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:RJF 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 RJF investment assuming no price appreciation.
2) Without reinvestment, the value of a $100 investment in RJF.
3) The value of a $100 RJF investment if dividends were reinvested promptly.
4) The value of a $100 NASDAQ:SPY investment if dividends were reinvested promptly.
Mechanics of Dividends
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. RJF
The graph above compares how much RJF 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 RJF bar indicates the ultimate difference between the red and blue lines in the previous graph.
When looking at the price chart of RJF’s common stock, it’s clear that price appreciation alone misses out on a significant amount of value if one plans 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
