Not necessarily. For example Dividend Aristocrats and Dividend Kings are more worried about basing their dividend on the last dividend amount than profit percentages. Second, dividends are determined by earnings and paid out of profits … but you can pay dividends even with no profit.
What definition are you using because I think you are over-complicating it because you’ve already claimed (and retracted) that it is based on the share price on the ex div date.
Can I continue this tomorrow?
Basically if implementing certain dividend strategies, a company is trying to make itself more attractive to buyers, yes? Im not critiquing strategies either way. I suppose we could then discuss share buybacks and ethics involved? I dont have an opinion.
Note, Im considering the two groups you mentioned, not companies that pay dividends in general.
Ill add I do appreciate the “youre wrong” follow ups.
Ok, it’s tomorrow.
I interpreted whack a mole’s post to mean that someone is paid based on how many shares they own, rather than a percent (or dollar amount per share) per share, so it seemed that the more shares one owns, the greater dividend they receive, but it should be a fixed amount paid per share.
The dividend is set by directors as an amount per share, (still a ratio right?) but not really presented as a percent, so you are right
I guess the key point is that dividends are typically the share of the profits but basically are the corporation distributing cash. The key point is that each share, being an equal “share” (piece) of the corporation gets the same amount. (Like every rule - exceptions - sometimes there is a class of “preferred” shares that get first dibs, etc.) Once you’re an actual corporation, you cannot for example decide to simply give Musk or Bezos a big chunk of the profits and the heck with everyone else. (Unless it’s their paycheque for acting as an employee, which has to be decided on by the board, yada yada…)
Also, share price nowadays is indicative of the health of the corporation. Most companies run on a line of credit, so an indication that the market thinks your company is doing poorly will reflect onto how bankers treat you, interest rate on loans, etc. (Line of credit, because a company that accumulates too much cash or liquid assets is a sitting duck for a takeover. Read Barbarians at the Gate, or consider A&P or Greyhound, who for historical reasons owned chunks of real estate in downtowns worth more that what they were listed on the books as, so ripe for takeover and sell-off of undervalued assets. )
Also, a company may want to issue more shares, say to raise money for a new factory. If the market does not like their shares, that would be harder to do.
Of course, it’s not just a matter of “Do we feel like paying dividends?”. The company (unless it’s failing badly) is getting money in, and then it’s deciding what to do with it. One option, of course, is just “sit on it”, but except in very unusual economic times, that’s usually a bad choice. The big choices are usually either to pay dividends to the shareholders, or to expand the company in some way (building more factories, buying other companies, etc.). If the company expands, then the share price probably will go up (unless something weird is going on, or people suspect that something weird is or will be going on), not on the greater-fool principle, but because the company really is worth more because it has more factories or whatever.
He’s not wrong. The amount per share is the same for everyone but you get paid based on yout total shares.
Dividend = $1.50 / share
Shares owned = 1000 shares
Amount paid = 1.50 x 1000 = $1500
Ratio of what and what?
One other option is for companies to buy back shares of their stock. There are times when that makes sense.
I interpreted their comment as someone receiving a higher dividend based on the amount of shares they own. The check is higher if someone owns more, but the dividend stays the same no matter how many shares they own. If I own 100 or 10000 shares, the dividend is still $1.5 per share. If you’d like to say I interpreted it wrong, I don’t care.
The ratio is the amount e.g $.5 : 1 share
Just clarifying as the statement was ambiguous re: dividend amount vs total amount as you picked up on.
I’m wondering whether the extensive answers have been helpful to the OP. @HeyHomie are you understanding rhe discussion?
but more common than you think! Companies don’t want their stock to go down. Companies known for paying big dividends may continue to pay such dividends even when the economics suggest they should retain more of their cash, since reducing dividends often then results in reduced stock price.
Yes, very much so, thank you.
Don’t thank me; I haven’t contributed, mostly because it’s a big, open ended question.
It all ties into the fact that stock price is all about perception.
Paying a dividend “should” be a completely neutral operation. For example: say a $100M company decides to pay a $1M dividend (1% of the company’s value). You own a single $100 share. On the day the dividend is paid, your share price should decrease to $99, because the company just gave away 1% of its value. But you got a dividend of $1 to compensate, so really you haven’t gained or lost anything.
That’s how it would work if everything was perfectly rational. And probably on average that’s true. But in any individual case, it usually doesn’t end up quite so even. Because paying a dividend is a signal for the fortunes of the company. Exactly what that signal means depends on the circumstances. Maybe it signals that the company is out of ideas, out of its growth phase, and can’t think of anything to do with the cash other than pay off investors. Or it might be a signal that the company is now a respectable, profitable, institution that can afford to pay a dividend. Or it might be a signal that the company is trying to prop up the stock price by bribing investors. Could be almost anything. Depends entirely on the expectations of the company by the investors.
Midwestern politeness, what can I say?
Of the approximately 500 firms in the S&P 500, over 400 of them pay dividends. Cite. The S&P 500 is about 86% of the total stock market. [1]
So a lot of firms pay dividends. Assuming investor rationality, purchases of a stock are done for the sake of current and future dividends. You might prefer a tech firm to invest in itself rather than pay out dividends, but once it transitions to the cash cow stage, you anticipate some concrete cash flow from your investment. Unlike bank interest, dividend payments tend to grow over time on a per share basis. So a paltry 1.25% dividend yield should not be directly compared to a 4% return on treasury securities, because the former will grow (you hope) while the latter will not. There are formulas for comparing the two.
The existence of meme stocks blows the previous paragraph out of the water. Also if a firm postpones dividend payments, that acts as a kind of tax shelter for the investor, which is part of the reason why growth stocks (which tend to pay lower dividends) retain their popularity. So the previous paragraph is simplified, but I think it’s a decent starting point.
[1] In terms of stock market capitalization as measured by the FT Wilshire 5000 : 50.7/59.2 = .86.
That’s the part I’m hazy on.
A company issues stock so it can, say, buy the machinery it needs to grind out widgets. The machinery is bought, the widgets are made and sold at a profit. The profit is used to buy the materials to make more widgets, pay the workers at the company from floor-sweeper to CEO, pay interest and principal on any debt incurred, and research how to make new and improved so it can stay competitive in the cut-throat widget business.
If after all this there’s some left over it gets distributed to the stock shareholders. If there’s none the shareholders get mad, sell off their stock, and the price goes down.
So what? The company got the money it needed to make the widgets with the IPO. If that was ten bucks a share and now the stock is two, how does that effect making widgets? In fact. if dividends are declared that are more than the profits, like a starving man, muscle is sacrificed to keep the body going until there’s none left and he dies.
Companies don’t want anything. The owners of the company want things. And the owners of the company want what they own to remain valuable, because there’s no sense in owning it if you might not decide to sell it some day.
Chronus got it right. In the simplest models, companies only care about profits. If the CEO isn’t sufficiently attuned to his shareholders, the board of directors will replace him. (Decades ago, CEOs used to believe they balanced the interests of various stakeholders so the monocausal profit model isn’t written in stone.)
If you want to expand your production of widgets, you will need more investment funds either through loans, bonds sales, or additional stock sales. Regardless, your quarterly profit reports (semi-annual outside the US) will be reviewed.
So does the stock price affect the amount of future purchases of capital equipment? Empirical studies say yes, but not that much. The stock price is more than a sideshow when predicting corporate investment, but it’s very far from center stage. I opine that the stock market gets way way more coverage than it should for those who care about the broad economy. But it’s good for evergreen news stories, because it changes by the minute.