According to Investopedia “A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.”
Dividends can be issued as cash, shares or other property.
So why are we interested in dividends? And how can they help us? Well according to Standard & Poor’s report dividends are responsible for 44% of the last 80 years of returns of the index. I don’t know about you but that caught my eye. Almost half of the returns people earned was due to dividends! I thought this might bear some looking into.
How do stock dividends work?
Dividends are a payout that a company will give back to people that own a part or share of their company. It can be in a form of cash, more stock or other property.
Dividends are usually paid out every three months and are declared before they are paid out. When a dividend is declared they also include the size of the dividend, the ex-dividend date and payment date.
To break these down a little bit. The size of the dividend will be declared which means that for example last quarter Wells Fargo announced they would be issuing a $.37 dividend for the quarter. So each quarter they announce the amount of money they are going to pay out.
The ex-dividend is typically two days prior to the record date, which is the date that you must own the stock. Investors need to buy the stock three days prior to the record date because it usually takes three days to settle any trade on the stock market. Since the ex-dividend date is two days before the record date the investor must hold the stock one day before the ex-dividend to received the payout.
The payment date is pretty obvious. This is the day that we get the money, stock, etc. It will be deposited into your brokerage account on that date. This is our favorite day!
Another option of payment is to have the dividend reinvested back into more shares of the stock. This is referred to as a DRIP or dividend reinvestment plan.
This is an awesome way to grow your wealth without having to place more orders of the said stock. Because there are no additional purchase fees this is a great way to earn more money. Because as you purchase more shares you get more dividends, which in turn gives you more stock and so on. It is amazing!
The rate that they are paid out is referred to the dividend yield. This rate is quoted in terms of a percent of the current market price. An example would be if the dividend paid is $1 and the price of the stock is $20 then the yield would be 5%. We like easy numbers.
Dividends are paid out every 3 months, generally. There are some companies that pay their dividends bi-annually or annually. But these are pretty rare. All companies that pay out dividends have to follow the declaration, ex-dividend, and payout dates as these are rules set by the SEC. One of the agencies that governs the stock market.
How do dividends get calculated?
The dividends are paid out of a companies earnings for the year. The process is such that the directors of the company will look at the financials for the year and decide if they are going to pay a dividend out of their earnings or if they will use that money for other purposes.
There are some very specific things you can look for in the balance sheet and income statements that will reveal how much a company has or will be paying out in dividends. We will start going over these particulars in upcoming posts. Just remember that numbers are your friend and that as a business owner you need to be aware of what happens with your company.
And make no mistake as an investor in stocks you are a business owner. Every time you buy a company you are buying a piece of that business.
The companies that consistently pay dividends do so because they want to give back to their shareholders for investing in their company. They also see this as a way of paying them back for their investment. These dividends are paid to the common stock shareholders at the payment date.
Typically these dividends are decided quarter by quarter and they are usually referred to by the amount that is paid per share. So, if you see a company that is paying out $.50 for a dividend that means that for every share you own you will receive $.50! Pretty neat huh.
Sometimes you will see notifications that say a company will pay out $2.00 a year in dividends. This means that they will pay out four payments of $.50 a quarter to add up to the $2.
Remember that if you own this particular stock at the time of declaration of a dividend you will receive that payout that quarter.
6 Proven Ways Dividends Grow your Wealth:
1. Reinvestment of your dividends.
One of the best ways to grow your wealth is to reinvest your dividends back into the company that you have already purchased.
So how does this grow your wealth? Well, first it grows your shares of the business as you reinvest. As you have the dividends purchase more shares, which will usually be fractional. You will accumulate more shares, which in turn will give you more dividends as they are issued. This allows you to grow your initial investment incredibly, without having to make a single additional purchase.
So numbers to illustrate this for you
We are using some numbers from Coke over the last 35 years. If you had started with $10,000 and reinvested your dividends this is what your amount would have grown too! Isn’t that amazing! I know when I started looking into this post I was amazed at the numbers that I ran across.
This is the power of reinvesting your dividends. Warren Buffet knew this all those years ago when he first purchased Coke and it has made him a very wealthy man indeed.
Another perk of this repurchasing of shares is that it comes at no cost to you. When you buy any share of stock you will need to use a broker to make those purchases for you. And to do this comes with a cost. Anywhere from $4.95 to $20 a share, depending on which broker you use.
This can add up to hundreds of dollars which you can save, which adds to your bottom line.
2. Passive Income
Dividend investing is one of the classic examples of passive income. After your initial purchase you just sit back and watch the value of your investment grow. If you employ the strategy of reinvesting your dividends your portfolio will exponentially expand.
Adding additional contributions to your allocation will help your investments grow tremendously. After you initial purchase you can and should continue to add to your position to continue adding