I Get Paid To Wait - The Mechanics Behind Every Dividend

Introduction

Have you ever wondered why a stock that pays you a dividend every quarter for 30 years doesn't eventually hit zero?

It sounds like a simple (and somewhat silly) question.

It's one of the best questions I've received in a long time. It came from a reader of one of my recent articles:

"Leo - Good article, well written (thanks for using punctuation!) I'd like to see an article expanding on the idea of a dividend being a partial sale... I have read before that companies will fall an equal amount to the dividend on the ex-date, but this certainly is not a cumulative/permanent decline. Were that the case, a long-term dividend payer like O would be reduced continuously by its continuous dividend. I understand that you can't buy the day before ex-date and sell the day after and make money because of this price decline, but where/why does the price recover before the next ex-date?"

This question touches the most misunderstood mechanic in all of dividend investing. And the answer happens to explain why companies that grow their dividends have beaten almost every other group of stocks for more than half a century. Fascinating, right?

In this article, I'll explain what really happens to a stock on the ex-dividend date, where the "recovery" comes from, why one of the greatest investors of all time agrees that a dividend is a partial sale, and why that makes dividend growth even more powerful.

As you can imagine, I'll bring a lot of data, a few famous quotes, and the honest catches, including taxes and yield traps. I'll also cover what all of this means for investors in their 20s, 50s, and 70s.

So, let's dive in!