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Author: Colovion Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27821  
Subject: Re: Beginner's Guide to Long Term Investing in D Date: 6/24/2014 2:39 PM
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You're misunderstanding it a bit... it's basic balance sheet theory that the value of the cash on hand falls the same as the dividend paid out so the value of the equity falls as a result per this theory. There's just one problem with it... like all theories it doesn't hold because we don't live on paper. Plus it would only really apply at that moment, not forevermore.

If you reinvest that dividend you're buying more shares which can indeed grow far more than the theoretical loss from that one time cash deduction by the company. The market is forward looking, and everyone knows when and how much the dividend is going to cost the company. It isn't like a surprise multi-billion dollar lawsuit the company is suddenly on the hook for. It's very likely factored into the stock price by the market well before the dividend is paid out.

At the end of the day you are getting more shares (if you reinvest the dividends) simply by owning the stock. Twenty years from now the small loss at the time of purchase (if there even is one, again it's only theoretical) would be totally imperceptible if the company stays in business and succeeds.

What isn't theoretical are the tax consequences of dividends, for both you and the company issuing them. You have to pay taxes on those dividends just as you have to pay interest on your bank accounts. That would likely far dwarf the effect of a $X per share cash hit by the company spread out over millions of shares (not all of which pay the same dividend, if they pay it at all). But even they won't offset the compounded growth of a good investment with dividends reinvested.
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