Introduction Dividends Are An Important Source Of Wealth
Dividends are paid out of cash flow and/or earnings, not stock price volatility. Stocks (companies) declare a dividend record date which is the date you must be on the company’s books as a shareholder to receive the dividend. The company also sets the ex-dividend date based on stock exchange rules. The ex-dividend date for stocks is usually one business day before the record date. Therefore, if you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller who theoretically owned the stock during the dividend accrual period is paid the dividend.
Consequently, there are a lot of people and even academics who want to argue that the dividend reduces the value of the company. I contend that is hogwash. In fact, the dividend is more likely to increase the value of the company than it is to decrease the value of the company. In the video I will explain that in more detail. It is true that the stock’s price will drop by the amount of dividend when it is paid, but that does not reduce the value of the business. This only temporarily changes the price, which is also volatile and will continue to trade going forward.
In the long run the price will be driven by the fundamental growth of the business. The growth of the business’ earnings and cash flows are the source of the dividend. And the dividend for best-of-breed companies will grow as the business grows.