Returns on Compounding
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:AMAT 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 AMAT investment assuming no price appreciation.
2) Without reinvestment, the value of a $100 investment in AMAT.
3) The value of a $100 AMAT 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.
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 AMAT’s reinvested dividends to those of index ETFs,
The graph above compares the performance of AMAT’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 AMAT, 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 post is to realize how much value is missed by simply glancing at the price chart of AMAT’s common shares if you want 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
