SPDR S&P 500 ETF (ETF: SPY), PowerShares QQQ Trust, Series 1 (NASDAQ: QQQ) – Five-year compounded stock of First Trust RBA American Industrial Renaissance ETF Holdings
In a world obsessed with stock price movements, it’s easy to lose sight of what those prices represent – the value of holding a company’s future profit potential. One of the primary ways in which the potential for profit turns into discounted profit in an investor’s pocket is through the dividend – the cash payments (usually) made to shareholders representing a portion of a company’s retained earnings. . Retained earnings are found in the equity portion of the balance sheet and represent the amount of profit a company has left after paying dividends to its shareholders.
Before we delve deeper into the discussion of why dividends can have a long-term impact, here’s a chart showing the difference reinvested dividends would make in NASDAQ holdings: Five-year AIRR vs. holding dividends in cash and regular price appreciation.
The following graph shows three values over a five-year period:
1) The value of a $ 100 investment in AIRR, with only price appreciation.
2) The value of a $ 100 investment in AIRR, without reinvestment.
3) The value of a $ 100 investment in AIRR if the dividends were immediately reinvested.
4) The value of a $ 100 investment in NASDAQ: SPY if the dividends were immediately reinvested.
A key point to note is that dividends will be announced with an ex-date. This ex date is the date on which it is necessary to be the owner of a share to receive the dividend of the share. At the close of trading on that day, the effective value of each share may decrease by the amount of the dividend, as new buyers will not be entitled to receive the dividend.
However, by the time the market opens the next day, the stock price could rebound beyond its previous close, or continue to lag after the dividend rights have been rewarded. This uncertainty is simply due to the broader market forces that exist every day of trading.
Value of reinvested dividends from index ETFs vs. AIRR
The graph above shows the evolution of AIRR’s reinvested dividends against those of the popular SPDR S&P 500 ETF Trust (NYSE: SPY) and Invesco QQQ Trust (NYSE: QQQ) ETFs (which track the components of the S&P 500 and of the NASDAQ 100, respectively, and pay dividends for the underlying securities). Note that the bars cannot be less than zero because a reinvested dividend represents a fraction of a company’s stock and those stocks cannot go below zero. Also note that the height of each bar for AIRR, SPY, and QQQ represents the final difference between the green and red lines on graph number 1.
Finally, what is all this for? The key idea to take from this article is to notice the value that is missing by simply looking at the price chart of AIRR’s common stock if one plans to hold the stock for a long time. Dividends can surely count.
You can view Benzinga’s dividend data here or in an enhanced view on Benzinga Pro