|
|||
|
|
|
|
|
With all the talk about DRIPs (Dividend Reinvestment Plans), investors have liked the idea of purchasing stocks that offer high dividends. However, many beginning investors may still be asking themselves "What is a dividend and how does it benefit me?"
What is a dividend?
When a company makes money, they often pay their shareholders a portion of their earnings in the form of a dividend. Stocks that offer dividends are often referred to as "income stocks".
Let's say that you purchase 20 shares of XYZ stock at $50/share and the company offers a dividend of $2 per share per year. After one year, you would collect $40 (20 shares x $2) from dividends. Dividends are often paid quarterly so you would actually receive 4 dividend payments of $10 each.
However, not all companies offer dividends. Many new and smaller companies elect not to pay a dividend. Instead, they use the money that would normally be paid to shareholders to reinvest in the company. By doing this, they are using the money to help the company grow.
One such company that does this is Berkshire Hathaway. However, they are neither small nor new. The CEO of the company, Warren Buffet, believes that when a company reinvests the dividends it is benefiting the shareholders as well as the company. He believes that this money can be used to help the company grow and the shareholders would take advantage of this growth through the appreciation of the stock price. To this day, Berkshire Hathaway has never paid a single dividend.
Who decides when dividends are paid and how much is paid to shareholders?
A company's board of directors meet to decide the payable date and the amount to be paid, or whether any dividend will be offered at all. If the company is doing exceptionally well, the board of directors may decide to increase the dividends that are paid out.
What is a dividend yield?
The dividend yield of a stock is the return that a shareholder could expect to make on a stock solely from dividends.
The dividend yield is figured by dividing the price of the stock from the annual dividend. For example, XYZ stock with its current price of $50 and its annual dividend of $2/share, would have a dividend yield of 4% (2 / 50).
How would dividends benefit me?
You can benefit from these dividends by investing in DRIP's. With DRIP's, instead of receiving a dividend payment each quarter, the dividends are reinvested to buy more shares of stock. By reinvesting dividends, you are essentially adding to the current amount of shares that you own. By owning more shares, you will receive more dividends. This is another form of compounding.
You can also benefit from dividends by using them as an indicator of good, reliable companies. A company with reliable dividends and the ability to increase them shows that the company is most likely stable and growing (a company that is losing money cannot afford to increase their dividends). This indicator is used by many investors to find stable and reliable companies. If you're hesitant about using dividends to pick stocks, you might want to take a look into a mutual fund that uses this method.
Two examples are the T. Rowe Price Dividend Growth Fund (www.troweprice.com) and the Fidelity Dividend Growth Fund (www.fidelity.com). Both of these funds invest in companies that offer dividends and have the ability to potentially raise them in the future.
Dividends may not seem very lucrative or enticing because of the small amount per share, but because it is a form of compounding, this little amount adds up. Taking advantage of these compounding dividends increase a Buck's chance for financial success.
(10=Most Useful)
[an error occurred while processing this directive]