OK so lets say I by a $10 stock that pays a 20 cent dividend. In order to pay the dividend, stocks are sold which reduces the stock price. So instead of owning a $10 stock, I might own a $9.80 stock and get 20 cents on the side. How is this any different than me selling 2% of my stock at $10?
I believe dividends are paid out of profits/cash flow, not by issuing new stock and diluting existing shareholders (if that’s what you mean by ‘stocks are sold’).
[quote=evolusd]I believe dividends are paid out of profits/cash flow, not by issuing new stock and diluting existing shareholders (if that’s what you mean by ‘stocks are sold’).[/quote]
Correct, dividends are typically paid out of retained profits, but the effect on share price should be reflected by a corresponding drop in market cap and hence the share price (in a perfect market.) That’s why you’ll typically see share prices drop the day the go ex-dividend.
Say, there’s probably a much better explanation of this online somewhere, but if you cant be arsed to google it, mm, neither can I..
I read that many companies sell their private stock to pay the dividend, I guess it depends on if they have cash on hand or not. From what I hear most companies are cash strapped as they have over extended themselves with the low interest rates that have been around. Kinda a mute point since so many companies don’t pay a dividend anymore.
if you are going to play with dividends, perhaps you should consider higher quality preferred shares like VZA or similar.
The issue with counting on dividends for common shares is that if the company sustains a huge financial setback, that dividend payment gets cut big time.
For example, it happened with CHK, Mattel, and more recently GE, and soon to happen with PG&E.
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