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 Power of the Dividend is one of the most important ways that
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 big of a difference reinvested dividends would make in a five-year holding of NYSE:CNMD versus dividends held as cash and regular price appreciation.
Three values are plotted over a five-year period in the graph below:
1) The worth of a $100 CNMD investment assuming no price appreciation.
2) Without reinvestment, the value of a $100 investment in CNMD.
3) The value of a $100 CNMD investment if dividends were reinvested promptly.
4) The value of a $100 NASDAQ:SPY investment if dividends were reinvested promptly.
What Effect Does a Dividend Have on a Stock’s Price?
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.
However, when the market reopens the next day, the stock price may rise above its previous close or continue to fall short of its previous value. This ambiguity stems from the broad market pressures that prevail on any given trading day. For example, the company’s industry could be trading up due to good news, entirely offsetting buyers’ lack of dividend rights…or, alternatively, the company’s industry could be trading down due to bad news.
When comparing the value of CNMD’s reinvested dividends to those of index ETFs,
The graph above compares the performance of CNMD’s reinvested dividends to that of the popular SPY and NASDAQ:QQQ ETFs (which track the components of the S&P 500, and NASDAQ 100, respectively, and pay out dividends for the underlying securities). The bars could not be lower than zero since a reinvested dividend is a fraction of a share of stock, and those shares cannot be lower than zero. Also, for CNMD, SPY, and QQQ, the height of each bar shows the ultimate difference between the green and red lines on the first graph.
If one examines the price chart of CNMD’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
