If stock price drops by the amount of dividend paid, what is the use of a dividend
There are many reasons for buying stock for dividends.
You are right in the sense that in theory a stock's price will go down in value by the amount of the dividend. As the amount of dividend was adding to the value of the company, but now has been paid out to shareholder, so now the company is worth less by the value of the dividend. However, in real life this may or may not happen. Sometimes the price will drop by less than the value of the dividend. Sometimes the price will drop by more than the dividend. And other times the price will go up even though the stock has gone ex-dividend.
We can say that if the price has dropped by exactly the amount of the dividend then there has been no change in the stockholders value, if the price has dropped by more than the value of the dividend then there has been a drop to the stockholder's
value, and if the price has gone up or dropped by less than the value of the dividend then there has been a increase to the stockholder's value.
Benefits of Buying Stocks with Good Dividends:
- Buying up-trending stocks with regular dividend will provide good long term returns.
- Some countries may have beneficial tax treatment for dividends compared to capital gains. In Australia investors get tax credits if they receive dividends from post tax profits.
- Regular dividends can produce a regular source of income to retirees and help supplement the income of those still working.
- Stocks with high dividends attract demand from investors thus potentially adding to the increase of the stock price over time.
What you shouldn't do however, is buy stocks solely due to the dividend. Be aware that if a company starts reducing its dividends, it could be an early warning sign that the company may be heading into financial troubles. That is why holding a stock that is dropping in price purely for its dividend can be a very dangerous practice.