There are certain things some people should know about dividends and I have put nine of them below for your review. A dividend is a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits. Now hopefully everyone will have a better understanding of what a dividend is and why it is important for the growth of your wealth over the long term.
If someone is still having a difficult time understanding, think of it as someone owning a toy that they paid $10 for. Every 3 months they will be paid $0.25($1 dollar a year) just for owning that $10 toy. Even if the price of the toy goes up or down, as long as there is a positive cash flow you will always be paid that $0.25 dividend or more if the toy decides to be generous. Honestly why would you not want to invest in great companies like Coca-Cola or Procter & Gamble that pay you Money just to own them? It’s almost like passing up free money and I don’t know too many people who would do that in America today.
1. In general, a company can choose to initiate, suspend, raise, or lower its dividend at any time. Dividends are not guaranteed.
2. As cash payments, dividends are non-refundable. Unrealized capital gains can disappear if a stock falls, but the minute a dividend is deposited into your brokerage account, it’s yours to keep.
3. Dividends are the only way you can make money from stocks without losing ownership.
4. Dividends are usually paid in quarterly installments.(Some companies pay monthly)
5. Some companies also issue “special” one-time dividends. For example, if a company sells off a portion of its business, it might choose to distribute the proceeds to investors.
6. A stock’s indicated dividend (also known as the “current dividend”) is the amount an investor should receive over the next year. For example, if a stock currently pays a quarterly dividend of $0.25 a share, its indicated dividend is $1 a share.
7. Investors will often talk about a stock’s yield. The concept is similar to bond yields – the yield is equal to the annual regular dividend payment divided by the stock’s current price. A yield is always expressed as a percentage. For example, a $10 stock that pays an annual dividend of $1 a share has a 10% yield.
8. Unlike earnings or sales, a dividend is not an abstract accounting construct. A company only has two choices: pay the dividend or don’t. This is an important fact: If a company doesn’t have the money, it cannot cover its dividend.
9. Historically, stocks that pay dividends are less volatile and have weathered bad markets(2000-Tech Bubble and 2008-Housing Crisis) better than growth stocks that don’t pay dividends.
Hopefully that helps anyone who wants to know how dividends get paid out/work. As of right now the market in 2016 is looking to have the most volatility since the crash of 2008(housing crisis). When I think back on that time when I was in college I wish I knew what I know now and had the money to do something about it, my future self would have loved the younger Jay. We live and we learn and as I always say its better to have started than to do nothing at all!
-Live Long & Prosper