If you are an investor or like to educate yourself about different investment strategies, you’ve no doubt come across the term “dividend”. A stock dividend is typically a portion of a company’s profits that is paid out to shareholders on a quarterly basis. For example, the chocolate company Hershey currently has an annual dividend payout of 2.83%. If you own a share of Hershey, which as of this writing is selling for $193/share, you will receive a quarterly payout of $1.37/share.

Dividend investors tend to be excited by the idea that they are receiving a consistent cash flow from their investment. After all, it’s pretty cool to know that you can expect to receive cash equal to 2.83% of your investment in Hershey, isn’t it? And Hershey doesn’t have the highest dividend out there—Verizon, for instance, has a current dividend yield of over 6%!

Still, if you believe in Harry Markowitz’ famous saying that “diversification is the only free lunch in investing”, as I do, then dividend stocks must have a downside as well as their obvious upside. Let’s explore.

On August 16^th of this year, Hershey declared a dividend of $1.37/share, to be paid on September 16^th. On September 16^th, shares of Hershey opened the day trading at $202.32/share. By the end of the day that price had dropped to $200.81/share. Meanwhile, the Dow Jones index went up by .6% on the day. What happened?

What happened was this: The Hershey Company had a certain value when the day started. This value had to do with the expected future profits of the company, how much cash the company held, and a number of other factors. On that day, September 16^th, Hershey paid every single shareholder a cash dividend of $1.37/share. With over 200 million shares of stock outstanding, Hershey paid out about $275 million dollars to shareholders that day. Instantly, the company was worth $275 million less than it had been worth at the beginning of the day, and the new stock price reflected that reality.

In other words, a dividend doesn’t just magically appear out of thin air; the company needs to pay for it out of cash reserves. This dividend payment affects the stock price in a negative way 4 times each year.

The question you probably have on the tip of your tongue is “so, are dividend stocks a good investment?” The answer, as it so often does, depends on your own personal investment goals and preferences. Dividend stocks do tend to be mature stocks that can be somewhat less volatile than other companies’ stocks. At the same time, because the companies are spending cash on dividends instead of investing that money into growth, dividend companies tend not to be high-growth companies.

If your goal is to have consistent income, you can certainly set up an investment account with dividend stocks that will provide that. Or, you can achieve something similar for yourself by investing in non-dividend stocks and selling enough every quarter to provide your own dividend-like payment.

The point here is that dividend stocks are not objectively and consistently better than other stocks. I am not aware of any evidence showing that dividends stocks outperform over the long run. You can use them to achieve your goals, or use another method. Regardless of your decision, it’s good to be educated about your options.

Whether you pursue a dividend strategy or choose not to, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.