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. RE = BP + Net Income – Dividends is the formula for calculating retained earnings. Where BP stands for Retained Earnings at the start of the term. Revenue – Expenses = Net Income
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:BBY 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 BBY that has only appreciated in value.
2) Without reinvestment, the value of a $100 investment in BBY.
3) The value of a $100 BBY investment if dividends were reinvested immediately.
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 BBY’s reinvested dividends to those of index ETFs
The graph above compares how much BBY dividends have been reinvested vs 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 BBY bar reflects the ultimate difference between the red and blue lines in the previous 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 BBY’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
