Excellent article in today's Irish Times on the irrational preference of investors for shares with high dividend yields:-
http://www.irishtimes.com/business/personal-finance/yield-hungry-investors-fall-for-free-dividends-fallacy-1.3134518
"Interest rates have been on the floor for years, prompting frustrated and yield-hungry investors to turn to dividend stocks. There’s a problem, however: research indicates many investors make costly errors because they don’t actually get how dividend investing works.
Do you? To test, state if the following statements are true or false:
(A) Dividend-paying stocks are less risky than non-payers;
(B) Like bonds, they offer free annual income as well as the potential for capital growth;
(C) Dividend stocks are an especially good investment when bond yields are low, like today.
Kudos to those who answered false. Those who didn’t may be guilty of what researchers call the “free dividends fallacy”.
Consider a company whose shares are priced at €1. It decides to pay its investors a 3 per cent dividend annually. On the date the dividend is due, the company will distribute €3 to a shareholder with 100 shares and the share price will drop by the amount of the dividend paid, to €0.97. What’s the difference between this and a non-dividend paying company whose share price remains at €1 throughout?
If the above investor with 100 shares wanted income, he could simply sell three shares – in essence, create a home-made dividend. It should make no difference whether he receives €3 in the form of a dividend or by selling shares – in both cases he is left with €97 of shares and €3 of cash. Investors who prefer high-yielding dividend stocks do not tend to think this way, indicating they may not be grasping dividend payouts trigger an equivalent decline in the share price."
http://www.irishtimes.com/business/personal-finance/yield-hungry-investors-fall-for-free-dividends-fallacy-1.3134518
"Interest rates have been on the floor for years, prompting frustrated and yield-hungry investors to turn to dividend stocks. There’s a problem, however: research indicates many investors make costly errors because they don’t actually get how dividend investing works.
Do you? To test, state if the following statements are true or false:
(A) Dividend-paying stocks are less risky than non-payers;
(B) Like bonds, they offer free annual income as well as the potential for capital growth;
(C) Dividend stocks are an especially good investment when bond yields are low, like today.
Kudos to those who answered false. Those who didn’t may be guilty of what researchers call the “free dividends fallacy”.
Consider a company whose shares are priced at €1. It decides to pay its investors a 3 per cent dividend annually. On the date the dividend is due, the company will distribute €3 to a shareholder with 100 shares and the share price will drop by the amount of the dividend paid, to €0.97. What’s the difference between this and a non-dividend paying company whose share price remains at €1 throughout?
If the above investor with 100 shares wanted income, he could simply sell three shares – in essence, create a home-made dividend. It should make no difference whether he receives €3 in the form of a dividend or by selling shares – in both cases he is left with €97 of shares and €3 of cash. Investors who prefer high-yielding dividend stocks do not tend to think this way, indicating they may not be grasping dividend payouts trigger an equivalent decline in the share price."