Are Dividends Income? (Part 2)

Since it’s 3-0, I’m not categorizing this as optionScam.com anymore. Nevertheless, I still have a problem with the dividend concept so I’m going to approach this debate from a different angle.

The financial industry is focused heavily on “the suitability standard.” When I pay someone for financial advice, the investment professional must make recommendations tailored to my personal situation. This is a Rule (2111) of the Financial Industry Regulatory Authority. For this reason, advisers compile an investment profile that includes:

• Client age
  
• Other investments
  
• Financial situation and needs, which includes questions about annual income and net worth
  
• Investment objectives (e.g. generating income, preserving wealth, or market speculation)
  
• Investment experience
  
• Investment time horizon
  
• Liquidity needs (i.e. withdrawal of cash to fund living expenses without incurring significant loss)
  
• Risk tolerance (discussed here)
  

Investment objectives may include growth and/or income.

Growth means capital appreciation, which according to Investopedia is:

      > A rise in the value of an asset based on a rise in market price.

In other words, the positive difference between current stock price and the price of the stock when I bought it. Reading on:

      > Capital appreciation is one of the two main sources of investment
      > returns, with the other being dividend or interest income.

The kicker to all this is what happens to the share price when a dividend is paid.

Do you know? This is not a secret but I suspect it is not common knowledge especially to the layperson. I went to a presentation on dividends the other night and it was not even mentioned until I asked about it.

When a dividend is paid, the price of the stock decreases by the dividend amount.

From an accounting standpoint this makes complete sense. If stock XYZ pays out $100M as a dividend then it would make no sense for the market capitalization to be unchanged. The number of outstanding shares does not change so the loss is reflected in a lower share price.

Sleep on this for a night or two because I’m going to come with this pretty hard in the next installment.