- Dividends are paid on the number of shares you own NOT on the market based value of those shares.* To use the farming example, there is the value of the land, and then there is the income made from selling the crops. If you own 100 acres of farm land worth $250,000 and you sell crops for $12,500 each year, what if the land goes down in value (think 2008) and is now worth $200,000 (20% decline)? Guess what, the crops still sell for $12,500.
- Dividends are paid on the number of shares you own NOT on the market based value of those shares. To use the Rental Property example, there is the value of the house, and then there is the income from the rent. If the property value goes down, does this mean your renter pays less each month in rent?
- Dividends that you take as income: You can spend that income without selling the stock shares at reduced market prices.
- Dividends that you "reinvest" by selecting the company give you more stock shares instead of cash works real well for you in down markets. The same dividend buys more shares of the company since share prices are lower. Thus when the market recuperates, there is a boomerang effect.
Personally I’ve learned from 2001-2002 and what happened to the high flying growth stocks. I’ve learned from the 2008 real estate and economic meltdown, and that is why I’m so defensive. That is why for the equity portion of my clients accounts, we buy profitable companies that pay dividends. My primary motivation is income planning and dividends pay that income. Personally that is the only way I can sleep at night during bad markets is I know the retirement paychecks via dividends still roll in.
As always, I'm here for each and every one of you if you want to chat.