The Truth about Stock Dividends

I'm sure you all heard this quote, "there is no such thing as a free lunch”. This quote definitely holds true when it comes to dividend investing.

Every investor should love getting the proverbial dividends cheques in the mail. It's a free money, right? Why we getting it Wrong.

A company’s dividend equates depend on earnings which usually leads to stock dividends price appreciation. Don't getting me wrong, dividends are great and I love nothing more than a juicy yields. I actually like stocks that pay a dividend because it means the company makes money and investing in that company its obvious they also making money too.  However, there are a few things you need to know about stock dividends.

The truth about dividends is they come with a price. I'm sure you've heard many pundits on television say they love a company because they pay a dividend so you get paid to wait. Well, where do you think that money comes from? Did it grow on a tree? No, that money came out of the company. Why? Because a dividend is the distribution of company profits paid out to its shareholders.

When a company pays out a dividend, that money comes from the company. This money gets taken out of the company's earnings, or cash. So if XYZ Corporation trades at $10 per share and pays a quarterly dividend of $0.10 per share, this money will come out of the shares price on the ex-dividend date. Therefore, using the example above, the stock will lose $0.10 in value on the ex-dividend date. This is because money is coming from XYZ Corporation's stock market capitalization, or value, and given to shareholders.

An ex-dividend date is when a company records who owns shares of the company and at what quantity. This is often months before the company actually pays their dividend. If you own shares by that ex-dividend date, you will go on record owning shares of the company and will be paid your dividend on the scheduled dividend date.

There is also the fallacy that dividends protect investors during stock market corrections or pull backs. Stock dividends do not protect investors when a stock starts crashing. An average dividend paying company might yield about between 1% and 4 %. If you have ever spent any time with Mr. Market, you know that a 1% to 4% move is quite common for most stocks. Therefore, riding a stock down because it yields a percentage no more than a daily move is foolish. Your paltry dividend payment is not going to be any good if you ride a stock down 20%, is it?

It is also worth noting that dividend paying stocks are synonymous with established companies. Typically these stalwart companies have been around for a while and instead of reinvesting cash back into the business these corporations decide to share wealth with its investors. You could, but typically won't, achieve large stock price appreciation with dividend paying companies as you would with smaller growth stocks. These dividend paying stocks will most likely be less volatile but are in the later stages of their business cycle.

The truth is there is no such thing as a free lunch. Whether it pertain to dividend payments or simply lunch itself, always 

read into what that free lunch is costing you.