Returns on Compounding
It’s easy to lose sight of what those prices signify in a market fascinated with stock price movements: the value of owning a company’s future earnings potential. Dividends, which are cash or stock payments that represent a share of a business’s retained earnings, are one of the most common ways that firm earnings make their way into an investor’s wallet. 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. RE = BP + Net Income – Dividends, where BP = Retained Earnings at the start of the term.
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 NYSE:OPY 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 OPY investment assuming no price changes.
2) The value of a $100 OPY investment that has not been re-invested.
3) The value of a $100 OPY 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?
The ex-date for dividends will be declared. This is the deadline for receiving a dividend if you own a share by this date. Because anyone buying the stock now will not get the dividend, the market price of each share is likely to drop by the amount of the dividend when trading closes 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.
Reinvested Dividend Value of Index ETFs vs. OPY
The graph above compares the performance of OPY’s reinvested dividends to those 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 OPY, SPY, and QQQ, the height of each bar shows the ultimate difference between the green and red lines on the first graph.
Last but not least, what’s the goal of it all? The most important takeaway from this essay is to realize how much value is missed by simply glancing at the price chart of OPY’s common stock if one intends to own the stock for a long time. Dividends can have a significant impact. You may examine Benzinga’s dividend statistics here (https://www.benzinga.com/calendar/dividends-ex) or in Benzinga Pro’s advanced view./n
