Tuesday, January 30, 2018

What is a Dividend?

I started this blog with the goal of educating and helping others that would like to achieve financial independence at a relatively early age. I recommend dividend growth investing, but that's not to say it is the only way to achieve financial independence. Achieving this early retirement will require an investment strategy and it will require diligent investing and saving. You don't need to make a lot of money, but you need to save and invest as much as you can. The more you can invest, the earlier you will be able to retire. 

If I can help even a handful of people get on the right path then I will be happy. I'm here to help answer any questions you might have about personal finance, investing, budgeting, credit cards, etc. I may not have all the answers, but I will gladly help find an answer for you. I believe we are all in this together and if we can learn and grow together then that is truly awesome. 

Most of you probably know what a dividend is, but there may be others who have stumbled on this blog and may not exactly know what a dividend is. It's not a stupid question if you don't know what one is. To be honest I would bet a lot of people in America and other countries don't know what a dividend is. I think a lot of college students aren't being prepared for the real world. They don't have general classes on investing, buying homes, taxes, insurance, etc. I wish they did because I think a lot of kids would benefit from a general class like this. 

To those of you who may not know what a dividend is, I will briefly explain it. 
The literal definition of a dividend is, "a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)"

Simply put, you get paid to own a piece of the company. 

How do you own a piece of the company? When a company goes public they issue shares of stock to raise money. People can buy shares of a company and they become part owners of that company. As time goes on the company may start paying dividends to the shareholders as a reward for being part owners and investing in the company.  

To be clear, not all companies pay dividends. They aren't required to do so at all. A dividend usually means the company has been around longer and has the capital to do so. Younger growth companies generally do not pay dividends, because they would rather use that money to grow the company. A lot of tech companies (Facebook, Google, Tesla, Netflix) do not pay dividends because they need that money to invest in new technology. That's not to say they won't do so eventually, but for now they don't. Apple (AAPL) is a good example of a tech company that didn't pay a dividend, but now finally does. They have a large amount of cash and wanted to reward the shareholders. 

How much do you get paid in dividends?

This can vary greatly from company to company, but generally anywhere from 1-6% of your money invested will be paid back in dividends each year. Most of these companies pay dividends quarterly or four times a year. If you are investing in dividend growth companies then there is a good chance the company will raise its dividend each year. This means that they will pay you more in dividends year after year. There are a great number of companies that have been raising dividends year after year for 10, 20, 30, 40, and 50+ years. 

To be completely clear, there is a risk when investing in the market. The value of your shares changes on a day to day basis and it is possible you could lose your initial investment. It is also possible that a dividend paying stock could stop paying dividends or significantly cut the yield. However, you can mitigate this risk by diversifying in the market and choosing large companies with a good track record. 

Why choose dividend stocks?

One of the reasons I love dividend stocks is the consistent and growing payouts by these companies. There is no guarantee in the stock market, but dividend payouts are the closest thing. Many of these companies have a long history of paying and raising dividends. If you happen to choose a stock that goes bankrupt in 12 years, but pays you a dividend for the next 10 then you really don't lose all of your money that you invested. 

What you do with the cash payouts is your choice. 

You can use the money to pay for bills or you can use it to invest in other stocks. You can also set up a Dividend Reinvestment Plan which would allow you to buy additional shares of the same company automatically. Your best bet is to reinvest the dividend payouts either in the same company or another company, but the choice is yours. 

Another reason is that you don't have to sell your shares in retirement. You may have heard of the 4% withdrawal rate in retirement. This basically says you can withdraw 4% of your money each year and you will not run out of money. However, why even worry about selling shares when you could just live off the dividends? Eventually they can become large enough that you could live off just those payments and never have to sell any stock. This means that the market could swing up or down and you wouldn't care. Did you know that most dividend paying stocks continued to do so even in the last recession of 2008-2009. Many companies even raised dividends during this period. 

My hope is that one day my dividends will total more than my expenses and then I will be financially free.

Let me know what you guys think! If you have any questions please feel free to reach out.

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