Dividends and stock appreciation / by kevin murray

According to worldbank.org, the total market capitalization of all United States stocks as of 2018 was over $30.4 trillion, in which the overall GDP of the entire United States at the conclusion of 2018 was according to the stlouisfed.org, just under $21 trillion.  The stock market of the United States, though regulated, is an open market, in which those that wish to purchase or sell stocks do so, typically utilizing a brokerage firm, in which the price of the equities so being bought is determined by the free hand of the marketplace.  That is to say, though pundits might indicate all the supposed rational reasons why a stock is going either up or down, in regards to earnings, revenue, dividend yield, future projections, the overall economy, the prevailing interest rate of the Federal reserve, GDP numbers, inflation expectations, and so on, the bottom line is that the price of individual equities at any given point, is what the market will bear.

 

Whether the stock market is rational is debatable, of which, all things being equal, if the stock market really was totally rational 100 percent of the time, then most days, in which particular equities had no salient news to report, the stock of those companies would be quiescent, but in actuality, stocks move up and down by some percentage, usually within a small range, each and every day that the market is open.  Further, for each stock traded, there must be a seller to go along with the buyer, of which, logic tells us, that both sides must feel that they are getting a fair bargain, or else no trade would take place; yet, in the scheme of things, it would appear that one party probably comes out better than the other, because no doubt, each party feels that they have been on the right side of the trade.

 

Additionally, when it comes to stock prices, there is an ingrain prejudice for the prices of equities to rise, as the higher a given stock price is, the more profit on paper, buyers of that stock obtain; in addition to the fact that many companies have stock options that only come "into the money" when the stock rises over a period of time, as well as compensation for senior executives are often built around the appreciation of the stock price. So then, the major players in the stock market, including the market makers and brokerage firms, desire for the price to rise, and in general, through also the effects of inflation, equity prices in America over the last hundred years, have certainly risen.

 

There are many stocks that offer a dividend payment attached to their stock, of which those dividend payments are periodically paid out to stockholders of record, during the year.  At the present time, as reported by multpl.com, the S&P 500 yield in aggregate is under 2 percent, whereas back in 1979 it was 5.24 percent, and in 1950, it was an astonishing 7.44 percent.  The fundamental difference between dividends and stock appreciation is that dividends are absolutely real in the sense that real money from the company's profits are distributed to the stockholders; whereas stock appreciation is something that is not only never guaranteed but can be rather fickle, for a given stock can lose 15 or 20 percent, or even more in one day.  Therefore, those that place their faith that the stock price of a given stock will ever go upward or even remain stable day-by-day, have failed to perceive the difference between cash in hand, as compared to cash on paper, in which, they are clearly not the same thing.