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Chickens' eggs are worth way more in proportion to the chicken than dividends are to a stock. The only way you're capturing appreciable amounts of money in dividends is with a very large portfolio. This kind of advice doesn't help folks trying to build a portfolio from nothing because $25 in monthly dividends doesn't really do or mean much.

I mean, of course don't try to time the market, but this story only further propagates the lie that everyone(tm) can make money on the stock market without gambling aggressively




In the long run it's only dividends that matter.

Using Robert Shiller's long term stock market data we find that s&p returns without dividend reinvestment is about 2%, after inflation. With dividend reinvestment it's about 6%. That's a 2x difference in 20 years.


>In the long run it's only dividends that matter.

Stock buybacks are a thing, and are generally better than dividends for the owners of stock since they can choose whether or not to have a taxable event.


Yeah a stock buyback is just a fancy dividend, automatically reinvested.


Unless the stock price boost from the buyback is temporary.


Why wouldn't it be permanent? You permanently reduced the number of outstanding shares in the company. All things being equal, having less outstanding shares would mean each share is worth more.

I guess you could argue that maybe the buyback was a bad decision (ie. sacrificing long term gains for short term gains), but the logic could be applied to dividends as well.


Say we're talking about company X, currently valued at $20/share. X buys back half of their outstanding shares, resulting in their valuation going to $40/share.

Six months or a year later, the business cycle turns a bit causing all stocks to go down, the business environment changes to make the business less attractive (buggy whip manufacturers are no longer a growth industry), an outside event (tariff changes?) costs X money, or X's CEO publicly abuses a service worker causing X to be disliked by the market. In whatever case, the valuation of X which was still about $40/share goes down to $30/share. Or $15/share.

The share price of a stock has essentially no attachment to anything in the real world, and can and will fluctuate according to real-world events, whims, or just randomly.


But wait, where did company X buy their shares from? They must have bought them from somebody. Therefore somebody got that money. Moreover, your shares in the company increased. If you had 1 share to start with, after the buyback you have the equivalent of 2 shares. Your "dividend" is the extra share, which the company bought for you using the cash they would have otherwise paid out.


"But wait, where did company X buy their shares from? They must have bought them from somebody. Therefore somebody got that money."

From investors. At the current market price; i.e. closer to $20/share than $40/share. Keep in mind two things: the person who sold the share doesn't get any further income from that share, unlike a dividend, and the company won't buy back shares if they believe the shares are fairly- or over-valued. They only buy back shares if they think the stock prices is too low.[1]

The buy-back only acts as a "dividend" to those who sell after the buy-back has raised the stock price, not to those who sold into the buy-back.

"Moreover, your shares in the company increased. If you had 1 share to start with, after the buyback you have the equivalent of 2 shares. Your "dividend" is the extra share, which the company bought for you using the cash they would have otherwise paid out."

Uh, are you confusing buy-backs with stock splits? Before the buy-back, you have one stock share. After the buy-back, you have one stock share, which represents a larger share of the corporation's earnings and book value. Bought-back shares disappear[2]. Your "dividend" is the difference in price of that one share before and after the buy-back.

And the price of that share is free floating, moving according to market forces.

[1] In theory. Ideally. They can also do so to manipulate the stock price, the strike price of management options, and other things that are generally bad for investors. Stock buy-backs have a legitimate purpose, to signal to investors that management considers the stock price to be too low. They're not a substitute for dividends.

[2] They go into the company's treasury, where they can be re-sold later to raise money without affecting dilution, IIUC.


All things aren't equal because the company doesn't have the money it used to buy back and cancel the shares any more. If the shares were appropriately priced before then each outstanding share is worth about the same after.


>the company doesn't have the money it used to buy back and cancel the shares any more

As opposed to the money that it used to pay the dividends?

>If the shares were appropriately priced before then each outstanding share is worth about the same after.

Right, but now you paid some number of share holders to exit their positions. It's the equivalent of buying $10 worth of stocks and giving it to you as the "dividend", rather than giving you $10 cash.


It's temporary because these companies create shares every month to give out as incentives to their corporate suite.


...which are both predictable and included in the company's income statement ("stock-based compensation" is a line item).

Stock prices move based on unexpected information. If you've done your homework on the company's fundamentals, dilution from stock-based compensation has already been factored into earnings per share.

(Bad acquisitions are another matter - a much more common failure mode for dumb companies is to blow a lot of money on acquisitions and then fail to integrate the acquisition in a way that increases the bottom line.)


> In the long run it's only dividends that matter.

Strong disagree. I put my money into other companies because those companies create more money with that money than I can.

I don't give money to companies for them to give it back to me. I give money to companies because their investment decisions are superior than my investment decisions.

Amazon can spend $5000 on new computers (and make more than $5000 back) in the long term. Better than anything I put $5000 in on. All shares are created from either the Initial Public Offering (which raised money for the company), or secondary offerings (an additional raising round after the IPO).


Suppose you give money to a company in return for a share of stock. The company does spectacularly, becoming bigger than Amazon and Brazil, combined! (That was a joke.)

The company, however, never pays a dividend. Eventually, the world changes and the company makes a few missteps, and then one day, bang! The company is bankrupt and your share is worthless.

Now, you could argue that you made money when you sold the share, but the guy who bought it didn't. Without dividends, the stock market is a zero-sum game. In fact, it's the world's biggest Ponzi scheme, with money coming in from new investors being used only to pay out to past investors.


> Eventually, the world changes and the company makes a few missteps, and then one day, bang!

That's not how bankruptcy works.

Kodak, Sears, K-Mart have proven that it (typically) takes years, maybe even decades, for a dying company to go bankrupt.

> The company is bankrupt and your share is worthless.

That's also not how bankruptcy works. Your factory equipment will be sold to the highest bidder, and your shareholders will be given the money that was left-over (after bondholders and suppliers are paid).

> Without dividends, the stock market is a zero-sum game.

Also a false assertion. The stock's price is most commonly tied to the equipment, land, and other resources a company holds.

If the equipment, land, and resources "suddenly" become worthless, then yes, the company is worthless. But in practice, land, equipment, and resources have real value. And that real value, is often above-and-beyond the cash value of those resources.

Tesla paid $5 Billion for the Gigafactory 1. I think it was a bad purchase, but the shareholders own the Gigafactory. I would never buy Tesla shares, because I think Tesla overpaid for their equipment, the land, and the workers at that site.

Tesla was ONLY able to buy the Gigafactory 1 because a pool of investors brought together $2+ Billion in 2014 (a secondary offering). The bond market handled the rest of the debts needed to build the factory.

As long as the Gigafactory 1 makes more than $5 billion over time, then Tesla will be a good buy for its shareholders and its managers.

(Unfortunately, Gigafactory 1 was a bad buy for Tesla and Panasonic. But that's another topic....). Most importantly, Tesla shareholders own a stake in that factory (and every other piece of Tesla). If it weren't for Wall Street organizing things, the Gigafactory 1 would never exist.

That's the power of the market: to conjure up $5 Billion out of nothing but the hopes-and-dreams of millions of investors, to hopefully make a factory that will hopefully make enough cars to be profitable.

And guess what? If Tesla goes bankrupt, those investors are happy that Tesla tried. So the market is very far away from a "Zero Sum" game. Go and ask any Tesla investor if you don't believe me. The vast majority are bought into this "changing the world" story, and are willing to lose money over it.


some of the individual tesla stockholders might be bought into the "changing the world" story. but i don't think it's the 'vast majority' as you claim.

plus most of tesla is owned by institutional money: pension funds, sovereign wealth funds, mutual funds. i can guarantee that money very much cares about economic outcome.

most tesla shareholders are NOT the fanboys as you claim.


Haha can confirm, am happy to lose money on TSLA, given what they've already done.


Yup, its a bit annoying when I argue against them, but its a point-of-view that I've begrudgingly accepted. In any case, its a "correct" way of thinking, especially when a company is still doing a lot of secondary offerings and needs the money (like Tesla).

Factories won't build themselves. It doesn't matter if you're Google / Facebook buying servers, Tesla building factories, O buying houses, or even Disney's entirely virtual intellectual property (Marvel / Mickey Mouse / ownership of cartoon characters + movie characters). Shares are a share of the company. Owners of those shares are literally the owners of the servers, factories, or houses (or other "assets") that these companies own.

To build new assets usually requires money, and that money was provided at some time by an IPO raising money for a company. That's what a share fundamentally is.


"Your factory equipment will be sold to the highest bidder, and your shareholders will be given the money that was left-over (after bondholders and suppliers are paid)."

dragontamer

""If a shareholder sees a company they own shares in has filed Chapter 7, it is near certain they’ll receive nothing," [Lynn M. LoPucki, a professor at the UCLA School of Law and the founder of the UCLA-LoPucki Bankruptcy Database] said. "If they see a company has filed Chapter 11, it's highly probable they will receive nothing.""

https://www.finra.org/investors/what-corporate-bankruptcy-me...

"Although a company may emerge from [Chapter 11] bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company's plan of reorganization will cancel the existing equity shares. This happens in bankruptcy cases because secured and unsecured creditors are paid from the company's assets before common stockholders. And in situations where shareholders do participate in the plan, their shares are usually subject to substantial dilution."

https://www.sec.gov/reportspubs/investor-publications/invest...

"Also a false assertion. The stock's price is most commonly tied to the equipment, land, and other resources a company holds."

dragontamer

No. No, no, no. When you buy any financial instrument, you are giving someone money now in exchange for a (hopefully larger)[1] sum of money to be returned to you later.

The majority of the millions of Tesla investors can believe anything they want, but I'll guarantee you that Baillie Gifford & Co, Capitol World Investors, the Public Investment Fund, Vanguard, Blackrock and the other 926 institutional investors that own 56.27% of TSLA shares (https://www.nasdaq.com/symbol/tsla/ownership-summary) do so because they expect to get more money out of the company than they put in.

You will find some investors define the "value" of a share of stock to be the net present value of the sum of the portion of future earnings the share represents. That's wrong; it's actually the net present value of the dividend stream plus any residual paid to shareholders when the company is wound up. (And yes, I've actually owned shares in companies that paid out on being finalized; I'd recommend against it as it confuses the daylights out of your broker's account tracking stuff. It took years to get the 0-value shares off my holdings list. The one interesting thing you will notice is that when a company announces the intention to do that, their share price immediately moves to be somewhere near their distribution value divided by the number of outstanding shares.) You will find exactly no one serious who defines the value of a stock to the company's book value, for any company that is a going concern. (Special situation investor note: if you find a company whose shares are worth much less than their book value per share (minus "intangible" parts of the book value, which are worthless), you may have found a good investment. Cough, cough, GME.)

The bottom line is that if you give money to a company in, say, an IPO, and that company never pays a dividend, they will eventually go out of business and you will get approximately nothing. You will have made a bad investment. The only hope for you, personally, is to sell your shares to some greater idiot and let them ride the shares down to worthlessness. That is very much a zero-sum game: any money you gain selling your share is lost by someone else. (Wait---the initial investment. It's actually a negative sum game.)

[1] Insurance is a special case. That I'm not getting into here.


I'm talking about data since 1870 till the present (courtesy of Robert Shiller). It shows very clearly that dividends > price action over periods of 20yrs or longer.

You have an opinion against data.


> You have an opinion against data.

And when your data runs contrary to Amazon, Apple, Facebook, and tons of other points of data in today's market... I think its reasonable to question the data. Is data from 1870s still relevant today? The USA was still on gold + silver (silver standard!!), and the Fed didn't even exist yet.

Case in point: maybe your data is only relevant during the times when the gold standard was still being followed (before the 70s, when Nixon finally ended the gold standard).

The economy of today's market is grossly different than 1600s era Dutch traders.


There's nothing new in the markets. Tech is the new Nifty-Fifty:

https://en.m.wikipedia.org/wiki/Nifty_Fifty

Are those companies bad? Probably no. Will they plunge and be available at a steep discount? Quite likely.


one could argue that the stock market of today is vastly different beast from that of 1870, or even comparing to 1970.


Markets have existed for a long time. The Dutch were trading stocks in 1600s already. It's actually more likely that it is still the same thing.

http://bilalhafeez.com/the-oldest-book-ever-written-on-tradi...

They even had options, called "opsies".


Doesn't really make sense when you consider some amazing stocks (ie: Berkshire Hathaway) that have never given a dividend.


They reinvest it for you, it's a holding/portfolio company (P/B ~= 1). Also BRK buys back its stock.


But, again, you need to making enough money from dividends to be able to reinvest. What about the guy with a $1,000 portfolio, or all the retail rubes with small portfolios on Robinhood?


If your income is lower than spendings then you can't invest as successfully as someone who has the opposite situation. More income = more money, what's weird about that?

A $1000 will not get you anywhere. You can maybe turn it into $2000 after inflation within 5-10 years, on average.


Amazon stock doesn't pay any dividends, and they don't buy back shares.

Therefore, your statement "only dividends matter" must be incorrect since Amazon stock has a non-zero value.


The price of Amazon stock is ultimately supported by expectations of future dividends. The same is true for other stocks too, of course.

Whether or not the company has paid out dividends in the past is a good predictor of whether they'll do so in the future, but it's not the only such predictor. Having accumulated a mountain of cash but using it to invest in the business (buildings, equipment, and other productive assets) is another. Probably better, at least in some sense/cases.

The other way in which the stock is supported is by other people's expectations of other people's expectations of future dividends, and so on. I.e., speculation. Still tied to dividends, just in an unhealthy and volatile way.


This. Right now, Amazon has about 40 billion dollars of cash and is generating another 10 billion a year and growing. Shareholders don't mind companies investing in future earnings but once they start having too much cash on hand signaling they don't know what to do with all of it, they will start clamoring for share buybacks and dividends just like what they are doing with Apple and Google who have had too much cash on hand.

I would make a large bet that Amazon will announce a share buyback and/or dividend in the next 5 years.


Or it's underpinned by the value of controlling Amazon and its wealth, rather than the expectation of dividends.


Ultimately, value of a stock rests on the expectation of future earnings of the company.


Really ? That's one of those things that is "obviously true", but if you go back to the 80s and measure ... it's not true (back then it was a very low multiple of bankruptcy sale value of the company. Something like 1.2, 1.3 times that, or for a bad company 0.8). So this is something that became true, really in the 90s, and has been true for 25 years or so now.

That of course means that it's not actually a law of economics, the way it's always presented. And I must confess myself reluctant to believe this is a permanent situation.


Sure, the present value of an asset is the discounted sum of future cash flows.

But if there is no expectation that shareholders will actually receive any of the future cash flows, then there are zero future cash flows to discount.


Berkshire Hathaway is one of the most successful stocks of all time and they have never paid dividends.


Yes they have through stock buybacks which are just a more tax efficient way of paying dividends. Also, they're so limited on investment ideas, he's even considering a 100 billion dollar stock buyback [0].

[0]: https://qz.com/1611997/warren-buffett-hints-on-timing-of-big...


Interesting, thank you.


Amazing analysis, only problem is n=1.


n >> 1

84 companies in the S&P 500 index do not pay dividends.

https://www.dividend.com/investor-resources/sp-500-companies...




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