JohnBlog

Lend me your mind's ear — communications and portals

Paid for faith and paid to wait: Have you thought about this regarding your dividend-paying investments?

leave a comment »

In Help! I can’t understand if I’ve made money with my dividend-paying investments! I blogged about the difficulty some investors have with dividend payments. What are dividends? How do they function?

Using the dividend data from my previous post …

If I made money, why doesn’t it show?

It does. You have to understand what’s happening when you get paid that dividend.

(You might want to review the previous post above.)

Here’s what it looks like:

dividendEach time your dividend of .63 cents per share is made (.63 cents x 100 shares = $63), your $63 dividend payment is subtracted from the share or unit price of the investment. If the share price was $62 when the dividend was issued, and the dividend was issued at .63 cents then the share or unit price is now:

Share price – dividend issued

New share price:

$62 – .63 cents = $61.37

The new share per unit price is $61.37 ex-dividend (after the dividend payment is made).

Paid for faith = Paid to wait

Some people have trouble understanding this change in the stock or unit price of the investment. The point is, the company has paid you for your faith in investing in it. (In our time of give-it-to-me-right-this-second, faith in the long-term future is a sadly diminished concept.)

The company has also paid (most probably) millions of other shareholders, so the share or unit price must go down by the amount paid out as a dividend. This affects your Adjusted Cost Base (ACB).

The dividend has been paid to you. You’ve already received it. It’s your choice whether you reinvest it into that same investment (over the long-term a good strategy) or take it in the form of cash and buy another investment with it — or spend it. However, spending this cash goes against one of the mantras of investing, which is, reinvesting your capital for the long-term.

What are your goals?

Cost is relative

Because you were paid the dividend amount, and if that amount is held outside of a registered account, e.g., an RRSP, the dividend payment becomes part of your cost:

$62 + a dividend payment of .63 cents as above makes your ACB: 62 + .63 = $62.63.

If you received four dividend payments of .63 cents that would be 4 x .63 = $2.52. Now your ACB would be $62 + $2.52 =  $64.52.

Time in

This is where people get confused. Because the ACB includes the dividend payouts, the payouts that are recent skew your cost base. The new dividend investment hasn’t had time to make much money, and so, it reduces the “look” of the performance of your shares.

Sometimes, especially if it’s a new investment, it looks like you’ve made less than you have.

Remember:

  • That dividend payment may add to your ACB, but it is money you “made”, money you didn’t have before

When you have a newer investment or in a declining market, this effect is amplified. But if you have a quality investment, this is short-term thinking. Resist short-term thought.

Declining market? New investment?

  • Your dividends are being paid out, and you’re buying at cheaper prices if you’re repurchasing stock / getting new units of a fund during a correction (the difficulty is trying to understand when the correction will end)
  • With a new investment, you haven’t had much time to profit, so the dividend payments are going to add to the ACB and make it look like you’ve made less than you have unless you remember you received that dividend payment every month, quarter or year
  • If you project out over three, five or ten years, you get a lot better idea of how those extra shares you reinvested in through your dividends increased over time (assuming an increasing market)
  • Even if you received your dividend as cash, you still got something you didn’t have before

Think like a business owner when it comes to your investments.

Life, business, investing – it all moves in cycles. Have the patience to wait, and the wisdom to filter out hype and noise.

Like the recurring circle of kids on their way back to school in fall, there are certain near-immutable laws and cycles that investors must consider.

Whatever the stock does, the dividend payment’s in your pocket

When investors sit down to look at their statements, even if their accounts are registered, the ACB appears to make it look like they haven’t made money in the short-term. But often, they have.

Remember, if the investment paid out a dividend this year of, say, 4 per cent, you made that 4 per cent. The investment would have to drop 4 per cent (of course, there are management fees to mutual funds and ETFs, and you have to subtract those*) for you to break even.

To sum up:

  • Remember, the share price will be reduced every time a dividend payment was made by the amount of the dividend payment (but you still received that payment in cash or through the purchase of more shares)
  • You now own more shares because of the dividend payments
  • Because you own more shares, if the price of the investment continues to go up, those additional shares will increase in value

It’s important to note that during real dividend payments (rather than our example), there may be more variation because of the numbers involved, but this example will give you an idea of how dividend payments operate and what a stock or unit price looks like ex-dividend (after the dividend has been paid).

In a year like this last, the returns have been excellent (the Dow Jones Industrial Average and S&P 500 are up over:

  • 26 and 30 per cent respectively since the low of June, 2012, and that’s without including dividend payments**).

You can expect to have made money even on some of the new money invested through the new dividend payments into new shares or units.

In my next post in this dividend series, get an example of what this looks like, including a chart.

Want to contact me? Go here.

creative-commons.png

This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.

Image: Flickr, Daily Dividend.

* Mutual funds subtract these fees before flowing gains to investors
** At the time of writing, and, in U.S. dollars

Related:

Advertisements

Written by johnrondina

September 19, 2013 at 4:05 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: