In this episode, I cover the impact of dividend payouts on the stock price. You'll learn both the short-term, and long-term impact dividends can have on the stock price.
I also cover the following topics in this episode:
- What are dividends
- The immediate impact of a dividend payout
- The long-term impact of a dividend payout
- Johnson & Johnson's 30-year stock price history
- Calculating dividend yield
- 3 real-life stock examples
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When you receive a dividend, does it lower or increase the stock price? I answer this question and more in this episode. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend podcast. In this episode, we're going to cover three topics. First, I'm going to show you what is a dividend. Then we're going to look at the immediate impact of a dividend payment to you, the shareholder. And then we're going to look at the long-term impact of dividend payouts. What happens to the stock price? Does it go up or does it go down? So let's get started with our first topic what is a dividend? A dividend is basically the company sharing its profits with you, the shareholder. So let's say we have a company that's paying a dividend of $1 per share and if you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend of $1 per share. Now you can spend these dividends if you wish, or you can reinvest them into more stocks that pay dividends. Now, keep in mind that you receive these dividends based on the number of shares you own. So in this example, if you own a thousand shares and the dividend is $1 per share. You get $1,000 every year, regardless of the stock price. Stock prices go up and down every day and the stock price can go down, it can go up. Regardless of that, you will receive, in this example, $1,000 every year in essentially cash. The money is deposited, the dividends are deposited directly into your trading account and that's why I said earlier, you can spend the money if you wish or you can reinvest it. Now we're going to look at the impact of dividend payouts to the stock price. So what happens when the stock price goes up or down? What happens to the dividend? So we're going to look at all of that in this episode. Now let's go on to our next topic. What is the immediate impact to the stock price when a company pays out a dividend? So let's take a look at a real life example with Johnson Johnson. This is an American company founded in 1886 and they have a little over 155,000 employees. So Johnson Johnson, the stock symbol is J&J. So let's take a look at the J&J's dividend history. So you can see on the screen. Here we have the last. Well, we have the two payments One is coming up and one has been paid already a dividend payment. So let's focus in on the most recent dividend payment, and you can see it on the screen. I've highlighted the section below as of this recording. So we're recording this in August, so September is coming up, so hasn't gotten there yet. So we're going to skip the September payment which is coming up. You can see there it says payment date for September 7th. So that hasn't happened yet. So what we're going to do is we're going to look at the most recent payment that was made to the shareholders. So Johnson Johnson had paid a dividend and you can see the cash amount is $1.19 per share and that was made on June 6th of 2023. So you can see the payment date, june 6th, and you can see the cash amount of $1.19. So what normally happens? Typically, when a company pays a dividend on that day, when the payment is made to the shareholders, the stock price drops by an equivalent amount. Now, I said typically. Generally doesn't always happen, but that's what we have seen in the past and that's what we normally expect. So in this case, johnson and Johnson paid a dividend of a dollar and 19 cents on June the 6th. So if we go back and look at June the 6th, we should see the stock price drop by a dollar 19. Now, if this doesn't always happen, sometimes the stock will drop by just a dollar. It might drop by 80 cents or it actually might drop by a little bit more maybe a dollar 25, a dollar 30 but normally we would expect it to drop by a dollar 19 and that's in the immediate term, like on the day the dividend was paid. Okay, so now let's go take a look at Johnson and Johnson. Let's take a look at the stock price. What happened on June the 6th? So here on the screen, you can see that we're displaying the stock price for the entire week of June 5th. So we've got June 5th. We've got 6, 7, 8, 9, so on. Let's zoom in on June the 6th. So that's what we care about Now. There's a whole bunch of numbers up on the screen here I'm gonna summarize them for you on the left hand side of the screen and you can see. Stock prices, like I said, go up and down every single day. So on June the 6th of 2023, the stock price opened at a hundred and fifty nine dollars and fifty eight cents and Then it closed. At the end of the day when the stock market closed, the stock price closed at a hundred and fifty eight dollars and 65 cents. So you can see that the stock dropped by 93 cents on that day. Now we were expecting it to drop by a dollar 19 because that was the dividend. The company paid a dividend of a dollar 19. We were expecting the stock price to drop by that much. In this case it dropped by 93 cents During the day. It was obviously fluctuating prices go up and down, so it did drop by a little bit more, but then by the time the stock market closed, the stock price was a hundred and fifty eight dollars and sixty five cents. So now when you look at this, you're thinking to yourself then why would I invest in dividend stocks? Why bother investing in dividend stocks when the stock price is going to drop by the amount of dividend that I was just paid? So I really didn't make any money. Now in this case, technically you made a little bit of money because the company paid you a dollar 19 and the stock price only dropped by 93 cents. Now, remember, we are long-term dividend investors, so I've been doing this for over 25 years and what I teach in my course and what I talk about in these videos is you always have to have a long-term perspective when it comes to this type of investing dividend investing so we don't think in terms of days, weeks, months or even years. We think in terms of decades. So what has happened to the stock price in the last 10, 15, 20, 30, 40, 50 years? Right, as the company has been paying dividends for that long. So it's always important to take a long-term perspective. If you're just looking at the day-to-day, you're gonna get confused by the constant fluctuations and you're gonna get confused and think well, the company paid a dividend, but the stock price dropped. This is not worth investing in, but believe me, it is, and I've been doing it for over 25 years. There is value in being patient and waiting for the long term. So now let's jump into our next section. What is the long-term impact to the share price? Because the company paid a dividend. So does the price go up? Does it go down? What is happening in the longterm? So now we're gonna look at decades and see what happens. So let's go back to our example with Johnson Johnson and I'm gonna show you the last 30 years of Johnson Johnson, the last 30 years, the stock price. Let's take a look at the stock price and the company has been paying a dividend for sure for the last 30 years. So does that mean that every time they pay a dividend the stock price goes down? Then they pay a dividend, the stock price goes down again. So does it just keep dropping? No, let's take a look at the screen here. Here is the Johnson Johnson stock price since 1993. And you'll see on the screen that the stock price has been going up over the longterm, consistently. It's just you know, if you're listening to the audio version, you'll have to trust me on this. On the video version you can see it that the trend is up and the stock price has continued to go up and up and up in the last 30 years. Now for sure, if you zoom in on a specific month or a specific week, you can see the stock price goes up and down, and that's what I said in the beginning. Stock prices go up and down every single day. Now I'm gonna show you something else. On the same graph we are now going to show you in an orange line we're gonna represent the dividend payments. So now you can see that even though the stock price has gone up and down, the orange line is consistently going up every single year. And in this slide we're looking at 30 years. So for the last 30 years the dividend has gone up every single year. So now you might be thinking to yourself here how can a company pay you a dividend and grow the dividend every year when its stock price drops by as much as $5 a share, $10 a share, and if you look carefully in the graph there's a point where the stock price dropped by $30 a share. So you can see significant drops over the last 30 years $5, 10, 15, 20, $30 drop in the share price. So how can Johnson and Johnson continue to pay a dividend and grow the dividend when its stock price drops? And the answer is the dividend is not paid from the stock price. The dividend is paid from the earnings, from the profits that the company is making. So as long as the company is profitable over the long term and the earnings keep going up over the long term again, you may have one or two years where the earnings drop, but over the long term, as long as the earnings are going up, then the company can afford to pay a dividend to the shareholders. Now remember every time the dividend goes up, that's more money in your pocket. You are now earning more, and you didn't have to work extra hard for that. All you had to do was hold on to the shares that you originally bought, and then the company increases the dividend. That's a higher return on your investment. Now I'm only showing you 30 years up on the screen here. In fact, johnson and Johnson has had an incredible track record of 62 years of consecutive dividend increases. So this is important. So I'm gonna say it again Johnson and Johnson has had 62 years of consecutive dividend increases. Think about how many market crashes we've had in the last 62 years, how many recessions we've had in the last 62 years. But yet this company has increased its dividend year after year after year, consecutively for more than 62 years. So that's an incredible track record. So it should give you some level of confidence that when you invest in a company like this, that you will earn your dividends. But even better, you will earn more dividends in the future. As time goes on, you will earn more and more, and that's a higher return on your investment. So we can see that over the long term, the impact of the dividend payment has actually helped the company. The share price has gone up. Every time they increase the dividend, well, over the long term the share price goes up. So why does the share price go up? So there's two reasons for that, two big reasons. Number one is that over the long term, the company is worth more. So in the case of Johnson Johnson, they've been profitable for many, many, many decades. What they do is they take those profits some of it is shared with the shareholders because essentially you are part owner of the company. So some of that comes back to you as a shareholder in the form of dividends. The rest of the money the company takes and reinvest it back into the business to grow the business. So this way they can introduce new products, new types of products and services. They can grow their customer base. As the customer base grows, they get more earnings. As they have more earnings, they can again continue to grow the company. So over the long term, as the company is worth more, the share price is going to reflect that. The share price is going to reflect the value of the company. So as the value of the company goes up, the share price will also go up, and that's also good news for dividend investors. Not only do we want to hold for the dividend. But eventually, at some point, if you want to sell your shares or sell some of your shares, ideally you want to be able to sell them for more than what you paid for, so you can make capital gains. So, in addition to dividend increases, you also have the potential to make capital gains. Now let's move on to number two. Why does the stock price go up? So the second reason is the company is providing higher returns to investors. So let me give you an example here. The dividend yield is really simple it's the dividend divided by the share price, the annual dividend divided by the share price. So let's take a look at this example here. Let's say a company is paying a dividend of $1 per share, so it's the annual dividend and the share price is $20. So we take one divided by 20 and we express that as a percentage. You can see it's 5%. So if you were to invest in this company today, you would make 5% return on your investment as you held on to the shares. Now again, the stock price can go up and down, but if you've bought it at $20, that's your purchase price. So the stock price can go up to $30.50. It can go down to $10. As long as you bought it at $20, your dividend yield is 5%. Why? Because the dividends are paid not on the share price, but they're paid based on the number of shares you own. So the number of shares you own doesn't change every single day. The stock price changes every day, but the number of shares you own doesn't change. So let's take a look at this example. If you had $1,000 to invest in this company, right? So what's 5% of $1,000? It's $50. So if you invested $1,000 in this company on the screen here, you would make $50 in dividends every single year, as long as the company continued to pay a dividend of $1 per share. Now another way to look at it is at the current price of $20 a share, with $1,000 to invest, you would be able to buy 50 shares. So as long as you hold on to those 50 shares remember the dividend is $1 per share. So what's $1 times 50 shares? That's $50. So we end up at the same number. So the dividend yield is a very quick way to figure out what is the return on your investment while you hold on to those shares. Now watch what happens in this example if the company increases its dividend. So instead of paying $1 per share, the company increases it to $1.50. $1.50. So the dividend is now $1.50. Divided by the share price, let's say the share price again today is $20, you can see that the dividend yield is 7.5%. So what happens to the dividend yield? Every time the company increases its dividend, the dividend yield goes up. So if the dividend was $2 a share so even higher the yield would be 10%. So what happens in real life? When a company increases the dividend, the yield goes up. Investors see that they can get an attractive return on their investment. So instead of getting 2%, 3%, they can make 5% or 6%. So if they can get a higher dividend yield, investors will be attracted to that company and they will buy up its shares. Now, as they buy up the shares because of supply and demand, the share price will eventually come up. And as the share price eventually starts to come up, the dividend yield comes back down to sort of its average. So in this example, if enough investors bought the shares in this company, the dividend yield would eventually come back down to 5%, assuming 5% is sort of the average 20-year dividend yield. So even though the dividend is higher in this case $1.50,. Eventually, the stock price comes back down to earth, the yield will come back down to 5%. So a higher let me rephrase this so an increase in the dividend gives us a higher dividend yield. A higher dividend yield attracts more investors, and then what happens is we're going to see in the next screen here. So as the dividend goes up, the dividend yield goes up. It attracts more investors to the company because they can get a very attractive yield. The share price also goes up. That's exactly what we saw with Johnson Johnson in the previous slides when I showed you the 30-year stock price history of Johnson Johnson. Now let's finish off this section with three real-life examples. We've already talked about Johnson Johnson, so now we're going to look at three different companies ADM, afflack and Walmart. Now, instead of looking at 30 years, we're just going to look at 10 years, the last 10 years. Let's see what has happened to the stock price of these companies in just the last 10 years. So let's start with ADM. So you can see, the dividend in 2013 for ADM was 76 cents a share. 10 years later, and the company increased the dividend every year. 10 years later, in 2023, the dividend is now $1.80 a share, so that's a pretty good increase. It's an increase of 137% in the dividend. So just having held on to this stock for the last 10 years, you would have seen your dividend income go up and in this example, in this company, your dividend income would have gone up by 137%. So that's pretty good. The stock price 10 years ago for ADM was $28.53. The stock price today, in 2023, is $82.51. So that is a stock price increase of 189%. So that's just capital gains and we haven't included the increase in the dividends. So overall, this company has returned well over 200% in 10 years. So that's a fantastic rate of return. Our next company is Affleck, and it's pretty much the same thing. You can see the dividend 10 years ago was 71 cents a share. Today the dividend is $1.68 a share. Surprisingly, the dividend has also gone up by 137%. Same as ADM, the stock price for Affleck in 2013 was $24.98. The stock price today is $74.45. That is an increase of almost 200%. So 198% to be exact. That is the increase in the stock price in 10 years. And the last company on the list is Walmart. So you can see the dividend and you can see it up on the screen. The dividend in 2013 for Walmart was $1.46 a share. Today it is $2.28. So it's a 56% increase in the dividend, and the stock price in 2013 was $72.98. The stock price today is $157.51. And so you can see the stock price increase is 116%. So these are all fantastic returns. And I just wanted to show you three other companies outside of J&J, and I wanted to show you, instead of 30 years and 10 years, a shorter time frame what happens to the stock price as the company increases its dividends. Even in a short amount of period, we can see that the companies have done really well for their shareholders and for the investors. So it pays to own quality dividend stocks for the long term. So remember long term. Day to day, stock prices go up and down all the time, and sure the stock price might come down the day the company paid the dividend, but over the long term, we've seen enormous returns over the long term, even after consistently paying dividends for decades and decades. Now does this mean that you should go out and buy any company today that pays a dividend? And the answer is no. So just pause there for a moment. And the reason is our approach to investing is to invest safely and reliably for the long term. So we don't want to just blindly jump into any stock that is paying a dividend today, because not all dividend stocks are the same. What I teach, and what I want everyone's goal to be, is to invest in quality dividend stocks. So not just any stock has to be a quality stock when they're priced low, so not just at any price. Like I said, prices go up and down all the time. We want to be able to invest in those companies when they're priced low or, in other words, undervalued. So when you're looking at a company, how do you know that it's a quality stock and how do you know that it's priced low? So for that I've created what I call the 12 rules of simply investing. You can see the rules up on the screen and for those of you on the audio version, I'm going to read them out in just a minute here. This is essentially your checklist. Before you invest in any company, make sure that it passes all of the 12 rules on the screen, not just eight out of the 12 or nine out of the 12, all of them. If a company fails even one rule, skip it, move on to something else. So here's the 12 rules very quickly. Rule number one do you understand how the company is making money? If you don't skip it? Rule number two 20 years from now, will people still need its products and services? Rule number three does the company have a low cost competitive advantage? Rule number four is the company recession proof? Rule number five is it profitable? Rule number six does it grow its dividend? Rule number seven can the company afford to pay the dividend? Rule number eight is the debt less than 70%? Rule number nine avoid companies with recent dividend cuts. Rule number 10, does the company buy back its own shares? Rule number 11, is the stock priced low? Remember I talked about undervalue? Is it low? So there's three things that we do here. We check the PE ratio, we compare the current yield to the company's 20 year average yield, and then we also compare the PV ratio, the price to book value ratio, and if it passes all of those three conditions, then we know that the stock is priced low. And rule number 12, keep your emotions out of investing. So these rules are designed to keep you out of trouble, to lower your risk, but maximize your gains. We want to do it safely and reliably. We want to build a consistent stream of dividend income because, at the end of the day, it's the dividend income that's going to cover your living expenses. We can't just hope for stock prices to keep going up, especially when a company doesn't pay a dividend. That's all you have is you just have hope that the stock price will keep going up and, as I've shown you in today's episode, the dividend helps to keep the stock price up. So follow the 12 rules and they will keep you out of trouble. If anybody that's interested, I cover the 12 rules in more detail in my online Simply Investing course. The course is simple. There's no jargon. It's easy to understand, easy to implement. There's 10 modules that we cover in the course. Module one start with the investing basics. Module two learn the 12 rules of Simply Investing with real life examples. Module three we apply the 12 rules and I provide you with a Google sheet and I take you step by step. We enter all the numbers in the Google sheet. Then we'll highlight which rules the company's past, which rules the company's failed. So then you know what to consider for investing. Module four we show you how to use a Simply Investing platform. Module five placing your first stock order, especially if you've never done it before, so I show you how I place a stock order from start to finish, step by step. The next module you learn when to sell. It's just as important as knowing when to buy, but you have to know when is you know the right conditions and when you should sell. The other module is to reduce your fees and risk, especially when it comes to mutual funds, index funds and ETFs. The next module is your action plan to get started right away. And module number 10 is I answer your frequently asked questions. For those of you that are interested in the course but also want to go a little bit faster, the Simply Investing platform. It's taken me two years to build. It is a web application. It automatically applies these rules to over 6,000 companies in the US and Canada every single day. So the platform will highlight which companies fail which rules every single day, and then you can figure out which companies to avoid because they're overvalued or they fail the rules and which ones to consider because they pass the rules and their price low. So if you're watching this or listening to this, you may want to write this down. 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