In this short article we will cover What is a Dividend ? Purpose of Dividend, Types/Frequency of Dividends and Example of Dividend paying companies. What is Dividend Yield ?
What are Dividends ?
Dividends are a percentage of companies profits that are paid to investors for owning a company stock.
Think of it as this way, when you buy a stock you are buying a piece of that business.
Dividends are a way for the company to return some of that profit to the investor.
Some popular companies that pay a dividend are – Apple (AAPL), Coca Cola (KO), Reality Income (O), Microsoft and others.
Different companies pay different amount per share in dividend.
Say a company pays $2 per share in dividend. Using this amount and the share price you can calculate Dividend Yield.
What is Dividend Yield ?
Dividend yield is a metric for calculating yield/gains in percent per year on money invested.
To simplify, we can say it is the yield per year you get on your money for every $100 invested.
Having understanding of the dividend yield can help the investor get the most of their investment.
Example: if you invest $100 in a company and it has a 2% yield and say another company has a 4% dividend yield.
Now can decide which suits better for you ?
Investors use dividend yield along with other metrics of the company when deciding to invest to help them make an educated decision and get them the best return for their investment.
Dividend Yield Formula = (Dividend per Share / Average Cost per Share) * 100
Calculating Dividend Yield of a Company – Examples
Example 1: If you invest $100 dollars in a company to buy 1 share and it pays a dividend of $2 dollars. What is the dividend yield ?
Answer: (2/100) * 100 = 2%
This was a simpler calculation. You can also use a calculator to calculate dividend yield if the numbers start getting complex, like we will see in next example.
Example 2: If you invest $52459.25 dollars in a company to buy 500 shares @ $104.9185 per share and the company pays a dividend of $4.95 dollars per share. What is the dividend yield ?
Answer: (4.95/104.9185) * 100 = ??
Lets use the calculator – mrvirk.com/dividend-calculator/
Does all companies pay a dividend ?
No, not all companies pay a dividend some keep the profits as retained earnings that are re-invested in the company for more growth, giving investors capital gains.
Neither are companies bound to pay a dividend, some companies can decide to pay a dividend and have the right to completely cut or temporarily cut dividend based on companies financial situation or other reasons in future.
Usually companies that have a mature business model and consistent income pay a dividend.
Purpose of Dividend
Companies use Dividends to –
– Attract Investors – investors love to get income from their investments, companies use certain percent of profit to reward investors.
– Reward Investors for Holding on to Company Stock – when an investor buys a stock and keeps it longer this reduces the supply of shares in the market leading to higher share price, which helps both the company and investors.
– Provide Income – REIT (Real estate investment Trust) Companies which manage real estate use dividends to provide regular high yield income to their investors since REIT’s are required by law to distribute at least 90% of its taxable income, allowing the opportunity to all small or big investors to invest in world class real estate and have monthly or quarterly income without the need for dealing with all the work involved in owning a rental property.
Many investors like to keep REITS in their portfolio to get high dividend yield
Frequency of Dividend
Frequency of Dividend is the number of times a company pays a dividend in a year.
Quarterly Dividends are very common, where company pays dividend 4 times a year at the end of each quarter.
If the company pays a $2 dollar per share, that means you will receive 2/4 = $0.50 per share in a given quarter.
Example of Companies that pay quarterly dividends – Apple (AAPL), Verizon (VZ), AT&T (T), Microsoft (MSFT) and many others.
Some companies pay their dividend every month, these are mostly REIT’s aiming to provide consistent monthly income.
So, If a company pays $2 dollar per share, that means you will receive 2/12 = $0.166 per share monthly.
Example of Companies that pay monthly dividends: Reality Income (O), AGNC Investments (AGNC) and others.
Yearly or Half Yearly Dividends
Not many companies use this frequency most pay quarterly or monthly. If you were dealing with a company with yearly dividend, taking the above example of $2 dollar per share it will pay you all at once in a year.
And if it was half yearly frequency 1$ per share two times in a year.
Note: This is only educational content, please do your due diligence before investing in a financial asset or stock. Dividend Stocks may have their unique risks make sure to research on disadvantage of dividends before buying dividend stocks.