The Difference between Price and Value

In simple terms, Price is what you pay for something and Value is what it’s worth. If you think about a bike (yes I’m a bit obsessed) the Price might be $1,500 but the real Value is the enjoyment and improvement in fitness it can provide. The same definition of Price and Value is applicable to the purchase of shares.

For a Trader, the Value comes from your sale Price being higher than the purchase Price. The trader is looking to make a capital gain and this is the real Value for them.

However for the Investor the real Value comes from the income or dividend that is received. We have seen enormous volatility in the sharemarket over the past month. In most cases this has meant a fall in Price. For a lot stocks however, the Value to the investor has actually gone up as companies have increased their final dividends. We’ve seen this with the like of BHP and Commonwealth Bank.  

To illustrate this I’ll use Westpac (WBC) as an example (note this is not a recommendation!). In the past 12 months, Westpac has paid 2 dividends totalling $1.50 which equates to a yield of 7.2% based on the current share price. This is an increase from the dividend paid in the previous 12 months of $1.25. On a “grossed up” or “pre-tax” basis this equates to 10.3%. So while the Price has fallen from over $25 down to $20 in the past 4 months, the Investor is getting more Value! 

Over the past 10 years, Westpac have managed to increase their dividend by an average of 9.4% pa (note it did drop during the GFC and is on the way back up). Of course there are no guarantees as to what will happen in coming years. However there is a lot to be said for the Value of investing in companies that are able to grow their dividends over the long term.

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