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 NASDAQ:RICK 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 RICK investment assuming no price appreciation.
2) Without reinvestment, the value of a $100 investment in RICK.
3) The value of a $100 RICK 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.
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 RICK’s reinvested dividends to those of index ETFs
The graph above compares the performance of RICK’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. It’s also worth noting that the height of each bar for RICK, SPY, and QQQ represents the ultimate difference between the green and red lines in the first graph.
Last but not least, what’s the goal of it all? The most important takeaway from this post is to realize how much value is missed by simply glancing at the price chart of RICK’s common stock if you plan 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
