The Motley Fool Discussion Boards

Previous Page

Investing Books / Other Investing Books

URL:  http://boards.fool.com/where-are-the-customers-yachts-29849369.aspx

Subject:  Where are the Customer's Yachts Date:  2/15/2012  4:13 AM
Author:  miclombardo Number:  1849 of 2172

Hi fools.
Chapter II of "Where Are The Custormer's Yachts" presents "a little aptitude test", in order to ascertain whether one should consider a careen in finance.
Among other questions, this one puzzles me: "If a stock which is not paying any dividend is split two for one, how much good does that do to the stockholder? (if you think it does him any real good, come down and join our sales department, but steer clear of out trading department). Thus implying it doesn't do any real good.

I understand that if a stock doesn't pay any dividend and it is split 2-1 the investor's situation remains the same.
i.e.
investor holds 1 stock of Roman's Empire (fictional company)
price of 1 stock= $10
split 2-1
price of 2 stocks= 2*$5=$10
investor owns 2 stocks of Roman's Empire

what about the case where the stock is paying some dividend?
investor holds 1 sotck of Roman's Empire
price of 1 stock= $10
dividend = $2
div. yield = 20%
split 2-1
price of 2 stocks= 2*$5=$10
dividend = $1
div. yield = 20% (assuming the same dividend yield)
investor owns 2 stocks of Roman's Empire

Is is safe to assume, in a split 2-1, that the dividend yield would be the same as before the split? or companies paying dividend and splitting shares usually decrease the dividend?
This aptitude test has been puzzling me for some time, and maybe I shouldn't own any stock at all!!
thanks,
mic
Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us