Do Dividend Payments Really Matter?
How should investors be looking at the ROI on their money invested for the long term in the stock market? Should stock price variations alone be taken into consideration or which role do investment yields in the form of regular payments of current dividends play? How should an investment portfolio be managed to nurture growth of the capital invested?
The evaluation of price trends from various categories of stocks reveals a disconcerting reality as far as dividend payments are involved.
Rising valuation without dividend payments
Companies frequently do not offer dividend payments to their shareholders, which should of course be of concern to investors when the stock price does not make any significant moves or even worse when its performance is negative due to the lack of any compensation mechanism for below par performance.
Nonetheless the recent stock market history of Internet Services and Technology companies demonstrates it can be otherwise since market leaders such as Google, Amazon and Facebook have so far never paid any regular dividend to their shareholders, which is more than offset by the relentless and impressive progression of their stock price from their Initial Price Offering (IPO) as illustrated with their respective price charts here below.
From its IPO at $38 per share in May 2012 NASDAQ: $FB has seen its price increase more than 5.5 times – a remarkable performance – without ever paying any current dividend to its shareholders.
NASDAQ: $GOOGL price progression is not less impressive from its IPO at a price of $85 in August 2014 since the stock price has moved up above $1000 or 1,200% price performance, and this again while never rewarding shareholders with payments of current dividends.
Then comes NASDAQ: $AMZN, which price went through a hype and trough cycle in the early years following its IPO that took place in 1997 at a price of $18 per share. Notwithstanding the initial price fluctuations shareholders who remained invested since the IPO have now multiplied their capital invested in $AMZN by approximately 55 times (5,500%). Should they care about Amazon never having paid any current dividend?
Price charts adjusted for dividends
For those companies rewarding their shareholders with dividend payments there are two possibilities, either to receive the payments in ready cash on their brokerage account or to use the proceeds to buy more shares of the same stock. The later is an incremental process that provides the well-known benefit of compound interest because the more shares are acquired the more dividends are paid on the accrued number of shares.
The best way to visualize this process is to take a few examples of dividends paying stocks and to compare their price charts with either the stock price adjusted for reinvested dividends or with the stock price with no adjustment for dividends.
UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN
NYSEARCA: $MORL has been picked out purposefully because it is presently yielding a massive 17.4%. The chart here below demonstrates unambiguously that with no adjustment for yield the price action does not appear to be conducive to investment, which is in fact fully misleading since cash payments received have not yet been taken into account:
The picture is however completely reversed once the chart options have been set to “price adjusted for dividends”, which makes a lot of sense for a security that is leveraging its performance with hefty yield payments:
Horizon Technology Finance
NASDAQ: $HRZN is a Business Development Company yielding above 10% yearly. With no adjustment for dividends the stock price performance appears not much comforting as it is drifting below the water line of the IPO price:
Here again adjusting the stock price with compound interest from dividend payments reveals a much more comforting stock price performance:
Dividend payments are no guaranty for price performance
Investors should also come to realize that yield chasing is no foolproof strategy that can as well turn into financial disaster over the long term as illustrated with some examples from the shipping sector, which has been in shambles over the recent years.
Navios Maritime Midstream Partners LP
NYSE: $NAP was picked out to demonstrate this case as it is the highest yielding company in the shipping sector with yield payments presently reaching 21.61%. But even with reinvested dividends the overall stock performance remains negative from the IPO date in December 2014. In this case three years of highest dividend payments did not help to reverse steam of the shipper:
What to say about NASDAQ: $DRYS, which saw its stock price bubble bursting in 2008 and has since then be in a relentless and dramatic collapse. Corrected for the series of recent reverse splits (purple arrows on the price chart here below) the price peak would have corresponded to above $1 billion per share in 2007 to come down to around $2 (equivalent to a division by 500,000,000). Needless to say that investors who did not jump overboard when the meltdown started have lost virtually everything they had invested in $DRYS.
But as of today DryShips continues to pay dividends with a yield of 8.67%, so WHAT THE YIELD?
From the above examples it becomes clear that dividends can be a tool for ailing companies to lure investors into an illusory promise of future performance against the sad business model obsolescence and solvency risk realities.
- Looking at the price charts with the stock price adjusted for dividends illustrate the true performance of any company’s stock due to the effect of compound interest.
- Performance leaders with a strong stock price momentum are rarely enticed to pay dividends since the appreciation of their stock price alone is more than enough to deliver fantastic capital gains to investors.
- Dividends paying stocks should only be considered from the angle of compound interest performance with dividends reinvested to buy additional shares rather than cash outs.
- Dividends payments offer no performance guaranty on the long term and can also be a tool for ailing companies to lure investors into unappealing and risky securities.
Technical chart set-up and true stock price performance trump any yield considerations and thus dividend payments do not appear to be the panacea investors have been looking for.
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