What Is A Dividend?

A dividend is a payment made by a company or corporation to its shareholders.

When you buy stocks, it basically means that you “buy” a small slice of the company, including it’s profits which is paid in dividends.

Most of the time, these dividend payouts are made in cash (cash dividends) but sometimes, companies may also distribute dividends in stock, where they “pay” shareholders additional stocks.

CASH DIVIDENDS

Depending on the dividend stock companies, they may pay either:

  • once per year (annual)
  • twice per year (bi-annual), usually six months apart
  • four times per year (quarterly), every 3 months

I’ve heard of some companies paying monthly (ie 12 times per year) but I hadn’t chanced across such dividend stock companies in Singapore.

Every company has their own dividend policy and schedules, and sometimes there are special (one-time) dividends declared, which are bonus on top of the usual dividends, and not factored into the stock’s dividend yield.

Thing is, not every company pays dividends, and companies can change their dividend policies at time – which is why when you choose to invest in a dividend company for their dividends, you must have a list of criteria (more on that later).

DIVIDEND QUICK FACTS

  • The term “dividend” derives from the Latin term dividendum, or “thing to be divided.”- basically, it refers to companies dividing their profits up with shareholders.
  • Companies have been paying dividends to shareholders for over centuries (about 400 plus years). The first company to ever pay a dividend was the Dutch East India Company in the early 1600s.
  • Dividends alone have accounted for over 40% of the S&P 500’s total returns since 1929.

s and p dividends over decades

WHY DO COMPANIES PAY DIVIDENDS?

It’s a business operations financing function.

In essence, companies sell stock shares to the open public to raise funds, which is used to fund existing sales/marketing operations and to expand their businesses. When the business is profitable, the company in turn, reward shareholders for helping them fund their operations and owning stock in the company.

That is why dividends is one of the key ways for companies to attract investors to buy (and keep) their stock.
dividend history

WHAT COULD INVESTING RETURNS BUY YOU?

Let’s make some basic assumptions:

  • You are 25 years old
  • You managed to save $1000 per month for 20 years
  • You invest this $1000 per month into dividend stocks that pays a blended average of 5% return per year for 20 years into very, very stable and defensive stocks/indices that has been around for years/decades
  • You reinvest the dividends for 20 years

20 years later, at age 45, you decide to look at your portfolio and your returns, this is what you will see:
1000 dollars monthly
Basically at 45 years old, you will have a lump sum of $419,284.32. If at 45 years old, with this sum, you decide to stop working and live off the dividends:

At 5% return per annum, you will get $20,964.216 (roughly $1,747 per month)

Note that this is very conservative, because:

  1. We assumed that any increment of monies/salaries isn’t added into the $1000
  2. We assumed that bonuses aren’t invested
  3. We assumed that the dividend companies dividend amount stays flat
  4. We assumed that you didnt get promotions/businesses with higher income gains
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Just by adding $8000 per year (assuming bonus + increments), after 20 years, the end value:
20 years compound interest
The numbers jumped from $419,284.32 to $697,038.33 (66.24% growth).

5% as dividends will be $34,851.91, which is roughly $2,904 per month.

What does that mean to you, to receive $1,747 – $2,904 per month at 45 years old? This is money that doesn’t require any additional work, that comes in like clockwork.

Does this additional money mean:

  • offsetting your children’s education costs?
  • additional family trips?
  • allowing extended time off due to circumstances?
  • decrease your stress and reliance on a particular boss/work?
  • and much more

From the early days of stock markets to today, dividends WERE the main method of paying back value to shareholders, and price appreciation (capital gains/growth) were considered more as bonus, as people bought stocks mainly for the dividends.

This “became outdated” as investors started to move towards “growth stocks” because of the computer/tech boom that showed companies like Microsoft, Facebook, Google, Apple etc – where stocks can increase in value 2x – 100x and more, and people loved the quick growth.

(At this point in writing in 2017, there’s where cryptocurrency such as Bitcoin, Ethereum and AltCoins is – the digital currency boom time).

However, gradually, a group of investors, who prefer reliable and consistent dividends for cashflow (people like myself) are anchoring ourselves and outpaced growth/performance/non-dividend stocks.

HOW DO I COLLECT A DIVIDEND?

If you buy a dividend-paying stock and have met the payout requirements (as determined by dividend dates), you will receive the dividends.

These dividend payouts are paid on a per-share basis.

Let me explain – if I purchase ONE share of ABC stock, which pays say $1 per quarter, that’d mean I will receive $1 x 4 quarters in a year = $4 in a full financial year. Most of the time, dividends are wired/deposited directly into a shareholder’s brokerage account.

In Singapore, all dividends are paid DIRECTLY to one’s bank account – I love this because I keep “finding” more money in my account. It’s like magic, and it’s so delightful to me.

In some cases and dividend-paying companies, if an investor buys directly from the company itself (through a special direct investment plan like DRIP – dividend reinvestment plan), then the dividends can be automatically be reinvested to buy more shares.

However, I do not like “locked-in” dividend reinvesting plans, because I like the flexibility of cash, as well as the flexibility of choosing which dividend stocks I want to buy more of.

WHAT IS DIVIDEND YIELD?

A stock’s dividend yield specifically refers to the projected/expected return of a stock, in dividends, over the course of a full financial/calendar year.

Yield is always presented based on a percentage of the stock’s current price.

An example, back to company ABC, say it’s trading at $100 per share, and it paid $1 per quarter x 4 quarters = $4 for the year. You can then see that ABC’s dividend yield is $4/$100 = 4%.

As a stock’s price goes up and down, so will the dividends go down and up. Dividend yield is inversely related to share price. The reason for this is 2 things:

  • dividend yield is locked at a value per share usually
  • stock/share prices fluctuate due to market sentiments
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Let me illustrate:

#1 – “Boom” market

I want to buy ABC company that is trading at $100 with usually paying $4 per share per year in dividends. During a boom, the price may spike, and instead of the regular price of $100 per ABC share, it became $120.

If I had bought one ABC share at $120, and they pay out their usual dividend of $1 per quarter x 4 quarters, then FOR ME, my investment of ABC stock has a return of $4/$120 = 3.333%

#2 – “Down” market

Using the example of ABC company, that usually trades at $100 per share and payout $4 per share per year as dividends. During a scare, or scandal, or fear, the share price may drop, and if I manage to buy it say at $80 per ABC share.

Then my dividend yield is $4/$80 = 5%

It’s not magic – it’s basically termed as “entry point”.

As a rule of thumb, if the company is really good and pays very good dividends, and you have been studying it for some time (or better still, are an investor of it), and you know some fear-mongering news happened which dropped the price of that company – then it’s time to enter the market and buy more. Only if you have the budget and are prepared for it.

“Be greedy when others are fearful, and be fearful when others are greedy” – Warren Buffett.

DIVIDEND INVESTING

Dividend investing is one of the most popular for conservative, traditional, buy and hold investors.

Usually what dividend investing activities are really is:

  • ensure that you have a consistent flow/pool of money to invest eg monthly savings, monthly dividends (occasionally you may have a lump sum from bonus etc)
  • research and focus on dividend companies that has paid out dividends consistently and has never once dropped the dividend amount (better still, has increased) through 5, 10 or more years – these are more likely than not to continue to distribute consistently and in growing trend.
  • we also focus on fundamental investing, looking at stock’s valuation, performance history, historical earnings as well as the company’s future-proofing plans by industry etc

CONCLUSION

Companies that have been paying dividends on a growing and consistent basis for 5, 10, 20 years and more tends to be longer term mindset, listening to shareholders feedback and preparing themselves for change and future proofing themselves – basically their strongest feature is their resilience, reliance and long term returns.

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