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:XYL 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 XYL that has only appreciated in value.
2) Without reinvestment, the value of a $100 investment in XYL.
3) The value of a $100 XYL 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.
When comparing the value of XYL’s reinvested dividends to those of index ETFs
The graph above compares the performance of XYL’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, for XYL, 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 article is to realize how much value is missed by simply glancing at the price chart of XYL’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
