If I own a REIT or dividend-paying stock that costs around $16.75 per share and pays a dividend of about 10 cents per share, would the dividend payouts increase as the price per share increases?

If I own a REIT or dividend-paying stock that costs around $16.75 per share and pays a dividend of about 10 cents per share, would the dividend payouts increase as the price per share increases?

Real Estate, Stocks
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3 weeks ago

When a stock or REIT pays a dividend it goes what's called "ex-dividend."  All things being equal, the security should trade at the most recent price less the dividend according to portfolio theory.  So if a stock is $100 and pays a $2 dividend, it would then be trading at $98/share.  This is because the balance sheet now shows $2/share less cash, an asset, because it has now been paid out to shareholders and unavailable to the company.  That said, this is almost never the case because many other things have to be taken into account.  Future prospects of the company going forward, and as long as the company can continue paying the dividend or even better, can increase its dividend, it may well trade above the $100 price based upon expectations.

But the most important variable determining the direction of stock prices, however, is the overall market itself.  When the market sells off, approximately 75% of all stocks decline.  When the market rises, about 75% of all stocks rise.  You also have economic factors affecting various sectors.  For instance, with rising interest rates, certain sectors will do better while other do poorly going forward regardless of their current dividend payout.

If you are looking for dividend paying stocks or REITs, the first thing you want to do is evaluate their balance sheet.  Make sure they are not cannibalizing their balance sheet selling assets or borrowing to pay the dividends.  This would be robbing Peter to pay Paul.  Then you want to look for a history of consistently increasing their dividend.  Therefore you want to invest in strong companies with solid Free Cash Flow (FCF) and increasing dividends.

I think a little outside the box and think of the dividend as a return of principal thus reducing risks & cost basis in the stock.  You will never know your total return on a security until you actually sell & unwind your position and evaluate your capital gain or loss including dividends. This might be a little more than you were asking, but I wanted to give you a complete answer & stimulate your thinking.

Hope this helps and best of luck, Dan Stewart CFA®

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