If you are an investor or someone who likes to learn about different investment strategies, you have definitely come across the term “dividend”. Stock dividends are typically a portion of a company’s profits paid to shareholders on a quarterly basis. For example, chocolate company Hershey’s annual dividend is currently 2.83%. If you own Hershey stock, which sells for $193 per share as of this writing, you will receive a quarterly dividend of $1.37 per share.
Dividend investors tend to get excited about the idea of receiving consistent cash flow from their investments. After all, knowing that you can expect to receive cash equivalent to 2.83% of your investment in Hershey is pretty great, isn’t it? And Hershey doesn’t have the highest dividend. For example, Verizon’s current dividend yield is over 6%.
Still, if you believe, as I do, in Harry Markowitz’s famous adage that “diversification is the only free lunch in investing,” dividend stocks have a clear upside as well as a downside. There should be. Let’s explore.
On August 16th of this year, Hershey announced that it would pay a dividend of $1.37 per share on September 16th. On September 16, Hershey’s stock began trading at $202.32 per share. By the end of the day, the price had fallen to $200.81 per share. Meanwhile, the Dow Jones Index rose 0.6% on the day. what happened?
What happened was that the Hershey Company had a certain value when the day began. This value had to do with the company’s expected future profits, the amount of cash it held, and many other factors. On that day, September 16, Hershey paid a cash dividend of $1.37 per share to all shareholders. With more than 200 million shares outstanding, Hershey paid out approximately $275 million to shareholders that day. Immediately, the company was worth $275 million less than it was worth at the beginning of the day, and the new stock price reflected that reality.
In other words, dividends don’t magically appear out of thin air. The company must pay its expenses from its cash reserves. This dividend payment has a negative impact on the stock price four times a year.
You’re probably wondering, “So are dividend stocks a good investment?” As is often the case, the answer depends on your own investment goals and preferences. Dividend stocks tend to be mature stocks and may have slightly less volatility than other companies’ stocks. At the same time, dividend-paying companies tend not to be high-growth companies because companies spend their cash on dividends rather than investing it in growth.
If your goal is to earn a steady income, you can open an investment account with dividend stocks that will provide you with that. Alternatively, you can accomplish something similar yourself by investing in non-dividend-paying stocks and selling enough each quarter to cover payments like dividends.
The important point here is that dividend stocks are not objectively and consistently better than other stocks. I’m not aware of any evidence that dividend stocks outperform over the long term. You can use them to achieve your goals or use another method. Regardless of your decision, it’s good to know about your options.
Whether you pursue a dividend strategy or not, invest wisely and invest well.
Larry Sidney is an investment advisor principal based in Zephyr Cove. Information can be found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past performance does not guarantee future results. Please consult your financial advisor before purchasing any securities.
