Hi everyone! Welcome to the virgin edition of Stock Market Saturday (SMS). I’ll be serving up one article each Saturday devoted to all things stock market. This week’s edition I’m taking a deeper dive into dividends – hooray! You may end up rethinking the way you select your investments when you better understand the impact dividends can have.
What’s a Dividend?
Dividends are a distribution of part of the companies earnings (usually in cash, but can be stock or property) to shareholders. Typically, stable and mature companies will pay dividends to keep investors – you and me – interested in the stock. Would you want to invest in a stock if the price hadn’t moved in ten years? Heck no! We’ve got much better things to do with our money than let it go stale. A dividend offering says, “Hey investor. We know we make a lot of money and we probably aren’t going to grow the stock price much more. We’ll give you some of our earnings, so you don’t have to rely on the stock price going up to make money.”
Dividends are usually referred to as dividends per share (DPS) or as dividend yield. Dividend yield is a percentage, calculated as dividend price divided by the stock price. They can be paid at any interval – monthly, bimonthly, quarterly, twice yearly, or yearly.
Note: Beware! Companies with a dividend yield much higher than others in their industry are at risk to reduce or eliminate their dividend.
Stock Dividend vs. Price Appreciation
How important are dividends to your earning potential? Extremely. Check out the table below:
See that number in the bottom right? 41.8% of all gains in the S&P 500 for the last 80 years came from dividends, not from the stock price rising. That’s huge! This is partly because prices go up and down, but you’ll never get a negative dividend. This is truly a testament to the adage, “slow and steady wins the race.”
Dividends aren’t sexy. They aren’t glamorous. You won’t brag to your coworkers about how you earned a 5% dividend on a telecom stock like if you had invested in a biotech stock and it went up 500%. But, the proof is in the
pudding table. Dividends hold their own against price appreciation and, when you consider that dividend stocks can also rise in price, it becomes clear why you should prioritize stocks that offer dividends over those that don’t.