I think you responders are missing the point. I posted such a question several years ago and got similarly unsatisfactory responses.
The crux of the issue is: what does owning .000001% of Google get me, or anyone else who might buy the stock from me? Any company like Microsoft, GM or IBM currently has too much market capitalization to be a takeover target, so it’s not even worth anything that way.
So where’s the value?
Take a company like GE or Microsoft. These companies grow earnings (profits) 15-20% per year. The theoretical or fundamental value of these companies is going up by that much per year. Sooner or later, the share price generally goes up more or less in line with earnings. It’s not efficient, and can take a few years, but generally companies with good net profit growth tend to see their share prices go up. The share price usually rises much faster than the 3% dividend yield.
Fundamentally, the share price will go up if the company is “worth” more money. Companies that make more net profit every year tend to be “worth” more.
The value is that “the market” as reflected in the share price, recognizes that these companies are worth more and the price goes up.
You average dividend or yield stock might be a utility. These companies are highly regulated, generally can’t grow their business (just get more efficient at running their business), can’t set prices, etc. Basically, any idiot can look at a utility, factor in the government regulations, and say these companies are going to grow about 5% per year for the next 30 years. the dividend yield might be about 5% or slightly below the profit. If you’re lucky, the utility over 20 years will give a yield a little better than inflation and US treasuries.
Yield or dividend stocks don’t grow by definition. They return profits to the shareholders instead of investing in new things. Since they don’t invest in new things, they never make a buttload of unforseen profits. They usually don’t unexpectedly lose money. Instead they are generally safely boring investments that in a good year do slightly better than inflation and treasuries. The peace of mind that utilities usually aren’t going to see their share price plummit is the value. Of course, don’t mention cough cough PG&E cough cough to my niave (sp?) mother.
The value of non dividend stocks is that they just might go up a lot faster than inflation, treasuries and those boring dividend stocks. Take Croc’s for example, you know they guys that make those fuggly sandels out of hi-tech plastic. They don’t pay dividends. then again the stock price went from $25 to $80 in the past year.
[QUOTE=Running with Scissors]
I think you responders are missing the point. I posted such a question several years ago and got similarly unsatisfactory responses.
The crux of the issue is: what does owning .000001% of Google get me, or anyone else who might buy the stock from me? Any company like Microsoft, GM or IBM currently has too much market capitalization to be a takeover target, so it’s not even worth anything that way.
So where’s the value?
[/QUOTE]
I think some responses do “miss the point”, but only because it’s hard for people to get to the core of why people have a problem with investing in something they know is going to be worth more later. To be perfectly clear - that’s the value. You own stock with the anticipation that in the future someone will pay more for it than you paid.
A lot of investments people make aren’t tied to any future cash flows except for the one they get upon selling it. People who invest in art probably love it, but they no doubt have no plans to charge people admission to see it. As an investment they’d only see money when they sell it. In my experience, most people who buy investment homes are only interested in the sale price after they’re done. If they own it long enough to rent it, the rent largely just goes toward the mortgage. So I don’t understand why you or anyone feels companies need to pay dividends to be a good investment. Companies make even more sense, to me. I’m sure plenty of people understand why houses with no improvements and ugly art become much more valuable, but it’s even easier with companies - they build more factories, develop new products, enter new markets, and make more money. Why wouldn’t someone want to own a portion of a growing, profitable company?
If I came to you and said “Here, buy 10% of this company. They’re building a new factory, they have 4 new products in development and they’re about to expand sales to Europe and Asia. They’re not paying any dividends but in 5 years they’ll be traded on NASDAQ and you can sell your 10% for 25 times what you put in” If you believed me, would you care about the dividends? Why is it so hard to believe that those people in 5 years will pay that much because they believe the company will continue to grow and that in 5 MORE years, someone will pay them even more?
Maybe a better question would be - If you reasonably believe that in the future someone will pay you more for your stock than you paid, why do you believe you need a dividend for it to be profitable?
And finally, I don’t know why you feel a takeover would be necessary for a company to grow in value - but how many people in say, 1980 do you think would have predicted that AT&T would eventually be acquired in 2005? Nevermind that it was acquired by a baby bell that only exists because of a anti-trust settlement… but the point is stuff happens. I don`t see what it has to do with dividends, anyway.
Yes, but you’re still missing the real question: Where’s the intrinsic value? It’s certainly not in the value of real property, since if a company was ever liquidated, shareholders would get almost nothing (and that would be after the stock’s price dropped dramatically.
In other words, other than there selling it to someone who wants to pay more for the stock because the value will increase, what can I do with it? Otherwise, as scotandrsn posted earlier, it’s all just a giant pyramid scheme.
[QUOTE=China Guy]
Sooner or later, the share price generally goes up more or less in line with earnings.
[/QUOTE]
OK, and my question is why would it, if no one but the managers of the company are ever going to see a piece of those profits?
If I am to invest in in a property that will be of no value to me at all until I sell it to someone else, I have to believe that there is a reason someone down the line would pay more for it. And if the only reason they would pay more for it is to sell it even higher to someone else, THEY have to assume THAT person has a reason to buy it.
There’s only so high the price can go on reasonable speculation that there’s a richer fish out there. At some point this chain of wealthier and wealthier suckers has to have someone who will pay the highest price anyone would ever pay, and I would guess that person has to have a reason beyond being able to sell it again. If that reason is not anticipation of dividends, what is it?
[QUOTE=Running with Scissors]
Yes, but you’re still missing the real question: Where’s the intrinsic value? It’s certainly not in the value of real property, since if a company was ever liquidated, shareholders would get almost nothing (and that would be after the stock’s price dropped dramatically.
In other words, other than there selling it to someone who wants to pay more for the stock because the value will increase, what can I do with it? Otherwise, as scotandrsn posted earlier, it’s all just a giant pyramid scheme.
[/QUOTE]
Putting a monetary value on ANYTHING is a pyramid scheme under this notion.
I am so missing the point of the notion that stocks which do not pay dividends are somehow a pyramid scheme. What a dividend does is give you your earnings now. What not giving a dividend does is increase the value of the company, of which you own a share.
Company A has an initial value is 100 million dollars. You buy a 1% share for 1 million dollars. The company does not pay out a dividend and retains the earnings, using them to create even more value for the company. In ten years the company is worth 300 million dollars and the value of your share in the company is 3 million dollars.
Company B has an initial value of 100 million dollars. You buy a 1% share for 1 million dollars. The company pays a dividend and retains a smaller percentage of earnings. As a consequence the intrinsic value of the company in ten years is 200 million dollars. Your share is worth 2 million dollars. You also have in hand the money from the dividends.
Why is this confusing? The numbers may vary. The tax consequences vary. But not the concept.
Dividends generate money for you now, to use on your terms. Not paying a dividend keep money inside the company to be used on their terms to create a more valuable company. Pretty simple, really.
Of course it’s possible that the company would “liquidate” and you’d be left with nothing if it went bankrupt. It’s also possible the company would be extraordinarily successful reinvesting money it did not pay out in dividends and you would be loaded, as are many original Microsoft investors. That’s called investing in stocks. It has nothing to do with pyramid schemes.
[QUOTE=Running with Scissors]
Yes, but you’re still missing the real question: Where’s the intrinsic value? It’s certainly not in the value of real property, since if a company was ever liquidated, shareholders would get almost nothing (and that would be after the stock’s price dropped dramatically.
In other words, other than there selling it to someone who wants to pay more for the stock because the value will increase, what can I do with it? Otherwise, as scotandrsn posted earlier, it’s all just a giant pyramid scheme.
[/QUOTE]
This is misleading. Nobody ever uses the liquidation price (technically known as the book value) of a company to value anything. Market cap, the sum of the price of the stock held, is used all the time instead.
From what I’m reading, the main source of confusion here is the lack of understanding of the concept of value.
Value is not fixed. It can be created and it can be lost. It can be created in many ways, as I indicated in an earlier post. Because value can be created, growth is always possible. Because growth is always possible, future value can always increase. Because future value can always increase, stock prices can always increase.
The Dow Jones has numerous flaws as a representative of value but it’s sufficient for this basic explanation. It was around 300 just before the Great Depression, sank to almost 100, didn’t get back up to its high until 1954 and didn’t go over 1000 until 1964. (All from memory, may be off a year or so.) That doesn’t mean the average stock price rose ten times in those 35 years. Because of splits and the way the Dow incorporates dividends into its index, the average price of any individual share doesn’t change much. But it does mean that the companies had created 900% more value in those 35 years.
43 years later, the Dow is around 13300. Another 1300% rise in value has been created. That value is what has created a fundamentally richer society that could possibly have existed in 1964.
So when people say “There’s only so high the price can go on reasonable speculation that there’s a richer fish out there.” they’re missing the entire point. A pyramid scheme is limited to the actual value of the money contributed at any given point. Value, on the other hand, is unlimited. It can always grow.
Historically, value has increased far faster than inflation or the money supply or other any reference source. Stocks reflect that rise in value better than any other investment instrument. That’s why people invest in stocks. The rise in stock prices in and of themselves are the best and surest way to make money over the long term. (About 8% annually historically.) Dividends alone are a fractional part of this rise. If dividends were the only proof of worth, no sane investor would buy stocks. Why do so for Microsoft’s 1.9% when almost any other way of parking one’s money would do better?
The future is uncertain. Everything could collapse tomorrow. However, the world can’t operate that way and it is rational to assume that the world will continue along historic paths for the foreseeable future. In that foreseeable future, there is no bar to value consistently increasing, and doing so at historic rates of growth. Since, once again, stocks represent a net worth approximation of future value, there is no reason to not assume that stock values will continue to increase.
Then why sell a stock? Many reasons. The rise is value is never smooth. The relative worth of investments continually differ. Money may be needed for other immediate needs. At that point other people can step in and make a rational valuation of a stock’s price and decide that the future is still acceptably high. As long as value can grow unlimited this can be a correct decision. There is no known future in which this will not a be a correct and rational decision.
In the unknown future you can argue that the entire earth will become limited and constraints on value will appear. At that time the stock market may collapse. Until then, however, all talk of pyramid schemes is simply wrong.
[QUOTE=Exapno Mapcase]
So when people say “There’s only so high the price can go on reasonable speculation that there’s a richer fish out there.” they’re missing the entire point. A pyramid scheme is limited to the actual value of the money contributed at any given point. Value, on the other hand, is unlimited. It can always grow.
[/QUOTE]
I’ll grant you that the specific semantics of the term “pyramid scheme” are in error here.
But my question is still not answered. Certainly the company can keep doing things that increase profits. But if the profits never materialize in the hands of the shareholders, whence their perception of the value of the stock?
Certainly, if the company keeps increasing profits, there may in fact continually be a higher payor who buys in anticipation of and even higher payor down the line, but what is the actual real value of the dividend-impaired stock to the person who winds up having paid more than anyone else for it when the company’s profits turn begin a downward trend or some other event occurs that brings the stock price down?
[QUOTE=scotandrsn]
I’ll grant you that the specific semantics of the term “pyramid scheme” are in error here.
But my question is still not answered. Certainly the company can keep doing things that increase profits. But if the profits never materialize in the hands of the shareholders, whence their perception of the value of the stock?
Certainly, if the company keeps increasing profits, there may in fact continually be a higher payor who buys in anticipation of and even higher payor down the line, but what is the actual real value of the dividend-impaired stock to the person who winds up having paid more than anyone else for it when the company’s profits turn begin a downward trend or some other event occurs that brings the stock price down?
[/QUOTE]
For all intents and purposes, you are correct. It is a house of cards; stocks have no value or utility outside of their capability of being sold again later. They are a purely imaginary commodity which is traded simply for the sake of trading something.
I, and several other posters, have outline reasons why people might still want to own stocks. Those posts are above. Certainly, many people are missing the point here, but some of us do get what you’re saying and have provided answers.
[QUOTE=scotandrsn]
But my question is still not answered. Certainly the company can keep doing things that increase profits. But if the profits never materialize in the hands of the shareholders, whence their perception of the value of the stock?
[/quote]
This point has been stated repeatedly in this thread and elsewhere. If the company has profits, then it can
A: Pay dividends,
B: Use that cash to buy stuff,
C: Do both
If you own shares in a company, you own a fraction of everything the company owns. If the company books record profits and buys a fancy new party boat, you own a share of that boat. That means you owned more than you did before. Hence the value of your share has increased. This is reflected in the fact that a potential buyer is now willing to pay you more cash for the share than before.
[QUOTE=scotandrsn]
I’ll grant you that the specific semantics of the term “pyramid scheme” are in error here.
But my question is still not answered. Certainly the company can keep doing things that increase profits. But if the profits never materialize in the hands of the shareholders, whence their perception of the value of the stock?
Certainly, if the company keeps increasing profits, there may in fact continually be a higher payor who buys in anticipation of and even higher payor down the line, but what is the actual real value of the dividend-impaired stock to the person who winds up having paid more than anyone else for it when the company’s profits turn begin a downward trend or some other event occurs that brings the stock price down?
[/QUOTE]
It is true that the “perception of the value of the stock” is somewhat artificial. It is not, for instance, the liquidation value of selling every physical asset. It is tied to things like predictions of future earnings, and perception of risk for that market segment and so on, as well as current assets.
It is also true that dividends paid out from a company whose stock price dropped during your period of ownership offset your net loss…
You seem to be making an argument that because this is possible, one should buy stocks that pay a dividend, thus giving partial protection from a stock price downturn.
The absence of a dividend is factored into the stock price along with many other variables. If profits never materialize, the price of the stock will drop, independent of whether it paid a dividend. What’s your point? That you would have been better off if the company that lost value had paid you a dividend? If you think you can make more money with your dividend money than the company can make by retaining the dividend money, don’t buy the stock in the first place. The only reason to buy a share of a company is the belief that you can make more money there than elsewhere. It’s very foolish investing to buy stock in a company with a poor business model hoping for a greater fool to take it off your hands. Such an assumption that stocks are, in fact, a pyramid scheme with greater fools always available to take them off your hands will leave you poor. That doesn’t have anything to do with dividends.
I would say most folks who buy stocks that pay dividends do so for reasons like needing a current income stream. Many dividend-paying stocks also tend to be fairly steady stocks in fairly standardizable niches such as public utilities. These are more attractive to risk-averse investors, and investors whose timeline to cash out is narrower (older folks, e.g.).
Recommended reading: the posts from Exapno Mapcase, above. If they don’t make it clear I’m afraid you are doomed to not understand it.
Myself:
Mapcase:
I would like to reiterate “dividend growth”, though. The people who tout this strategy may have a point for long term investors, although it is a conservative strategy. You might consider MSFT’s dividend very important if you thought that MSFT was committed to constantly increasing dividends as they increased earnings. It does not fall into this category, but a company like GE, JNJ, PG, K or HRL does. It’s not so much that PG’s 2.2% yield is a massive return in and of itself, but you believe that PG’s history of nudging up their dividend is going to continue, the share price will nudge up with it in the long term. Note that you are STILL investing in hopes of increased valuation, NOT to get a lot of return out of the dividend itself. In essence, you are saying “honest, well run companies pay dividends, and if they make larger profits, they will pay bigger dividends”. You then go and look for companies with a good track record of rising dividends, NOT for companies which pay huge yields (here be dragons, generally, until you know WHY they’re paying the big yield). There are worse strategies, and somebody who did this for the very long term probably did OK by buying into a bunch of blue chips, and having their portfolio value double every 8 or 10 years. They missed picking up high flying growth stocks that doubled practically overnight, but they also missed them cratering overnight. Like I said, it’s a conservative strategy with some merit and a large comfort zone.
[QUOTE=Running with Scissors]
Yes, but you’re still missing the real question: Where’s the intrinsic value? It’s certainly not in the value of real property, since if a company was ever liquidated, shareholders would get almost nothing (and that would be after the stock’s price dropped dramatically.
[/QUOTE]
What’s the “intrinsic” value of anything? Why is an empty vacant lot in Manhattan worth millions? It’s just dirt and broken bottles. It’s valuable because of it’s potential.
A stock represents actual ownership in a company. You own a share of GE or Microsoft, you own 1/x millionth of that company. The total value of all outstanding shares (market capitalization) represents what the world at large belives to be the value of that company?
So how does one value a company?
Well you could take the value of all the companies assets (facilities, equipment, vehicles, etc). That really only works with defunct companies though. Valueing just the assets doesn’t take into account the fact that those assets produce something. It also doesn’t account for intangilbles like the companies brand or intellectual property.
Another method of figuring out the value of a company is to take the present value (inflation adjusted value) of all the cashflows that company is expected to produce into the future.
The stock market is different from pyramid scheme in that the company has intrinsic value as a going concern. The fortunes of the shareholders are tied to the fortunes of the company.
[QUOTE=scotandrsn]
Certainly, if the company keeps increasing profits, there may in fact continually be a higher payor who buys in anticipation of and even higher payor down the line, but what is the actual real value of the dividend-impaired stock to the person who winds up having paid more than anyone else for it when the company’s profits turn begin a downward trend or some other event occurs that brings the stock price down?
[/QUOTE]
Pretty much exactly the same as the real value of a stock that pays dividends and is bought at its high.
Say you buy a stock at its high and hold it for five years. In those five years it loses 50% of its value. If they pay out 2% in dividends over those five years then you still have a massive negative return on your investment. It may be slightly better than if they hadn’t paid out dividends, but the difference is marginal. And that’s not mentioning the obvious fact that a company losing half its value is unlikely to be paying out dividends.
As Chief Pedant pointed out, the price of a stock already includes a valuation of its dividends, so any changes will already have that factored in. And as both he and yabob note, a conservative investment strategy can use dividend payments as an income source but that is a totally different issue than the value of stock prices.
The problem with the dividend strategy is that it is 2007 and not 1957. In 1957 there were few investment strategies available to the non-wealthy that paid more than a percent or two a year. Bank savings accounts were low-interest. CDs and other higher-yielding cash storage systems had yet to be invested or were not available at the local bank. The two main sources of reliable income streams were bonds and dividends. Municipal and government bonds tended to require high initial investments. Savings bonds could be purchased for as little as three-quarters of $25 but took years to reach maturity. Stocks were seen as a way of achieving a better percentage return for less initial investment than bonds. Very few people actually owned stocks, however. Those who invested in them invested either in the bluest blue chips or in widows and orphans stocks like utilities which, since they were regulated by government, could guarantee a return.
None of that is true today. There are a huge number of investment strategies available to the average person. Mutual funds, 401-Ks and their equivalents, IRAs, CDs and money market funds and many other strategies allow for pooling of individual small scale investments to receive the same higher returns that once were only available to the very rich. Businesses are less secure. The once huge industrials have vanished or transformed. The blue chips now include Wal-Mart. Utilities have been deregulated and cannot guarantee high returns.
In short, dividends were once important only to the extent that they allowed a reasonable return for investments in a world with limited other choices. They never were important for themselves, only as an alternative. The very rich could always speculate in stocks and this speculation was always the largest and most important factor in a stock’s price.
Today, when other alternatives abound, every investor can act like the rich. Dividends have been revealed to be the minor factor that they always were. Valuation based on total information about the company, not just current profits, is the driving force behind stock prices.
I can’t say it any clearer. Dividends say nothing about a company and mean nothing about a company. Whether a company decides to pay out dividends or keep the money for investment or purchases is a factor that is used as part of the total information package, but a decision not to pay out dividends may say nothing negative whatsoever about a company. Stocks can be picked on the basis of whether they pay dividends - there is some evidence that these stocks do grow faster - but the absolute returns paid on dividends is only reflective of other factors in the valuation of the company rather than meaningful in itself. Stock prices are a measure of overall value.
Are stock prices real? Only in the sense that the piece of rag cloth issued by the government as money is real. We know that money fluctuates in value every moment by comparing it to other currencies. Stocks have far higher volatility than money but their value is determined in exactly the same way. You can say that neither one is real, but to do so is to negate everything we understand about modern real world economics. Representational value is the only reality there is. Nothing has an intrinsic value. Nothing. The value of anything is what people are willing to pay for it. As long as this is true, stock prices follow naturally and inevitably.
As I’ve said before, value is the core principle of economics. If you don’t understand it then you cannot understand any aspect of the real world economy. Once you do, much that seems odd or obscure clears up magically.
Look, I don’t know how much clearer I can make this. It’s not as though I’m down on stocks. I have a 401K that invests in them. I’m just trying to understand.
A company issues stock, and I buy it. Part of the assets of the company are mine. I also own my share of any profit the company shows. I get it.
If, as the company becomes profitable, and I’m twiddling my thumbs waiting for the company’s managers to decide how much of the profit will be released as dividends and how much will be re-invested in operations, I notice another soul who wants part of the profits, and is willing to pay more than I did for some shares because the company is more profitable, an amount which is more than my likely dividend, it may make more financial sense in certain cases for me to simply sell my shares to that person and go on my merry way. I get that too.
It may in fact be the case that my motivation for buying in the first place was that I anticipated being able sell higher, and that may be the motivation of my buyer as well. I get that too. But I emphasize that the desire to get a share of the profits is not gone, it is simply projected onto some future potential buyer.
Until we get to the case where the company never releases dividends, and every single person transacting shares of that company is aware that it has not happened and is not likely to. Once we get there, it’s turtles all the way down, and the company’s name may as well not be on any paperwork, because without someone’s belief that they will eventually share in it, any connection between the price of the stock and the company’s profitability (a conecpt repeated umpteen times in this thread, yes I read it) is illusory, a selling point to catch suckers, IMO. It’s simply people buying a worthless piece of paper on the gamble that they can find someone dumb enough to pay even more for it.
I thank WoodenTaco for making the first post I’ve read in this or any similar thread that admits to this, although even a “house of cards” is built on something, unlike the scenario above.
But I would be the first to admit I don’t know anything about this, which is why I put forth the example of someone paying high just before the stock price tumbles, simply to show that there must be a bottom this thing, a last buyer who can not expect to profit from the sale of the shares. Either that person knew they couldn’t turn a profit and knows some way that I don’t know of other than dividends to profit from owning a piece of a company that does not issue them, or they didn’t know and the whole business of buying and selling shares in a company that does not pay dividends is just a big game of hot potato, and the highest paying buyer is simply the one who loses.
So I’m just trying to understand, which is it? I think WoodenTaco has gven me the answer.
There are two competing interpretations of value in this thread. The first, presented by the OP and a few others, is that value is based on utility, that something is valuable if I can derive some sort of use from it.
The other, most clearly advocated by Exapno, is that the value of something is whatever you can sell it for - that “Everything is worth what it’s purchaser will pay.” In this view, the actual utility of something has no relevance to its value. Value is a constructed system of buyers and sellers which operates independently of what anyone actually wants to use an object for.
In the first view, that utility constructs value, stocks are indeed useless beyond their capability of being sold. In the second view, that the market itself constructs value, one should buy stocks in the hope of selling them later because their value might increase.
If you are on either side of this debate, the problem is simply that you are operating exclusively within your own interpretation of value. If you see the other side’s understanding in this regard, you will see their position on stocks.
[QUOTE=Running with Scissors]
Yes, but you’re still missing the real question: Where’s the intrinsic value? It’s certainly not in the value of real property, since if a company was ever liquidated, shareholders would get almost nothing (and that would be after the stock’s price dropped dramatically.
In other words, other than there selling it to someone who wants to pay more for the stock because the value will increase, what can I do with it? Otherwise, as scotandrsn posted earlier, it’s all just a giant pyramid scheme.
[/QUOTE]
Besides receiving dividends eventually, there are two other ways that shareholders can get cash out of the business:
First, if the company has a stock buyback program. Second, if somebody buys the company for cash.
If the company is successful, at least one of those 3 things is bound to happen eventually: dividends; stock buyback; or buyout.
Yes, you might have to wait a long time, but so what? It’s like the 85 year old woman who asks why her money is being invested in 30 year treasury bonds. As long as there is an expectancy of an eventual payout, there will be plenty of buyers in the meantime.
[QUOTE=scotandrsn]
But I would be the first to admit I don’t know anything about this, which is why I put forth the example of someone paying high just before the stock price tumbles, simply to show that there must be a bottom this thing, a last buyer who can not expect to profit from the sale of the shares. Either that person knew they couldn’t turn a profit and knows some way that I don’t know of other than dividends to profit from owning a piece of a company that does not issue them, or they didn’t know and the whole business of buying and selling shares in a company that does not pay dividends is just a big game of hot potato, and the highest paying buyer is simply the one who loses.
[/QUOTE]
Nobody knows anything about the future.
And yet we must live there, in the sense that every second that passes takes us into that future. How then to run a world on the basis of such uncertainty?
In the way that WoodenTaco phrases it, some people look to the past (or present) for reassurance. You want the solid comfort of knowing that profits in the past have been x, therefore you will get a share of them now in the present as y dividends.
Modern economics as reflected in the stock market says that such a view is constricted, that we can use a multitude of factors to predict a rational view of the future. The major factor is such a determination is not past profits but projected future growth. A stock price is the present value of projected growth. Dividends play only as much a part in this calculation as needed to provide one of the many factors that influences growth.
Again, the future is entirely unknown. There are millions of factors to consider and some factors are simply unknowable. Rational investors can come up with millions of rational futures, each different but plausible. Therefore it is possible for a rational investor to look at a stock whose price is currently high and make a rational decision not to sell it because the price could go higher yet. Sometimes they are wrong. Sometimes, however, they do make money. You cannot talk about a stock price in hindsight and say that it was obvious that it was at its high. At the time no human could possibly have known that. If you buy a stock at 400 and sell it at 425, it doesn’t make any difference that it would go to 500, or that it would later go to 65. You made a deal based on your best estimation of the situation at your current instant. How else would you buy a stock? What use is it to say that you should buy a stock at $100 that pays a 2% dividend? Those are old numbers. They may change by next quarter. There may not be any dividend at all. What then? Should you sell the stock? What if its price is going up? What information do you use to make your decision if all you look at is the past?
(It is obviously true that some investors are not at all rational and make no logical calculation of value. Oddly, this doesn’t change any of the foregoing.)
We’re back at the concept of value. Which I repeat you don’t understand. Talk of turtles all the way down and stocks as worthless pieces of paper prove that. Both of those statements implicitly use the concept of intrinsic value. But there’s no such thing.
A stock is a worthless piece of paper even if it pays dividends. How does the stock price reflect the dividend pay-out? It doesn’t. The dividend pay-out is a separate thing, irrelevant of the stock price. You are trying to use stocks as a bank savings account, expecting to put your money in and get more out. Well, how does that magic happen even with a bank? The bank takes your savings and loans it out with interest and does it to an average of five people. That’s right. The bank can take your $5000 deposit and loan five people $5000 each. It can do so because it can be fairly sure that you won’t ask for all your money before it gets sufficient payments back to cover it. The bank has magically made $20,000 of value appear, plus enough extra to pay you your interest and pay its own expenses and maybe pay out some dividends to the stockholders.
What’s the proper price of the bank stock because of this? You can’t say from the above example. It varies from a million factors that have little to do with the money that the loanees are paying back. And if the bank sees that the housing market has changed and can start making subprime loans at high interest, then a rational investor would pay more today for its stock even before the money starts rolling in.
Stocks have no intrinsic value. They are worthless pieces of paper. But absolutely everything is a worthless piece of paper that somebody has put a price on. Shirts, web design, gold, book advances, movie tickets, airline seats, the SDMB.
Should we worry that because all prices are arbitrary that everything could fall apart tomorrow? Yes, we should. It is a rational fear because there are examples in all times and places, from depressions to wars to natural disasters. It’s how we should act on that rational fear that shapes society.
On the individual level we can buy guns, stockpile foods, and dig bunkers. On the national level we can build up a military.
But both of these things are extremely expensive and money spent on them is totally wasted if the catastrophe doesn’t come.
It is just as rational to assume that we, here today in the U.S. and most of the rest of the west, are in fairly stable circumstances in which the future will not be horrible every-man-for-himself dystopias but more of the same prosperity.
It is exactly that rational assumption that puts a base to the turtles. It’s what makes money worth something - and worth almost exactly the same tomorrow. And it’s what puts a value to stock prices and makes their rise (as a whole, over time, with fluctuations) a viable picture of a rosy future rather than an untrustworthy floundering based on nothingness.
It could be wrong. However, it hasn’t really been wrong in this country since 1940.
And please don’t call it faith. It’s a rational conclusion based on evidence. It may turn out to be wrong, but one can say that about any decision. As long as the future is unknown, all decision-making must proceed in this way. As a whole, it works. YMMV as an individual.
It’s also true that if the market capitalization (total value of all stocks) ever fell below the actual liquidation value of the company’s physical assets, there would be an immediate buyout. So the “real” value of the company forms a floor below which the stock price can’t practically fall.
I participated in a recent thread on this subject. My conclusion was that the value of the stock really is tied to the value of the company, but very loosely. I think of it as similar to the relationship of the government to the monarchy in the UK as Polycarp has often described it: In theory, all of the powers of the government originate in the monarch and are exercised on her behalf. In practice, the monarch has just precisely enough power to keep the whole system from collapsing and no more. (It’s not a perfect analogy, but I like it.)
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It’s also true that if the market capitalization (total value of all stocks) ever fell below the actual liquidation value of the company’s physical assets, there would be an immediate buyout. So the “real” value of the company forms a floor below which the stock price can’t practically fall.
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This is mostly true, but comes with a pile of caveats.
Unless I’m badly misremembering, GM’s market cap, which is a mere $17.26 billion, is below its liquidation value. The problem, of course, is that GM also comes with staggering debt and health and pension liabilities, is mostly worthless if not connected into a coherent whole, and is too big to be reasonably purchased as a whole given its liabilities.
And it’s been paying quarterly dividends for as far back as I can track. Certainly since its stock price was twice what it is now. You could buy it for its dividends, I suppose, but that’s the weirdest way of making money ever invented.