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Who are the two Ms?
An email from a reader says...
Hi AK,
I followed you and bought XXX because I want to have passive income.
The price is now down.
I don't blame you.
I made the decision to follow you.
However, I worried and I got more worried after talking to someone in a forum.
He said I am just taking back my own money when I get the dividend now.
Can you talk to yourself on this? Thank you.
YLF
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| It is a journey. |
AK says...
Hi YLF,
I gave some thought on how to answer your question.
Hmmm, let me tell you a story of two investors, A and B.
A and B decided to invest in XXX because they liked the business and XXX also paid a good dividend.
A few months later, XXX's stock declined in price.
The business had not changed and, in all likelihood, it would still pay the same dividend.
A said that he had lost money and that when XXX paid him dividend, it was like taking back his own money.
When he got the chance to break even, he sold and was happy.
B said that a lower stock price meant that he could increase his investment in XXX for a higher dividend yield because nothing else had changed.
He was quite happy and bought more of XXX's stock.
As XXX's business was still chugging along nicely over time, B continued to receive meaningful dividends year after year even as the stock price went up and down over time.
B was quite happy.
A became sad again.
Best wishes,
AK
There might be cases when a dividend is a return of capital.
We can tell when we look at the financial statements if that is the case.
In such an instance, we could say that we would be taking back our own money when paid the dividend.
However, to say that we are taking back our own money when we receive dividend from a company because its stock price has declined from our entry price is either mischievous (if the person is in the know) or misguided (if the person is not in the know).
The two Ms revealed.
Prices go down and prices go up.
It is normal.
If we are investing in a good business with money we do not need for anything else and if the business pays regular dividends, we can hold forever.
If we can hold forever, short term movement in prices doesn't mean anything.
As investors, we should have the stomach for some volatility or else the stock market is a bad place for our money.
"Our favourite holding period is forever."
Warren Buffett
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