Dividends

Introduction

What are dividends? The first thing I’ll say is that they’re pretty dang awesome. A dividend is just money that a company gives you for owning their stock. In other words, it’s free money! You will get a certain amount of money for every share that you own.

Dividends in Detail

Dividends are typically paid every quarter (3 months), but some companies will choose to pay them annually (1 year). As long as you own stock from that company before a specific date (called the ex-dividend date, which you can find by searching up “company name” ex-dividend date), you will receive dividends for that period. Companies choose how much they want to pay in dividends. Many choose not to pay any. Let’s take a look at why.

Why Won’t a Company Pay Dividends?

The most common reason why a company won’t pay dividends is that they are simply too expensive. Most companies have hundreds of millions of shares, and even just paying one dollar per share in dividends is a huge expense. Many small, quickly growing companies need all the money they can get to expand, and they don’t have the money to spare for dividends.

Why Do Companies Pay Them Then?

A logical follow-up question, then, would be why pay them? If they are such a huge expense, wouldn’t the company be better off without them? A lot of large companies do have the money to spare to pay dividends, but what benefit do they provide? Remember, the shareholders are owners of the company, so it’s the company’s job to make them happy. What makes people happy? Well, a lot of things, but one would probably be free money! Dividends shareholders in two ways. One is, of course, the free money. But also, paying a hefty dividend is very attractive, and it’s a great incentive to get people to buy the company’s stock. What happens when a lot of people want to buy a company’s stock? By the law of supply and demand, the price goes up. If the price is higher, the shareholders make money, which makes them happy.

Dividend Yield

Dividend yield is a common term that you’ll see. The yield is the dividend amount per share divided by the price per share, multiplied by 100 to make it a percentage. For example, if a stock costs $100/share and each share gets $5 in dividends, that’s a 5/100 * 100 = 5% yield (which is quite good!). The yield is what you want to be looking at when considering dividends, not the flat dollar amount. Say you have $100 to invest. If Company A’s stock costs $10/share and gets $1/share in dividends, and Company B’s stock costs $100/share and gets $2/share in dividends, which company will give you more in dividends? Well, Company B clearly has the higher flat amount per share ($2 to $1) but Company A has a 10% yield compared to Company B’s 2% yield. Let’s look at the total amount you’ll get in dividends. You can buy 10 shares of Company A ($100/$10), and you get $1 for each share in dividends. That’s $10 total in dividends. For Company B, you can only buy one share, and you get $2 for that share. That’s a total of $2. See how Company A will give you more because of the higher yield. Always look at the yield, not the flat amount.

Conclusion

Dividends are a fantastic bonus in investing. I mean, who doesn’t love free money? Especially if you don’t earn a lot of money, investing in stocks with great dividends can be a great way to get a little extra cash.