The Dividend’s Influence
It’s easy to lose sight of what those prices signify in a world fascinated with stock price movements: the value of owning a company’s future profit potential. The dividend, which is a cash payment paid to stockholders representing a portion of a company’s retained earnings, is one of the most important ways that profit potential becomes profit actualization in an investor’s pocket. The amount of earnings a firm has left over after paying dividends to its shareholders is known as retained earnings, which is listed under the shareholder’s equity section of the balance sheet.
Before we get into why dividends are important in the long run, consider the following graph, which shows how much of a difference reinvested dividends would make in a five-year holding of NASDAQ:AVGO versus dividends held as cash and ordinary price appreciation.
Three values are plotted over a five-year period in the graph below:
1) The worth of a $100 investment in AVGO, assuming no price increases.
2) Without reinvestment, the value of a $100 investment in AVGO.
3) The value of a $100 AVGO investment if dividends were reinvested promptly.
4) The value of a $100 NASDAQ:SPY investment if dividends were reinvested promptly.
Mechanics of Dividends
It’s important to note that dividends will be declared with an ex-date. This is the deadline by which a shareholder must own a share in order to receive the dividend. Because new purchasers will not have the opportunity to receive the dividend, the effective value of each share may go down by the size of the dividend at the conclusion of trade on that day.
The stock price could rebound beyond its previous level by the time the market opens the next day, or continue to lag after the dividend rights have been paid…this unpredictability is simply attributable to broader market factors that occur on any trading day.
AVGO’s Dividend Reinvestment Value vs. Index ETFs’
The graph above compares how much AVGO dividends have returned when compared to the popular ETFs SPY and NASDAQ:QQQ (which track the components of the S&P 500 and NASDAQ 100, respectively, and pay out dividends for their underlying securities). The bars could not be lower than zero since a reinvested dividend is a fraction of a business’s share, and company shares cannot be lower than zero. It’s also worth noting that the AVGO bar indicates the ultimate difference between the red and blue lines in the previous graph.
If one examines the price chart of AVGO’s common stock, one can see that price appreciation alone misses out on a significant amount of value if one intends to own the stock for a long time. This is also true for other stocks; see all of Benzinga’s dividend statistics here (https://www.benzinga.com/calendar/dividends-ex) or in Benzinga Pro’s enhanced view./n
