# Are dividends real income?



## RogueTrader273 (12 October 2013)

Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...


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## sydboy007 (12 October 2013)

RogueTrader273 said:


> Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...




Not necessarily.  Sometimes the share price falls more / less than the gross dividend.

In theory the profits can perpetually recharge the dividend "pool" and that's at the end of the day what you are "buying" - a share of the profits.

Not sure of your bank analogy.  If you lend $10,000 to the bank at 4% with qtrly interest payments you would receive 1% or $100 each interest payment.  At the end of the term you receive your initial 10K balance.


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## SilverRanger (12 October 2013)

RogueTrader273 said:


> Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...




If you take a short term view, that is buying just before ex-div and sell on ex-div then it's hard to call it income. However if you take a longer term view, say for illustration purpose, you never sell the share, then as long as the company survives, you are entitled to its profits in perpetuity. The share price movement in this case will not matter (since you never sell anyway) and you are paid dividends every year, and hopefully in some future time cover your initial share purchase price. That's surely an "income" (or I should say profit). In between, it's an "income" to you as long as the share price stays above your initial purchase price, which the longer you hold, the more likely it will happen if you believe in the conventional investment theories.


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## Bill M (12 October 2013)

Of course it is income. I've held some stocks for several years and the dividends have not only given me an income the stock has also paid for itself. I am currently a self funded retiree who partly lives off of his dividend incomes.


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## ROE (12 October 2013)

RogueTrader273 said:


> Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...




You bought a rental place paying you 5% yield, your properties went down 10% in value does it mean your
properties disappear in 10 year times? ...you continue to get the rental income until such time you don't have a tenant..

Same in stock market, business as long as it making profit, you entitle to the dividend provided it is a business with a history of paying dividend...when stock doesn't make profit it doesn't pay dividend...

and only when it went belly up you lose your capital but price move up and down every day 
has little bearing on stock paying dividend. 

if you buying good business time will be your friend, your chance of getting more dividend and price of the stock goes up is fairly high.

take Woolies for example in 2000 it pay 10c dividend every 6 months, today it pays 60c dividend every 6 months
that 600% in dividend increase along with share price increase

a 1000 shares in woolies in 2000 cost you $5000, today the same share price you can sell for $34,000
not counting spins various off like SCP which you get them for free add even more to your pocket..

If you in the game of income and dividend you got to take a long term view, buy up good business and ignore day to day price movement.


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## Judd (16 October 2013)

RogueTrader273 said:


> Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...




A question which can be asked but a strange one in my view.  To view in the way the question is framed is to take the position that a company produces nothing but a share price.  No goods, no services, no profit distribution to shareholders in the way of dividends.  However, to each their own.


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## polpak (26 November 2013)

The ATO regards received dividends as real "taxable income", while same "taxable income" can be reduced by various deductions, including some previous losses.


Bank interest payments are calculated (often daily) using multiplier (mostly not accumulative) to calculate account holders accrued interest, then this accumulated interest is paid at arranged dates.  



Returns on shares vary considerably, some pay close to a regular % rate, the % relative to their chosen periods for average share prices.

Exist opportunities for shareholders to increase their % return by purchasing or selling prior to shares going ex-dividend, with many corporations showing relative price changes around dividend entitlement times.  

Shareholders in Australia increase their benefits trading stocks with those not able to benefit from franking credits.


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## laurie (27 November 2013)

There is one thing that hasn't been mentioned here is Franking Credits just as important as the dividend itself if not more


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## FxTrader (4 December 2013)

laurie said:


> There is one thing that hasn't been mentioned here is Franking Credits just as important as the dividend itself if not more



Indeed, and most notably to well informed self-funded retirees where 100% franking can yield a reasonably high tax free income threshold if you have sufficient funds invested.


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## Bill M (4 December 2013)

FxTrader said:


> Indeed, and most notably to well informed self-funded retirees where 100% franking can yield a reasonably high tax free income threshold if you have sufficient funds invested.




And with your SMSF in Pension mode ALL your franking credits are refunded from the ATO back into your super fund.


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## andrecurry (4 December 2013)

To be a qualified dividend, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.


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## Bill M (4 December 2013)

andrecurry said:


> To be a qualified dividend, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.




What are you talking about? Please post links as your whole paragraph does not make any sense what so ever.


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## ROE (4 December 2013)

Bill M said:


> What are you talking about? Please post links as your whole paragraph does not make any sense what so ever.




45 Days rules has always been the case unless something has change but not lately

http://www.ato.gov.au/Individuals/I...You-and-your-shares-2012-13/?default=&page=11


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## Bill M (4 December 2013)

ROE said:


> 45 Days rules has always been the case unless something has change but not lately
> 
> http://www.ato.gov.au/Individuals/I...You-and-your-shares-2012-13/?default=&page=11




Yes I know about that, but he is rambling on about "qualified dividends" and 121 days and 60 days, I got no idea what that's about.


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## ROE (4 December 2013)

Bill M said:


> Yes I know about that, but he is rambling on about "qualified dividends" and 121 days and 60 days, I got no idea what that's about.




The only date you care about is XD date and 45 days holding rules  
it has been from as far back as I know you get dividend if you have it 1 day before XD date.


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## Joe Blow (4 December 2013)

andrecurry said:


> To be a qualified dividend, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.




Please disregard the post I have quoted. This user name was a spammer from the Philippines (now banned) who simply cut and pasted information from a source that discussed dividends in the US: http://taxes.about.com/od/income/qt/dividend_income.htm


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## Craton (10 December 2013)

laurie said:


> There is one thing that hasn't been mentioned here is Franking Credits just as important as the dividend itself if not more




Agreed, those tax inputs are a great way to minimize tax and have certainly helped me out with offsetting tax on interest earnings.


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## qldfrog (10 December 2013)

Craton said:


> Agreed, those tax inputs are a great way to minimize tax and have certainly helped me out with offsetting tax on interest earnings.




I have to say I do not understand what all the fuss is about Franking?
As I understand it:
if franked then you only pay the difference between your tax rate and the company rate [30% as per ease of calculation ] youmay get a refund,
if not franked then you have to include the fact you will pay full tax on dividends received
So what is the big deal once you take that into account?
I understand it make a difference but why should I prefer franked return of 2%
 to unfranked return 3.6% [supposing you are taxed at 50% marginal rate?

case one you pay extra 20% tax on the dividend 2%-> net return 1.6% after tax
case two, you pay 50% tax on 3.2% return-> net return 1.6% after tax

->1.6 % tax free return

Am I missing something?


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## TheUnknown (11 December 2013)

Can someone explain how dividends work? You can give me an example using TLS & 30k worth of TLS.

How often are dividends paid and what do you get back on 30k?


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## Trembling Hand (11 December 2013)

TheUnknown said:


> Can someone explain how dividends work? You can give me an example using TLS & 30k worth of TLS.
> 
> How often are dividends paid and what do you get back on 30k?




Best you watch this,


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## waimate01 (11 December 2013)

qldfrog said:


> Am I missing something?




No, you're not missing anything. A $10 unfranked div and a $7 franked div are equivalent.

But that said, I prefer franked dividends because it means the business is paying tax, which means it's probably not just reporting imaginary profits and paying dividends out of borrowings or capital expansion. It's a useful 'sniff test'.

(But there are plenty of business that have a good reason for not paying fully franked dividends - notably those with offshore earnings. So some interpretation required).


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## Craton (12 December 2013)

@qldfrog: Franked/unfranked whatever, its certainly something I look at as an investment decision but no doubt we all have differing strategies so each to their own


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## Bill M (12 December 2013)

qldfrog said:


> I have to say I do not understand what all the fuss is about Franking?
> 
> [*]case one you pay extra 20% tax on the dividend 2%-> net return 1.6% after tax
> [*]case two, you pay 50% tax on 3.2% return-> net return 1.6% after tax
> ...




No, with that example you are right.

To simplify things for a newbie investor: If 2 stocks of similar type and business are paying dividends and 

1. Is offering 5% unfranked

and 

2. The other is offering 5% franked

Then I would go the franked one everytime. 

For the newbie, *you need to gross up the dividend*. 

Case at hand, I am considering buying VHY (Vanguard High Yield ETF). Right now this ETF is paying a 4.8% partly franked dividend. When you tally up the dividend + franking it comes to around 6%. 6% for doing nothing but investing in an ETF with no trading or monitoring involed is not bad money at all in this low interest rate environment.

And the point I was trying to make earlier is that with a Super Fund in pension mode you will not have to pay tax on the 6% either.


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## qldfrog (13 December 2013)

waimate01 said:


> No, you're not missing anything. A $10 unfranked div and a $7 franked div are equivalent.
> 
> But that said, I prefer franked dividends because it means the business is paying tax, which means it's probably not just reporting imaginary profits and paying dividends out of borrowings or capital expansion. It's a useful 'sniff test'.
> 
> (But there are plenty of business that have a good reason for not paying fully franked dividends - notably those with offshore earnings. So some interpretation required).




Good point I had not considered before..well aware of the O/S effect but the ability to offer franking means some actual ATO profit
Good point indeed


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## mistersmith14 (21 January 2014)

Literally, yes apart from your earnings.


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## Value Collector (21 January 2014)

RogueTrader273 said:


> Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...




Yes, offcourse dividends are real income,

Using your example, its like having a bank account that pay 3% interest, So it goes from $1000 to $1030 over the space of the year. At the end of the year they pay out the $30 so the account goes back to $1000 that you started with.

A company that generates cash flow, will be building up cash reserves through out the year, So technically by the end of the year it is worth more, because it still owns the same businesses it did at the start of the year, But now it has a pile of cash as well in the bank from the earnings, So the value of the share should have gone up to reflect that extra cash sitting as an asset.

If that extra cash gets paid out to shareholders, the value of the stock should go down by that amount, 

So yes it is real earnings, the drop in value after dividends is paid out is offset by the gradual accumulation of value as those earning were built up.

Notice I said value though and not market price, Because market may not always follow the value exactly.


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## dave39 (9 May 2014)

andrecurry said:


> To be a qualified dividend, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.




not true. the rule is 45 days plus buy and sell day so in reality it is 47 days.  to get the franking credits you must hold the share 47 days (reset preference shares it is 90 days +2).  The share must be held at risk for those 47 days so you can't use any insurance methods - put options etc to cover a down turn. If your total franking credits for the year from all share dividends is less than a figure of around $3000 (I can't remember the exact figure without going to the ATO website) then you can collect the franking credits even if you didn't hold the shares for 47 days.  You could buy the shares 1 day before ex-date and sell them 47 days later, some people do that. You could do the ASX website dividend stripping game of buying immediately after the company announces its financial statement and if the results are OK buy then or you could take a punt and buy ~40 days before the expected ex-date and hold for a few days after the ex-date to see how the price recovers and then sell.  there is no such 60 day/121 day rule - never heard of it.

Dave


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## mattsharp (27 July 2014)

RogueTrader273 said:


> Since a share's price is adjusted downward by the amount of the dividend, how can a dividend be called income?  Isn't it the same as having a bank account where they pay you 3% but take 3% out of your account beforehand?  Or am I missing something here?  Just wondering...




It it transferring some of the value in the company to the shareholder. That value has been building up on the business' balance sheet as cash since the last dividend, then come dividend time it is removed from the company's balance sheet and added to yours. If you buy shares some time after a dividend, part of the price you pay is for the cash that has accumulated since the last dividend.


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## waimate01 (28 July 2014)

mattsharp said:


> It it transferring some of the value in the company to the shareholder. That value has been building up on the business' balance sheet as cash since the last dividend, then come dividend time it is removed from the company's balance sheet and added to yours. If you buy shares some time after a dividend, part of the price you pay is for the cash that has accumulated since the last dividend.




+1

Mrs Waimate01 had been troubling over this effect, thinking there was some sort of catch. She grew up on the land, and I found a good explanation that made sense to her was to think in terms of selling a mare (female horse). The mare might be worth $1000, but a mare that's just about to foal might be worth $1200. The day after it foals, it'll be back to worth $1000. Arguably if the mare was only 170 days into its 340 day gestation, it might be worth $1100. (*)

(* I didn't grow up on the land, so have no idea whether these relative figures are indicative or not. But the principle is the same. Now I need to sit down and try to work franking credits into the analogy somehow).


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## GwenRowen (9 January 2017)

The stock market is one of the best ways to build wealth, but not all stocks are created equal. Whether your long-term investment horizon is five years, 25 years, or 45 years or more, your best option for creating long-term wealth is with a diversified portfolio of high-quality income stocks. Learning how to invest in dividend stocks, however, is a lot more work than picking the names with the highest yield.

Before the financial crisis, investors were told it was financially prudent to invest a portion of their retirement portfolio into fixed income investments like Treasuries or Certificates of Deposit (CDs). And why not? Fixed income returns provided investors with stable income; they know what their annual returns will be and can budget accordingly.


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## minwa (9 January 2017)

GwenRowen said:


> The stock market is one of the best ways to build wealth, but not all stocks are created equal. Whether your long-term investment horizon is five years, 25 years, or 45 years or more, your best option for creating long-term wealth is with a diversified portfolio of high-quality income stocks. Learning how to invest in dividend stocks, however, is a lot more work than picking the names with the highest yield.
> 
> Before the financial crisis, investors were told it was financially prudent to invest a portion of their retirement portfolio into fixed income investments like Treasuries or Certificates of Deposit (CDs). And why not? Fixed income returns provided investors with stable income; they know what their annual returns will be and can budget accordingly.




And click here to read the rest because the copy paste was incomplete: https://www.incomeinvestors.com/invest-dividend-stocks/4765/


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