Investments

Pro Tips: A Common Misconception about Dividends

Many people think dividends are “free money”, but the dividend actually comes from the value of the stock.
Example: a stock is worth $100 before a dividend of $1 is paid out in cash. After the dividend is paid out, the price of the stock drops to $99.

This change is almost unrecognizable, being that it doesn’t show up as a drop in value for the day and the price history of a stock is dividend-adjusted and split-adjusted, meaning that whenever you look up a stock’s price history (on Google, Yahoo Finance, etc.), the price isn’t reflective of what the price actually was at that point in history, but it does accurately reflect the percentage growth of the company’s market capitalization, and therefore, the value of 1 share of stock.).
Example: When you look up the price of Apple (ticker: AAPL) on Google, it shows their stock price was under $1 for much of the 1980’s; this was not the case. What has happened is the stock of Apple has split and paid out dividends many times, changing their “historical” price over time. What is accurate is the percentage growth of the stock. So as of May 27th, 2020, Google shows that AAPL closed at 51 cents per share on December 12th, 1980. AAPL is currently trading at $315 per share. This represents growth of about 61,665% meaning an investment of $100 would have turned into $61,765. Having said that, this growth does not include the dividends that have been paid out, even though the historical price of the stock does.

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