Dividend
Posted by Blain Reinkensmeyer
April 12, 2007 at 4:39 pm
Ever wonder what a dividend was? Well here at Stock Trading 101 we are all about stock market education, and a stock dividend is another term we will be adding to the list. Earlier this week I covered capital gains tax, which was a great read! This article will explore dividends, what they are, why companies pay them, and why some investors like them in easy to understand stock lingo.
What is a dividend?
Like all of our terms, I like to start out with the definition from my personal favorite financial education site, Investopedia.com. Investopedia says a dividend is the “Distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (i.e. dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.”
That is broken down pretty darn well, and really the key words to be taken from this are Distribution, Earnings, Shareholders. A dividend is simply the distribution of a company’s earnings to its shareholders.
Why Companies Pay Dividends. The Benefits.
The reason why some companies pay dividends is to simply give more value to their shareholders who own pieces of the company. It really can be described as the company handing you a check and going, “thanks for supporting us, have a nice day!”
When companies have tons of cash sitting around, paying dividends are an attractive option to consider. By them paying you money for holding those shares (or a piece of the company), it not only intices you to keep holding those shares, but also buy more.
Some investors may only buy stocks that pay dividends. For this reason dividends also attract in new and possibly more investors than a company that has no dividend. People think, “Why buy 100 shares of stock XYZ when I can buy shares of ABC and also get paid for owning those shares.”
If you haven’t figured out already, not all companies pay dividends, so you have to search to find companies that do pay them.
Dividend yield, a further understanding
From the investopedia definition, you probably noticed the term “dividend yield”. This is a term that simply means what the dividend is paying, expressed as a percent of the stock price. Let’s take Microsoft (MSFT) for example, and if you pull up its statistics on yahoo finance, you can see at the bottom right it says dividend yield: 1.40%. This means that Microsoft is paying 1.4% of every share of stock it owns in cash back out as a dividend to its shareholders. If you take 1.4% and multiply it by the stock price which in this case is about $28.50, you’ll come out with $.40. So what does that mean? That means that for every one share of Microsoft stock you own, Microsoft will pay you $.40 extra over the course of the year just for owning the stock. So, if you owned 100 shares of Microsoft for a year, you would get inna sense a check written to you by Microsoft for $40 (or 40 cents x 100) for owning the stock that year, cool!
Closing Notes
I don’t want to get to far into the complexities of dividends here because keeping it simple it better than getting everyone confused. With the brief explanation above I hope you can have a basic understanding for what a dividend is, why companies pay them, and how to figure out what value it holds to you. Dividends in the end used as an extra perk to get you to hold shares of a companies stock over someone else’s. They also serve as an added reason to buy the stock in the first place, and can serve to attract investors that want to own a dividend paying stock over a non dividend paying stock.
To learn more about dividends, feel free to get in touch with me and I will be happy to help you out. If you enjoyed this post and are thinking to yourself, “wow, this actually makes sense!” than it is a good time to subscribe to the blog! 
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This is a great post Blain, helps a lot, thank you
Glad you enjoyed it, thanks for the feedback!
Here is a funny story that you might appreciate.
I recently established a Roth 401K retirement plan for my company’s employees with a company match. All of my personal retirement accounts are managed through one broker with Waddell and Reed.
The company plan is administered through the company that handles our payroll for us (I don’t like tax forms) so it was a natural extension to have them handle the pre-tax deductions, etc.
Over the past few years I have privately referred many of my employees to my personal WR broker to establish their own accounts.
One of my employees took the company plan (admistered by Paychex of Omaha) to my WR broker. He had an account with her as well, and he was not comfortable trusting a Paychex broker he didn;t know.
He asked her for advice on what percetages he should invest in which funds, and she flattly refused to help him. Then she called me and was QUITE upset that I had not at least given her the opportunity to bid on the plan. She actually raised her voice with me like I was a bad school child.
So now I am faced with the need to establish an education savings account for my 8 month old son and I don’t know what to do.
I don’t want to go back to her because of the way she treated me, but WR has been earning me 10-12% consistenyly for the past three years. I could go with another broker in her office, but then I would alienate her forever I am certain. Of third, I could just go elsewhere and buiold a new relationship from scratch.
To complicate things even further, we fix computers and she uses us for all of her computer repair needs. So if I have not lost her business already, going elsewhere would probably finish the deed.
Any suggestions on what I should do?
[...] Dividend by Blain @ Stock Trading 101. The post answers basic questions like “what is a dividend?” and “why companies pay it?”. Short and simple with no investing jargon. [...]
[...] ring a bell to ya? I have covered a few of them here on the blog! Let’s see… Volume, Dividend yield, and stock [...]
& don’t forget dividend re-investment - thats the best way to optimize your returns.