# Relationship between share price and dividends?



## Tyler Durden (2 January 2011)

Hi, just wondering if there was a relaitonship between the two at all?

I was looking at the dividend yield of some shares, and wondered, if the SP went up significantly, would the rate of dividends keep up, or be the same? I mean, for a company to increase dividends, it would have to produce more revenue, whereas an increase in SP does not necessarily mean more revenue, as it's just determined by the market.

So if there is no relationship, then a company that once paid 5% dividends can now have a dividend yield of, say, 0.001% just because everyone decided to inflate the SP?


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## burglar (2 January 2011)

Tyler Durden said:


> Hi, just wondering if there was a relaitonship between the two at all? ...




"When viewed over long periods, the share price is directly related to the earnings and dividends of the firm. Over short periods, especially for younger or smaller firms, the relationship between share price and dividends can be quite unmatched."
http://en.wikipedia.org/wiki/Share_price

"division of after tax profits among shareholders"
http://en.wikipedia.org/wiki/Dividend

Good ole wiki !!


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## So_Cynical (2 January 2011)

Tyler Durden said:


> Hi, just wondering if there was a relationship between the two at all?
> 
> I was looking at the dividend yield of some shares, and wondered, if the SP went up significantly, would the rate of dividends keep up, or be the same? I mean, for a company to increase dividends, it would have to produce more revenue, whereas an increase in SP does not necessarily mean more revenue, as it's just determined by the market.




Sure there's a relationship...and just like all relationships there's good and bad relationships and levels of closeness etc, dividends are a major SP driver, but not the most important.

Tysonboss recently posted some insightful comments on this subject in the high dividend yield thread. https://www.aussiestockforums.com/forums/showthread.php?t=18433&page=4



Tysonboss1 said:


> I have been reading through this thread and tend to aggree with So_c more than you condog.
> 
> The Stocks that So_C as been describing,( eg. Safe companies with strong cashflow that due to unfair market setiment have had there share prices Bashed which has resulted in strong sustainable yields). do make fantastic investments that are very low risk.
> 
> ...






Tysonboss1 said:


> some example that I personally profited from.
> 
> APA @ $2.70 - 11.7% yield , Share price has since recovered to $4.19 bringing a 55% capital gain on top of an 11.7% cashflow.
> 
> ...


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## Julia (2 January 2011)

Tyler, it might help to clarify the issue for you if you remember that the dividend is always announced (usually twice a year) in terms of cents per share.
This is not going to change unless the company declares it to do so.

So if you buy 100 shares of a company who has announced the dividend to be 10 cents per share you will receive $10 regardless of what the share price is doing.

The percentage yield which is what is usually quoted will vary all the time depending on what the SP is doing.

There will also be some variation amongst companies as to the amount of imputation credits available (franking).  Most offer 100% franking, but some offer less, and a few nothing at all.

So this is something else to consider when you're adding up the potential benefits of buying any share.

Hope this helps.


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## danago (6 January 2011)

If a stream of dividends paid by a company are considered as a perpetuity, the dividend discount model can be used to value the stock:

http://en.wikipedia.org/wiki/Dividend_Discount_Model

Of course there are difficulties in using it (uncertainties in future dividends, dividend growth and required return. Also mispricing by the market will give deviations from the model), however it is a good basis for looking at the relationship between dividends and share price.


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## glen rosa (25 September 2012)

Julia said:


> Tyler, it might help to clarify the issue for you if you remember that the dividend is always announced (usually twice a year) in terms of cents per share.
> This is not going to change unless the company declares it to do so.
> 
> So if you buy 100 shares of a company who has announced the dividend to be 10 cents per share you will receive $10 regardless of what the share price is doing.
> ...




I am resurrecting an old thread - seems to be the place for my question - I hope someone finds it here....

I'd like to understand this a little better if anyone can help me.
Lets say I buy 100 xyz shares at today's (september 2012) price of $10/share = I spend $1000
The asx info says XYZ pays a dividend yield of 5% once a year (ff) due in December = what is the dividend I receive in dollars (is it 5% of $1000=$50)??
and next year (September 2013) the SP is $5 so I now own shares worth $500 but I still have 100 of them so is the dividend now 5% of $500 ?? i.e the return is down as is the capital

- which means i can only compare the yield against a bank account's interest if the stock has positive or zero capital growth - otherwise I can't really compare if its better to have my money in the bank or in shares.... is that correct or am I missing something?

If, as Julie says above, dividends are not actually a percentage but a pre-determined price per share that is *expressed as a percentage after the fact* then that is a whole different kettle of fish... and what would impact on that???

hmmm ...confused ! 

Thanks,
GR


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## prawn_86 (25 September 2012)

Hi Glen,

The % yields you see quoted are just a historical guide, based on the amount of the last dividend paid.

A company can change (or cancel) its dividend when it reports its earning to the market. So in your example the company last paid a dividend of 50c a share, that is where the 5% came from.

If the price then fell to $5 a share and the company maintained the dividend then the yieild would now bhe 10%. So yeild depends on what price you buy, plus the dividend amount the company gives. A dividend is a payment you get for owning part (a share) of a successful business.

Keep reading the ASX site, it has all the basic info on there


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## burglar (26 September 2012)

glen rosa said:


> I am resurrecting an old thread - seems to be the place for my question - I hope someone finds it here....
> 
> ...



Hi glen rosa,
Welcome to ASF!

If your earlier question was ignored, that would be because no one had a reasonable answer!
I saw your earlier question and did not have a clue how to help.


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## glen rosa (26 September 2012)

prawn_86 said:


> Hi Glen,
> 
> The % yields you see quoted are just a historical guide, based on the amount of the last dividend paid.
> 
> ...




Thanks for the posts.
Its getting a little clearer... so when people say interest rates are dropping my money will get a better return in shares... this is a little misleading. If I buy TLS now at around 3.88 with a 7.22% yield - that may or may not be the case in 12 months time - apart from potential loss of capital I could lose the yield as well (or gain in both)
is this correct?
hang on - penny dropped! it looks like the dividend stays the same (for the most part - all things being usual) but the yield changes because its the dividend (fixed) divided by the shareprice (fluctuates) - yes?


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## prawn_86 (26 September 2012)

glen rosa said:


> hang on - penny dropped! it looks like the dividend stays the same (for the most part - all things being usual) but the yield changes because its the dividend (fixed) divided by the shareprice (fluctuates) - yes?




Yes that is essentially correct, however the dividend can change throughout the year also (but not on a fluid basis like the share price). Over the long term you want to be investing in a company which earnings are increasing, and they end up paying more and more dividends in order to keep pace with inflation.


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## ROE (26 September 2012)

glen rosa said:


> Thanks for the posts.
> Its getting a little clearer... so when people say interest rates are dropping my money will get a better return in shares... this is a little misleading. If I buy TLS now at around 3.88 with a 7.22% yield - that may or may not be the case in 12 months time - apart from potential loss of capital I could lose the yield as well (or gain in both)
> is this correct?
> hang on - penny dropped! it looks like the dividend stays the same (for the most part - all things being usual) but the yield changes because its the dividend (fixed) divided by the shareprice (fluctuates) - yes?




Dividend yield is based on your entry price when compared to banks deposit...

no point comparing it a few month down the track and said now I only get 5% instead of 7%

people comparing apples and oranges because sometimes stock jump 30% and they said hmm
at current price I cant get the same yield, you cant but you got a lot of capital gain to compensate for
it something banks deposit cant do.

If you play the yield game you need to know about the business and have reasonable confident
that it can maintain the yield... I dont buy for yield if I know a company has high probability of unable 
maintain the yield....

Look for stock that has low volatility in earning as in it make money by doing cheap stuff and get a buck
here and there from a lot of people, dont need to win big contracts,dont need to spending lot of money to maintain
equipment and business...There are plenty of those on the ASX and many outside the big bluechip boys...


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## glen rosa (26 September 2012)

I have worked out something else as well.... there are a lot of people out there who don't really understand the share market!! and still, they have tens of thousands, and hundreds of thousands invested in it! Perhaps this is the confidence that was built in the run up to the GFC where even the least competent made massive gains....
From what I can tell in my early research --- the current global economic situation makes this a game for the truly dedicated. The days of buy it and forget it could be gone for quite some time...
thanks guys.


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## Julia (26 September 2012)

glen rosa said:


> apart from potential loss of capital I could lose the yield as well (or gain in both)



The potential loss of capital is something not enough people take into account imo, especially in a volatile market, when they just focus on yield. Not much point getting a couple of thousand a year in dividends if your capital is down three or four times that much.


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