Stocks without dividends?

[Guppies]

meditate - The first book I ever "read" on the stock market was "The Intelligent Investor". I put read in quotation marks because I got about halfway through and realized that the majority of the information was flying over my head. So I put that aside and read a couple of personal finance books ("Rich Dad, Poor Dad" and "Automatic Millionaire"). I'm about to finish "A Random Walk Down Wall Street" and then I'm gonna go back to "The Intelligent Investor" and read that for real this time. If you, or anyone else for that matter, has some good suggestions for books to read after that I would really appreciate it.

By the way, this thread has been really informative, thanks to everyone for taking the time to talk the subject out.

[Korch]

Dividends or not, the company has value because it (hopefully) makes money. Since you can buy all the stock and own the company, you can be assured, dividends or not, that the stock has value.

[Sand]

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Once you are more familiar with the concept of compound interest, you will find that you really don't want a company with a high dividend payout rate- this generally indicates that they are past their growth stages and need little money to expand their business further. While this may seem like a good thing, you really want a company that is increasing their earnings by 15-20% per year- NOT 5%. Most companies that can sustain this type of growth need to retain their earnings and throw them back into the business to hire new employees, buy more hotels, and make sure they have some spare get out of jail free cards lying around.


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A company growing at 5% per year and paying out a healthy dividend is nothing to sniff at. In fact over the last many years these boring dividend issuing companies have done extremely well as a whole. A decent bit of my balanced portfolio concentrates on healthy dividend companies.

A snall item overlooked in the dividend versus reinvestment debate is the effect of stock options. It is all good and well to think that the company you are invested in is making wise decisions and will do better with your money than you will (which I disagree with for the most part, BTW). Many companies these days use stock buybacks to keep their float stable after issuing a large amount of stock options to employees/executives. So it LOOKS like you are getting a good deal, but in effect the investor is losing value repeatedly (since these buybacks aren't generally timed for maximum effect).

A dividend is much more transparent. There is a lot to be said for cold hard cash slid over your way rather than a promise to manage your stake in the company well.

[Scorpion Man]

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Also a minor nit. There was a previous example about a company paying out a $5 dividend, and trading for $5 less afterwards. In reality it would probably trade around $4 less after the dividend, because of tax effects. Taxes on a $5 dividend are between 75 cents and $1.20, depending upon your state. So typically you will see the market reduce the price by the amount of the after tax distribution.

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Disagree. Not in my experience. The market makers, for example, in an NYSE stock will use an anchor the full $5 down the next day, not some theoretical tax effected rate. There is a simple reason for this. It does not matter that you don't get the full $5 of value from the dividend...what is relevant is that the company does LOSE the whole $5 in value from the dividend. THere are many, many participants in the market that do not pay US taxes and all sorts of fancy trades that get done around dividends to protect from taxes.

It is possible that a stock will adjust for some of these tax issues upon dividend ANNOUNCEMENT (not payment). Although again, in my experience, it does not work this way...if anything the stocks tend to go up rather than down on these announcements. There is no theoretical or practical reason for it to work as you mention on the ex-dividend day.

[ahnuld]

Scorpion man, whatever you may think you see, any rational person would only pay 3$ more the day before ex-dividend if that is the cash in their pocket afterwards. If div. declared is 5$ it tends to drop 3$ (or wtv. tax rate is) when it is ex div.

[Scorpion Man]

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Scorpion man, whatever you may think you see, any rational person would only pay 3$ more the day before ex-dividend if that is the cash in their pocket afterwards. If div. declared is 5$ it tends to drop 3$ (or wtv. tax rate is) when it is ex div.

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Um...no. Simple example.

Company X consists of only cash of $10 per share and trades at cash. Declares $5 per share dividend, for argument's sake here and simplicity's sake we will ignore the time lags and complications of ex-div days.

Where you think the stock is going? $7?? Because the dividend is only worth $3 to you? So the company, which traded at cash previously, will now trade at a 40% premium to cash, because you had to pay taxes?

It's unequivocally wrong.

[Scorpion Man]

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Scorpion man, whatever you may think you see, any rational person would only pay 3$ more the day before ex-dividend if that is the cash in their pocket afterwards. If div. declared is 5$ it tends to drop 3$ (or wtv. tax rate is) when it is ex div.

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There is also a very obvious arbitrage here. There is tons of non tax paying money out there (pensions, non US investors). They would just buy the stock from the tax payers since its worth more to them and push it back up to fair value.

Oh. And at my hedge fund we owned dividend paying stocks and we cared mostly about performance nums and taxes on divs came up only in rare instances. So we were "rational" and moving around billions of $s and it was not generally a factor for us.

[Scorpion Man]

Apparently there is a little organization called the Options Clearing Corp that agrees with me. As you might know MSFT paid a $3 per share dividend a couple years ago. I believe it was the biggest dividend in US History. In response to this announcement:

"The Options Clearing Corp decided to adjust all strike prices down by $3 as of the ex-dividend date".



http://mediaserver.thinkorswim.com/t...l_dividend.pdf

[DesertCat]

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There is also a very obvious arbitrage here. There are tons of non tax paying money out there (pensions, non US investors). They do buy the stock from the tax payers since its worth more to them and push it back up to fair value.


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From my copy of "The Complete Arbitrage Deskbook", by Stephane Reverre, pg 46.


"Traditional wisdom says the price of a stock should go down by the amount of the dividend on the day it goes 'ex'. This hypothesis is institutionalized, for example, by the fact that NYSE open orders are modified by the amount of the dividend on an ex-day."

He goes on to describe how market professionals regularly perform dividend arbitrage. There are several problems with this arbitrage however. First, he wrote this in 2001, before the dividend tax cuts (I believe). Cutting the dividend tax reduced the value of the arbitrage substantially, and certainly reduced it's prevalence in the U.S. market.

Secondly, it's a very narrow arbitrage on most dividends. For example if you try to arbitrage a $20 stock yielding 4%, the quarterly dividend is only 20 cents. The difference between the untaxed and taxed dividend is only about 4 cents, barely enough for transaction costs. So the edge is just too narrow to arbitrage in the vast majority of dividends.

Lastly, you do have some level of market exposure, so Stephane recommends hedging with index futures. Pretty complicated for such a narrow EV arbitrage. He indicates it's more prevalent in high dividend tax countries.

[Evan]

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Scorpion man, whatever you may think you see, any rational person would only pay 3$ more the day before ex-dividend if that is the cash in their pocket afterwards. If div. declared is 5$ it tends to drop 3$ (or wtv. tax rate is) when it is ex div.

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Um...no. Simple example.

Company X consists of only cash of $10 per share and trades at cash. Declares $5 per share dividend, for argument's sake here and simplicity's sake we will ignore the time lags and complications of ex-div days.

Where you think the stock is going? $7?? Because the dividend is only worth $3 to you? So the company, which traded at cash previously, will now trade at a 40% premium to cash, because you had to pay taxes?

It's unequivocally wrong.

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The company would not trade at cash to start with because the $10 in their bank account is not worth $10 to the shareholders. The error is in your example.

The more realistic answer is that the company would get bought out.