Why are dividends so good?

[rigz]

as a newbie investor I thought that dividends were like a bonus at the end of the year.

Now that I'm watching more closely I see my mutual fund dropped yesterday a ton (while the market rose over 100 points!) and I read it was so they could distribute the dividends.

What's the point in that? They drop the fund value them give you some of the money back? And in fact I lost money on the two transactions overall because the dividend amount didn't match what I lost on my account balance.

Can someone explain the benefit of a dividend?

[Petunia 100]

as a newbie investor I thought that dividends were like a bonus at the end of the year.

Now that I'm watching more closely I see my mutual fund dropped yesterday a ton (while the market rose over 100 points!) and I read it was so they could distribute the dividends.

What's the point in that? They drop the fund value them give you some of the money back? And in fact I lost money on the two transactions overall because the dividend amount didn't match what I lost on my account balance.

Can someone explain the benefit of a dividend?

People like them for the income. Remember, your mutual fund is just passing on dividends received from the stocks it owns. It is the underlying stocks which are actually paying the dividends. The dividends received were sitting there in cash, an asset belonging to the mutual fund, contributing to the per share value. Now they have been paid out, no longer belong to the mutual fund, and so the per share value drops.

But I agree with you, total return is what counts.

[disneysteve]

I don't have time for a detailed response but make sure you aren't confusing dividends with capital gains. They aren't the same thing. The year-end distributions are typically due to capital gains primarily. Dividends are usually paid out quarterly, so there is a payout at the end of the year, but there were 3 other payouts earlier in the year. The big "hit" to the fund value comes from capital gains.

[kv968]

as a newbie investor I thought that dividends were like a bonus at the end of the year.

Now that I'm watching more closely I see my mutual fund dropped yesterday a ton (while the market rose over 100 points!) and I read it was so they could distribute the dividends.

What's the point in that? They drop the fund value them give you some of the money back? And in fact I lost money on the two transactions overall because the dividend amount didn't match what I lost on my account balance.

Can someone explain the benefit of a dividend?

Although the fund probably did distribute a dividend at the end of the year, if the fund dropped "a ton", that wasn't the dividend that did it but the capital gains built up in the fund that was distributed as DisneySteve said.

Dividends are in a sense a zero-sum game. For example, some people think they'll buy a stock at $50 that's going to pay $0.50 dividend, collect the dividend and then get out of the stock. What they fail to realize is the stock price will fall the exact amount of the dividend ($49.50) when its distributed. It may not be exact due to trading but that's what happens. So now you have $49.50 in stock and $0.50 in your account. $50 total so in a sense you're no better off except for the fact that, unless you've reinvested the dividend, you can't lose that $0.50.

Besides income as Petunia pointed out, one of the benefits of dividends are that they are usually reinvested back into the stock and/or fund thereby buying more shares which over time could greatly compound your holdings.

For example, the annual average return of the S&P 500 from Jan 1998 to July of this year without the dividends being reinvested was about 7%. However with the dividends reinvested over the same period the average annual return was 9.7%, a difference of about 2.7%/year. Just to be clear, these are average annual returns and not CAGR's but you get the idea.

Another advantage of dividends are their tax treatment. If they're "qualified dividends" (basically a stock held for 60 days or more) you're only taxed at 15% (20% if you're in the highest brackets) instead of your ordinary income level.

[Retired To Win]

...Dividends are in a sense a zero-sum game. For example, some people think they'll buy a stock at $50 that's going to pay $0.50 dividend, collect the dividend and then get out of the stock. What they fail to realize is the stock price will fall the exact amount of the dividend ($49.50) when its distributed. It may not be exact due to trading but that's what happens. So now you have $49.50 in stock and $0.50 in your account. $50 total so in a sense you're no better off except for the fact that, unless you've reinvested the dividend, you can't lose that $0.50...

Yes... and no, kv968. Most of the time, on its ex-dividend date, a dividend-paying stock's price will drop by the amount of the dividend it is going to pay. Sometimes the price drops by more than the dividend to be paid. But that price drop is temporary. As the time approaches for the next quarter's ex-dividend date, the stock's price recovers back up. And you can collect its dividend (again) and keep repeating the cycle.

OR... you can have a stock such as MEMP, which (1) pays you its quarterly dividend, (2) then a couple of weeks later has its price soar well over 10%, and (3) you are able to sell it for a nice profit after having collected its generous dividend. Which is what I just did with MEMP.

Needless to say, I think dividends are the cat's meow!

[snafu]

Being a newer investor puts you on a major learning curve. One thing that might help is to assess your tolerance for Risk. You need to be able to sleep at night. I suggest you look on-line at the top ten holdings in your particular MF as it might help ease your mind. It's smart to buy more units of your dividend fund quarterly on ex dividend day, sort of 'on sale' day. I hope you've elected to re-invest dividends to buy more shares.

[kv968]

Yes... and no, kv968. Most of the time, on its ex-dividend date, a dividend-paying stock's price will drop by the amount of the dividend it is going to pay. Sometimes the price drops by more than the dividend to be paid. But that price drop is temporary. As the time approaches for the next quarter's ex-dividend date, the stock's price recovers back up. And you can collect its dividend (again) and keep repeating the cycle.

I agree, most stocks will regain the temporary drops in price they experience after a dividend has been paid (although not all do). This could be the very next day or longer.

What I was pointing out was the dividend capture theory some people try in that they buy the stock right before the ex-dividend date, get the dividend and then are out of the stock the next day thinking they got ahead with collecting the dividend. Granted they very well could have since the stock could trade higher than the ex-dividend price on the next day and they collected the dividend so in that case they made out. However if it doesn't move up the next day and they still sell it then there was really nothing gained.