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Do Dividends Pay Off?

Initial date of publishing: 2022-11-13.

Given the conditions that the company is "stable", established, and makes steady money (and will not go bankrupt) - do dividends pay off? The price of the stock falls equivalently to the payout, so why bother with dividend stocks? If our case is a long-term investor in this aforementioned "stable" company, does it make sense to be in a dividend stock?

It Depends

First off, it depends on your age and financial situation. If you are saving money for your kids (or yourself) to use in 20 years, you probably want the dividend payouts to be reinvested. But there are few or no absolute certainties. Some people consider dividend payouts as steady, passive income to be spent on daily needs, etc.

It also depends on your political climate, ie. how high taxes are on stock dividends, if this applies to your situation, meaning the investment is not inside an account that is sheltered from immediate taxation; however, in the end, upon withdrawal, taxes hit most of us mere mortals.

Key Indicators Change

Regardless of your approach, I am presenting a basic notion I conceived the other day. The notion is simply that as P/E, P/B and other indicators adjust to the new, lower price after dividend payouts - the stock suddenly seems more undervalued or more attractively priced than before the payout. Depending on news, conditions for the company, and a myriad of other factors, this could lead to the price adjusting "back up", given somewhat rational investors.

I will try to study the effect when I have a window of time and data sources available, to see how dividend stocks develop over time vs. non-dividend stocks. I'm sure extensive research has already been done - I just haven't had a chance to study it.

This does not fully explain why dividends can/could be a good idea in stocks; it was a simple thought I had about a psychological phenomenon that could be in effect on the financial markets. A kind of logic around dividends and fair pricing of an asset.

It's Not A Perfect World

Of course I don't expect a "perfect pattern" to exist out there, meaning e.g. a stock with extremities of 10 USD and 100 USD, now priced at 50 USD with a 5 USD dividend, to always fall down to 45 USD and then reach 50 USD again before the next dividend payout. But this last example serves as a highly simplified conceptualization of what I am imagining.

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