When a stock pays a dividend, the value of the stock is decreased by the amount of the dividend. If company “A” pays out $50 million in dividends to its shareholders, the value of the company has just decreased by $50 million. That is an inarguable fact (that many dividend investors will argue against).
Ben Le Fort
While this is true in as far as it goes, it really doesn’t have much of anything to do with the actual share price of the stock. A well run company manages the payout of the dividend based on profitability, not share price. The dividend you receive is your piece of the pie for the last period of company operations. You’re an owner of the company. As such you get your share of the profits in the form of a dividend.
If the company is well run, that’s a pretty reliable income stream (think Johnson & Johnson, PepsiCo, Microsoft, etc) for a long period of time, regardless of the the price of the stock. You can hold it forever and receive income from it the whole time. It’s a drastically different way of “playing the market”. Frankly, it’s a lot less stressful way to make money in the stock market than trying to chase stock price. But it does require having quite a large stake in the market and it’s no way to get rich quickly.
Dividend investing is entirely rational, if one is looking more for a steady, reasonably safe income stream from the market rather than to try to multiply their existing investments. It probably doesn’t make a lot of sense to the investor with $1000 in the market but it makes all the sense in the world to one with a million dollars in the market that they don’t want to risk losing.