days, sitting at near $42/share as this was written.
The reason is simple: The company will pay a special dividend of $5.15/share. Even at $42, that's a guaranteed yield of 12% for money held in the stock for a little over a month."
These statements are not only completely false, but dangerous to anyone buying or selling the stock. Whether you label yourself a trader or an investor, the market doesn't care.
Then trade it and make money if you're right.
But after trading for one of the most respected options trading firms in the world, I'm willing to bet that option prices rarely get out of line with the pricing of a dividend.
My personal view is that dividends are neither good or bad. They are what they are, which is something that in and of itself does nothing for your bottom line.
If you reinvest the dividend, or put that capital to work elsewhere, you MIGHT make money if your stock goes up. Or you might not make money. It all depends on whether the stock goes up, not whether you receive a dividend.
If dividends truly make you wealthy, then why not just put all of your money into the biggest dividend-paying company you can find? Probably because you don't want to have another Enron, GM or C on your hands.
"...you state that this proves that dividends don't provide value to the shareholder."
Not exactly an accurate portrayal of what I'm saying. I'm saying the dividend doesn't make you wealthier. If you believe that a higher cash balance in exchange for lower equity in the stock is a 'value' to you, perhaps because you can reinvest that money, then great.
But the higher cash value in exchange for lower equity doesn't make you wealthier.
How did dividend reinvestment work in GM? How's it working in C? How'd it work in Enron - especially for the employees?
Nicely stated.
No.
(ORCL stock would have to be higher without the dividends paid, thus equalizing the return. Otherwise, your example creates money out of thin air.)
Assuming that a stock is "always" going to return to the price pre-dividend is a dangerous assumption for investors. Remember, Citigroup used to be a blue chip. Then the NYSE had to lower its de-listing threshold to $1 from $5 to keep C listed.
My only argument is this: ex-dividend does nothing to increase investor equity/net worth/profit - however one wants to say it. What happens after that is up the market.
And your net worth would remain unchanged from that dividend transaction. Precisely what is misunderstood by a lot of folks.
By the way, your math is off but I get your point.
Where do I say that dividends are negative? I'm only pointing out what they are not because far too many investors believe erroneously that dividends make one wealthier. It's always been my belief that an educated investor is better than one who is not.
Hi Oxwell,
Since you think my article was pathetic, can I include you in the folks that believe they're going to make free money by buying AOL for its special dividend?
NV_GARY,
Not sure what you mean. I understand ex-div date versus record date. Doesn't change the fair pricing of anything. If it did, people would be able to make money from it.
If one assumes two companies, each trading at $20 for example, and then assuming each company moves to $30 for example, then one is looking at apples versus apples. But if one of those companies pays a dividend, yet still moves to $30, then that stock naturally has to appreciate more than the non-dividend stock. Any outperformance is made by the fact the stock appreciates more...not from the dividend.
Doesn't matter. The dividend doesn't make anyone any money; regardless of how long one holds a stock.
Enron was a dividend-paying blue chip before it was found out to be a hoax. Investors' memories get very short.
And no, I've never done fundamental analysis as it seems that companies are prone to lying to investors. Remember that other blue chip...Lehman Brothers? Their CEO swore up and down they had no exposure to the mortgage mess; until it could no longer be hidden that they had exposure to the mortgage mess.
What this article does, as do many of the others written on the same subject, is assume that the stock automatically reverts back to the price prior to ex-dividend. If it does, then great; the investor has made money. But the money is made from the stock going back up in value. Not from the dividend.
Also, it's an assumption that the stock will go back up to the ex-dividend price. Anyone remember dividend-paying blue chip stocks such as GM and Enron.
This article is certainly nicely written. But it goes beyond the scope of my article.
So? So you make on the rise in the stock's price (regardless of the reason) and not from the dividend as so many people believe. Again, read the comments in the AOL article about "guaranteed yield."
How's the "dividend compounding" working in C?
Wow, Doc. Nothing like being misquoted.
First: "the authors questioned whether or not buying dividend stocks makes sense." I never suggested that dividend stocks go OR bad.
Second: "both authors admit that the price usually returns to the pre ex-dividend price fairly quickly." Nope. Never said it.
If you're going to link to an article I've written, at least have the decency to quote me fairly.
Greg
Chuck,
By assuming company B will be worth $30, then you're assuming that the company's stock rises more than Company A.
First, that's only an assumption. Not all dividend paying stocks necessarily go up over time.
Second, your profit in this case would come from that stock appreciation, not the dividend. If companies can give away cash, yet still have their stock price remain unchanged or grow, then that just means that some other asset the company has is growing - which raises the stock price.
"There is no question that the book value of the company drops at the moment the company transfers the dividend to its shareholders. But to extend that to a perceived necessity that the market price must drop is merely another hypothesis, unsupported by empirical evidence as far as I can see."
I don't disagree. Stocks will go up or down due to market movement. A company can pay a 2-cent dividend and this can easily be overshadowed by a 50-cent move higher on the ex-day or any day thereafter. But whatever the price is, it's going to be 2 cents lower than if the dividend had not been paid.