The Dividend’s Influence
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:OFLX 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 OFLX, assuming no price changes.
2) The value of a $100 investment in OFLX that has not been re-invested.
3) The value of a $100 OFLX 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.
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.
The Value of OFLX’s Reinvested Dividends vs. Index ETFs
The graph above compares the performance of OFLX’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, the height of each bar in the first graph for OFLX, SPY, and QQQ represents the final difference between the green and red lines.
If one examines the price chart of OFLX’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
