I am back to blogging with a super informative series that I am certain most of you will love.
One of the most frequently asked questions from our community and a topic I love talking about (and participating in!) is dividend investing. I’ve realized I haven’t really covered this topic enough.
In this post, I’ll explain the basics of what dividends are all about. As always, I’ll also share a real life example!
If you participated in my most recent Stock Market Investing Course for Beginners, some of this information might look familiar. You can read this post as a nice refresher (the example is different 🙂 ). For those completely new at this, and looking to understand dividends, you came to the right place!
Let’s get started.
What Exactly Are Dividends?
Dividends are payments made by (some) publicly traded companies to their shareholders simply for owning the stock. The easiest way to think about dividends is as interest payments that you would receive from a company if you owned shares of their stock.
Companies that pay dividends do so quarterly (every 3 months). However, there are also companies that make these payments twice per year or other intervals.
The money companies use to pay a dividend come from the profits – funds available after they’ve covered all business-related expenses. When a company has money leftover they can also reinvest it back into the business, get involved in share buybacks (buy back their own stock), and/or a combination of all of these options.
It is important to note that companies are in no obligation to pay a dividend and is actually something they choose to do in order to reward shareholders for being “part-owners”. A company with a history of paying dividends can decide at any time to stop payments.
With that said, it is extremely rare for a dividend-paying company to cut off dividends. This usually happens if the company is struggling financially and decides the money would be better spent by investing it back into the restoration of the business.
How Do Payments Work – Real Life Example
Using a real life example, let’s go with a company like Johnson & Johnson (NYSE: JNJ) which currently has an annual dividend yield* of 2.59% which translates to $3.36 per share.
Source: Yahoo! Finance – Chart Date: 9/29/2017
If you owned 10 shares of Johnson & Johnson that means you would receive $33.60 per year in dividend payments (10 shares x $3.36 per share = $33.60). Since Johnson & Johnson pays dividends every 3 months (quarterly), this mean you would receive $8.40 in your account each time a dividend is paid ($33.60/4= $8.40).
This may not sound like much, however, the money does add up as it compounds over time. Also, the more shares you own from a particular company, the bigger your dividend payment. Your dividend payments will be a result of how many shares of a company you own and the company’s dividend yield.
Your dividend payments will be a result of how many shares of a company you own and the company’s dividend yield.
Remember that dividend payments are extra money you get regardless of whether the stock price goes up or down and are separate from capital gains (the money you make when you stock goes up in price and you sell at a profit).
If you own dividend-paying stocks, the return on your investment is composed of both – capital gains (if the company does well) and dividends.
*Think of yield as the “interest” rate a company would pay you.
What You Can Do With Dividend Payments
When a company pays you a dividend you can do one of two things:
- You can ask your online broker to enroll your stock in DRIPs (Dividend Reinvestment Plans) this simply means that every time the company pays you a dividend the broker will automatically buy you more shares of the company. If the dividend payment is not enough to buy you a full share (which is often the case), the online broker will buy you fractions of shares. Through this process, your investment in that particular company will grow and compound over time without you having to do anything. You usually have to call your online broker directly to request the DRIPs option and this is done at no charge.
- You can just keep the money in cash within your account and wait until you accumulate enough to buy shares in something else.
I should probably add that you also have the option to transfer the money back into your regular bank account but I have never done this. I personally like to keep the money I make from investments right in my online brokerage account to help grow my holdings and investing funds.
Reasons Some Companies Don’t Pay Dividends
As mentioned above, companies are in no obligation to pay a dividend and there are actually many companies out there that choose not to pay one.
Here are a a few of the main reasons:
- The company may be fairly new and in no financial position to pay a dividend.
- The company is still in an aggressive growth phase and management believes any extra money available should be reinvested back into the business to fund growth and development strategies as oppose to paying it to shareholders.
- The company may already be well-established. However, management believes that they can make better use of the money internally by investing it back into the business as oppose to paying it out to shareholders.
Examples of extremely profitable companies that don’t pay any dividends at the present time (and never have) include Google, Facebook, Amazon, Netflix, and Berkshire Hathaway, among many others. And so, the level of financial health of a business is not necessarily related to whether or not they decide to pay a dividend. It is always up to management and the board to decide how profits are spent.
And this is it for PART I of this mini series on dividends! If you’re a beginner, hope you’ve learn something new so far. If you have questions about anything that was explained above, be sure to let me know in the comments and/or head over to the Facebook Group and join the discussion.
Hope you have an AMAZING weekend and CHEERS to health, love, success, and PROFITS! ❤
Mabel ❤ $
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- FREE 8-day series: “Preparing yourself to start investing”? If you haven’t yet, you can enroll here.
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