When researching about where to invest, many investors like to look at stocks’ dividends. Especially when someone has the idea of investing and holding, the value of the interest represents a fixed income that is entering into your account regularly. If and when you decide to leave the investment, you sell at the same price in which you bought. At least you would have earned the dividends. Of course, investors do not expect only that, but also an increase in the price of the stocks.
However, the market does not behave as if dividends were fixed income because they actually are not. Most of the companies can change the amounts they distribute on dividends at any time. A company with a 5% dividend today can be a non-dividend company tomorrow. These decisions are usually made quickly and when individual investors least expect them.
There may be some exceptions in which a specific company has to distribute a certain amount of its profits as dividends by law. But even in that cases, the accountability can be adapted so that dividends increase or decrease according to the board committee interests.
Therefore, the first reason to not overweigh dividends in our investing decision is that they are not as fixed as we think.
Even more important is the fact that the market is an intelligent entity. If a stock’s price is 10 pounds and everyone knows that tomorrow it will distribute a dividend of 1 pound, the market will increase the price of the stock to compensate that dividend. Think about it. If you know that the stock you have will give you a certain amount of money tomorrow, would you not ask for the price plus that amount when you try to sell it?
You may not detect the movement due to the dividend because there are many other factors involved in the price of a stock, but it is still there. Thus, if you are buying a stock that is distributing a dividend of 10%, you can be sure that you are paying the stock price plus 10%.
Therefore, the second reason not to invest because of dividends is that you are already paying the dividends in the buying price.
You can invest in the stock market looking at value, technical analysis, or both, but dividends only influence the price of stocks because there are many investors that like them. However, these investors tend to be the small ones. The big capitals knows that dividends are more a marketing tool than real value, and they invest accordingly.
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