In a world obsessed with price movements of stocks, it's easy to lose sight of what those prices represent -- the value of holding a company's future profit potential. One of the key ways that profit potential turns into profit actualization in an investor's pocket is the dividend -- cash (usually) payments made to stockholders representing a portion of a company's retained earnings. Retained earnings is found under the shareholder's equity portion of the balance sheet and represents the amount of earnings a company has left over after paying dividends to its shareholders.
Before further discussion of why dividends can be impactful in the long-term, here's a plot showing how much of a difference reinvested dividends would make in one's five year holdings of NASDAQ:COKE compared to holding the dividends as cash and regular price appreciation.
The following plot shows three values over a five-year period: 1) The value of a $100 investment in COKE, with only price appreciation. 2) The value of a $100 investment in COKE, without re-investment. 3) The value of a $100 investment in COKE if dividends were immediately reinvested. 4) The value of a $100 investment in NASDAQ:SPY if dividends were immediately reinvested.
Dividends will be announced with an ex-date. This is the date by which one must hold a share in order to receive the dividend. Right when trading closes on that day, the market price of each share is expected to drop by the size of the dividend, because anyone now purchasing the stock will not receive the dividend.
However, by the time the market opens the next day, the stock price could rebound up beyond its previous close, or continue to lag after the dividend rights have been rewarded. This uncertainty is simply due to broader market forces that exist on any day of trading.
Index ETFs' Reinvested Dividend Value Compared to COKE's
Finally -- what's the point of all this? The key insight to take from this article is to note how much value simply looking at the price chart of COKE's common stock misses if one's considering holding the stock for a long period of time. Dividends surely can matter.
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