I also invest in some energy stocks, like BP, KMP, LINE… Boy I wish I bought some LINE when the dividend was around 18%. Now it’s down to 10%

The REITs are trusts, so the tax treatment is a little different than regular stock. I think it would be wise to research how the taxes are handled before you jump into REITS.

The current stock price of an equity is equal to the market’s expected present value of all future dividends, discounted at the appropriate cost of equity for the firm.

Actually, this is true of ANY asset (PV of expected free cash flow, discounted appropriately).

Investing is buying a cash flow, as in dividend paying stocks. Speculating is buying for price appreciation, and often ignores cash flow all together.

I think that’s a crucial issue in investing. A company paying dividends is rewarding it’s stockholders for the use or their money, and plans to be around a while. The key it seems is to look for stocks that have been paying dividends reliably for several years.

Several investment types have recommended that the bulk of your money should always be in income producing assets, but I think we’ve mostly lost that since the 1980s.

My guess is that it’ll be more important in the future.

Unfortunately I bought several good dividend paying bank stocks as they were going down several years ago because the returns based on price was so good. Of course they subsequently stopped paying. I am hoping as they recover they will start back up and since I got in low I can one day have a good ROI.

Personally now I would stick with oil stocks or something in the health category.

What this means to the investor is that for every year they own the stock, their dividend income from that stock continues to rise. If you funnel these increasing dividends into more and more shares of the same company (or other investments for that matter) then you achieve a compounding effect. It can really add up over time.

On the other hand, it is quite inefficient income tax wise to earn a dividend as the company pays dividends using their AFTER tax money and the investor ends up paying tax on the dividends again. It makes more sense for the company to retain their earnings and reinvest in the business if it can generate a good return on invested capital. (if the company does not have projects with good ROIC to invest in and is therefore making dividend payments, than the company is not a good investment in the first place)

Yes, many great and strong companies pay dividends. I just think it is not wise use of the shareholder wealth to continually carve out 15% or so in unnecessary taxes to Uncle Sam every year

The key I believe is to invest in a company that can continue to pay (not too high, not too low).

Stock prices do not “decrease because of paying the dividend”. You don’t simply count up all the assets of a company, subtract the liabilities and then divide by the number of outstanding shares to get the stock price.

Perhaps you are confusing what happens with a mutual fund paying out dividends. With mutual funds, the net asset value is calculated at the end of each day. When dividends are distributed, the net asset value per share will of course drop by the amount of dividends per share distributed and therefore the price of each mutual fund share will drop.

While it may seem intuitive that stocks should work the same way, they don’t. There is a lot more that goes into pricing a stock. To see proof of this, think of what would happen if a company announced it was no longer going to pay a dividend just before the ex-dividend date completely unexpectedly. With your reasoning, the stock price wouldn’t decrease because they are saving the dividend payout. In reality, the stock would tank after such an announcement out of the blue.

Also it should be noted that the IRS taxes dividends currently at 15%, but this is a tax-relief provision could expire after 2011 if not renewed. With deficits at the rate they are going don’t expect them to stay at this rate.

John DeFlumeri Jr