When I make posts about Skyy receiving a dividend on facebook, I sometimes get asked what is a dividend? To be honest I forget to some people this is an unknown knowledge. I take for granted in observing investments, that the term “dividend” is well known and generally obvious. In a previous post called “Dividend Investing Template” I talk a little about what a dividend is but will break it down further below.
A distribution of a portion of a company’s earnings decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
The distribution of earnings, which can be in the form of money, shares or even property, is a method in which the company tries to reward the shareholder for investing in the company. I want to know that the company is healthy and producing profits. People can look at balance sheets all day, but the best way to know a company is healthy and actually has cash is when they return some of that money directly to me. Can’t beat Facts!
Not all companies return a portion of earnings back to shareholders. Most growth companies, which are defined as any company that is growing faster than the relative market, do not pay a dividend. The growth company usually would rather reinvest the earnings back into the business to keep the growth rate high. This could be perceived as a positive or a negative, depending on your point of view.
For me, myself, & I, we prefer not to invest in growth companies. First, there is no guarantee that the company can actually get a better rate of return on the money than I can. Second, I like to reinvest the dividends and therefore compound my investment. I can’t reinvest money when I’m not receiving any from the company I’m investing in. There are cons to receiving dividends for keeping the earnings. I get taxed on the dividend, which some view this as double taxation as an unfair and a natural disadvantage to dividend investing. Also, there is perhaps the chance that I won’t grow that money as fast as the company can. As many of you know and the people who follow me knows I view receiving dividends as a positive, because it gives me freedom of choice in how to reinvest that returned money.
At times I just don’t understand why more people don’t save and invest. It’s like they don’t want to build wealth or leave something for their family. Or make excuses of why they can’t save. Receiving cash is great and no matter the situation, with the money going into the account, I can choose how to use it!
Work Hard or Work Smart?