Dividends are something that many investors dream about. Understand the dividend, investment can go further!
With the in-depth research and thinking, my understanding of dividends has gradually deepened. By discussing and communicating with everyone in Snowball, I have gained some new understanding. Record it, please correct me.
Some of these understandings are supplements to the previous ones, while others jump directly to the opposite. The reason why I accept this opposition is that my current understanding is more coherent and better able to explain the truth of investing.
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1. The source of dividends is profit
Dividends (especially cash dividends) come from the company’s profits, so the company can still make money , which is the fundamental problem of value investing. Dividends without profit are just a guise, neither sustainable nor meaningful. Dividend yields, like any other financial ratio metric, cannot be used as a stock selection metric, at least not directly. Companies that make more money do not necessarily pay more dividends; companies that make less money do not necessarily pay less dividends.
Key points: Don’t be deceived by dividends, look at the essence through phenomena, look at profits through dividends, and look at the company’s ability to make money .
2. Dividends do not increase wealth
Stock dividends are a part of their own assets, so they must be ex-rights. Before and after the dividend, the total wealth has not changed, that is, the left hand is the right hand. It’s as simple as “you have 100 yuan in your pocket, take 10 yuan and put it in your hand, and you have 90 yuan left in your pocket”. – I never thought about it before.
Then why pay dividends?
3. Purpose/significance/value of dividends
There is only one point for the company: the money earned is wasted when it is kept in hand.
If a company cannot efficiently reinvest its profits to expand production, rather than keeping the profits in its hands, it is better to distribute the profits to investors and let them solve the efficiency problem by themselves.
A measure of the company’s core value, ROE=profit/net assets. When profits cannot grow quickly, the more net worth accumulated, the more it will turn itself into an inefficient machine .
For investors, there are two points:
(1) Provide liquidity
It is a cliché that wealth that cannot be enjoyed is not real wealth. Dividends allow investors to get cash for consumption or reinvestment without selling the stock . Why insist on not selling stocks?
(2) Reallocation of equity
Stocks are proof of equity, and a certain amount of equity represents how much an investor owns the company. Dividends do not increase the total amount of wealth, do not affect the company’s value (earning capacity), and do not increase the total share capital.
Investors who receive dividends, A chooses to consume the dividends (investment results), B chooses to buy the company’s equity, and C chooses to make other investments.
What is the impact? Let’s assume the company makes the same amount of money next year. A’s shares have not changed, nor has his shareholding ratio changed. Next year, he is entitled to the same amount of profit as this year’s. B’s shares have increased, but the total share capital has not changed, so B’s increased shares must be someone’s reduced shares (selling shares to cash out), and B will be able to enjoy more profits next year than this year. C’s rights in the company are the same as A’s, but C has the right to enjoy other investment profits. This is the reallocation of equity.
Cash dividends give investors the opportunity to increase their shareholding ratio at almost no cost, which is the most critical thing for investors.
4. If you want to pay dividends, you have to ask for the stock price
Dividends are important, and everyone wants to own as much of this money-making machine as possible. So can you just focus on dividends without considering the stock price? no! – I thought it was okay before.
First of all, the root of dividends is profit. A company that makes money efficiently and for a long time cannot have a long-term slump in its stock price. It is hard to imagine that a company will have long-term stable and growing high dividends. The market will make such a company’s high dividends turn into low dividends. Secondly, if the stock price is not considered, there is actually a model of “giving you dividends and asking for your principal”. Especially when investors have an exit demand, it will be more troublesome.
Some investors said that I am not worried about the stock price falling, and that I can buy more shares when the stock price falls. – Investors who think this way are mostly net buyers and haven’t thought about exiting yet.
This logic is correct, but incomplete; the key is whether the shares you buy have any value. If you think a company is very profitable, but the stock price continues to be so low that it makes you collect more shares. Do you think you are wrong or the market is wrong? Most likely you are wrong. The market is a voting machine in the short term and a weighing machine in the long term. The company continues to pay high dividends and the stock price continues to decline. The high probability of dividends is unsustainable, and the stocks you collect are not valuable.
The ideal situation is: the company will continue to make profits, the stock price will continue to rise, the dividend will be considerable for a long time, and the shareholding structure of each shareholder will continue to be restructured after the dividend. Faced with such a company, no one will sell the stock unless the money is really needed, so the reinvestment of dividends cannot be realized. At this time, the company can choose to pay dividends, maintain its own roe, or not pay dividends, so that it will gradually become an inefficient company, and then gradually pay dividends and slowly restructure its shareholding structure. This is why dividends are good for the company.
The stock price trend of the former recovery rights is the merger of the two incomes of “dividend cash flow + capital gains”. Comparing the stock prices of the two companies, no matter whether the dividend is distributed or not, and the dividend rate is high or low, as long as the stock price trend of the former recovery is at a disadvantage, the investment must be a relative failure.
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Summarize:
The above four points are not clearly described in some places, because I have just understood these principles and need to be further sorted out and refined. in conclusion:
Dividends come from profits. It is the key that a company can make money. Dividends are just an appearance. The purpose of corporate dividends is to maintain their own operating efficiency. Investors receive dividends to obtain almost no-cost opportunities to increase their own shareholding ratio on the basis of obtaining liquidity, and to reconstruct the ownership structure of this money-making machine. High dividends + long-term stock price downturn is not a good thing. There is always a mistake between the market and you, and you are most likely to be wrong. A good company can make money, its stock price will also rise, and its dividends will be more. Only those who really need money will spend dividends or sell shares. This is an ideal investment. This situation may be difficult to occur, but it is the real goal of investment and the logical paradigm for understanding dividends.
$ Agricultural Bank (SH601288)$ $ Sinopec (SH600028)$ $ China Construction (SH601668)$
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