A dividend is not free money. On the ex-dividend date a stock's price drops by roughly the dividend amount, so the payout just moves value out of the share price and into your cash. Drag the slider to size a dividend on a $420 stock and watch the two stacked bars: your total stays about the same before and after.
Your value: share price plus cash
Share value Cash (the dividend) Lost to tax
Per share
Share
Cash
Total
Before ex-date
-
-
-
On ex-date
-
-
-
15%
Plain English
Ryan's opinionThis is part of why Ryan generally prefers a company reinvest in the business or buy back its own shares instead of paying a dividend - a buyback or reinvestment can compound without forcing a taxable event on you. This is his stated preference, not a rule you have to follow: income investors who want regular cash may reasonably feel differently, and dividends are a perfectly legitimate strategy.
Three things to know about the dividend drop:
The drop is real and mechanical. On the ex-dividend date the share price falls by roughly the dividend amount. The exchange even adjusts the opening price for it - it is not a coincidence or a market opinion.
A dividend moves value, it does not create it. Value leaves the share price and lands in your cash. Right after the payout your total (shares plus cash) is about what it was before.
Tax can make it a net negative. In a taxable account the dividend is usually taxed the year you receive it, so your after-tax total can end up slightly LESS than if the money had simply stayed in the share price.