On Dividends

2 cases on dividend (will be a superrrr long post)

CASE 1
Someone saying, "hurry up, buy the stock of Durian Sdn Bhd, the company is giving out dividend!" and the next moment u rack up hundreds of lots of company, hold it, and wait patiently for the dividend.

you tell yourself, 'im just gonna wait for my company to give out the dividend, and will sell it back INSTANTLY'. so u waited. and yes, Durian did give out dividend.
but between the time period where the company decides to pay dividend (declaration date) and the dividend is actually paid out, your share price falls.

so you got your dividend, sell back your share at a slightly lower price, and sit down wondering 'did i actually make money?'

well sadly, no. how i wish to say yes, but, truly, if everything is put aside (assuming that market is smart and adjusts at a fast pace) you just got yourself nothing. maybe a loss of small amount of brokerage fees.

well before people going around saying HOW CAN THIS BE? the company is giving out dividend, isn't it a good thing? price should rise! yea true. 1 assumption i made in this theory is by assuming that the market is efficient (i undergo a stressful time trying to convince myself that EMH hypo holds truth in it) and people are RATIONAL.

before delving further into this theory, Share Dilution must be understood. Durian company has 100 000 outstanding share at $8. if Durian decided to split it shares 2-to-1, it will have 200 000 at $4. Market Cap remains the same. is this dilution? Well, NO. NO NO NO.

dilution can be categorized as dilution (sounds awkward here) if and only if there is a change in num of outstanding shares WHICH affect current shareholders in negative way. for example, Durian decided to give the newly appointed squirrel-hunter 100 shares to motivate him to work harder. the new num of outstanding shares is now 100100. well as a shareholders, its bad news! now instead of dividing the pie (earnings, valuation…) into 100 000, you have to divide it by 100100. now this is called dilution.

back to the dividends. now u think that buying a share before the dividend is given out is good. well, u need to understand where dividend comes from. basically part of the company earning is given out as dividend. thus, dividend comes from earning. do u realize whenever a company announce a dividend payout rate, the share price drops a little? well that is because dividends is part of earning which is part of the company valuation. its in the income statement. if dividend is pay out, free cash in the company will drop and the valuation of the company will also drop. people will value the company at a lower price. make sense right?

so u see, dividend is part of the company earnings. so giving out dividend will lower the value of the company. but u get the cash. ignoring brokerage cost, you actually earn nothing and lose nothing. but you will say hei, i actually earn through this way! well, that will bring to another point that has nthg to do with company valuation and balancing. its mainly due to behavior investing-- herd instinct.

well I'm not gonna talk much about that. its just basically people do what others did, and thats what make the market inefficient. company that is giving out dividend will forgo the benefits which could be gained from reinvesting the free cash. depending on whether the company is a growing company or a mature company, dividend might be a good or bad thing. well google don't pay dividend.

CASE 2
Durian company CEO Wahlen Bahfet announces 'well we are not giving out cash dividend! we are giving out stock dividend! for every 1 shares, u get 2 for free!'

YIPEE! initially you have 10 shares. now you have 30 shares! too good to be true? no. it is not even good. but true.

take for example Durian has 100 000 shares. by giving out 1-to-2 stock dividend, Durian will have 300 000 outstanding shares. ISN'T it and indirect way of splitting the stock? knowing that 100 000 shares will be 300 000 shares, the share price will definitely falls from 9 to 3 (in an efficient market). but CEO Wahlen Bahfet isn't stupid. he will definitely couple it with some amazingly good news like "Angmor is starting to love durian! sales will increase!" or "we found a new way to produce artificial durians using rocks which taste like durians."

you will be happy. people will be happy. good news + stock dividend. outlook is good. despite the indirect way of splitting the share, stock dividend has high chances (if couple with good news) of preventing the share price from dropping (sometimes even push it up!).

remember: if Durian give you 1 for 2 stock dividends, everyone get it. e.g. if u own 5% of Durian company and it is giving out 1for2, or 1for10, or 1for1000 stock dividend, u will still own 5% of the company. nothing actually changes. just the behavior and outlook of the people have changed. for me, i see this as (1) bad things happening soon and the company is trying to keep the shareholders happy by giving stock-dividend (not cash dividend) so they don't sell. (2) company wants to stop giving out cash dividend but don't want to do it in a obvious way. so the company 'lie' by giving out stock dividends. and whenever the company stop giving out CASH-dividend, its time for you to watch out. the end of the world is arriving soon.

thanks for reading. :)

PS: the "you" is not intended for anyone. its just the easiest way to writing this down. the above article is just a note to remind myself that not all dividend is good.