What is a Dividend? (Dividends Explained)

What is a Dividend? (Dividends Explained)

October 15, 2018

Investing in the stock market can be scary at first. I know because I was a beginner once too. New to the markets, hopeful that I would do well, and always willing to learn. And oh did I learn.

Like many, I became hooked on investing after realizing how little PHYSICAL effort it takes to make some money. (You click on a screen and your money turns into more money, how exciting is that?!) But I learned the most when the reverse happened: When I lost money by investing in overvalued companies that in turn, went down in price.

I came to solidify a strategy that works for me, and that I think will work for you: Long-Term Dividend Investing

First and foremost, before I can delve into my personal investing strategy, I should explain the terms I just used in describing it.

1. Long-Term: To me, long-term means I would be willing to hold the underlying business through multiple market cycles. Technically described as "longer than one year", but to me it means basically forever or until my assumptions about the investment no longer hold true.
2. Dividend: The underlying investment must pay me in cash to hold it in regular intervals (monthly, quarterly, annually, etc..)
3. Investing: As opposed to "trading". Investing is taking a position and holding it, so long as your initial assumptions about the business and its potential are unchanged.

This is what I do. Why do I do it? Because I believe it to be the most successful strategy that I can employ for me personally. I want to invest in solidified, high quality businesses that churn out cash flow year in and year out. They do not have to be Mega Companies like Apple or J.P. Morgan, but they should have a track record of profitability and growth along with some form of economic "Moat".

A Moat" is something that makes a business special, something that gives it a competitive advantage over other businesses in the same industry. It can be intellectual property, brand recognition, or even corporate culture. But at the end of the day, if you are putting your money in a castle (the castle being a business in this case), you would want it to have a good moat to keep intruders away.

Warren Buffett, the billionaire investor and owner of Berkshire Hathaway, uses the long-term dividend investing strategy. I can say that it seems to have worked for him. If you are interested in learning more about his philosophy and outlook on investing, check out the documentary, "Becoming Warren Buffett". It is incredible.

If you are still wondering, "But MDAS, what IS a dividend? How do I receive one? How does it really work?" You are in luck, because I am about to explain!

A Dividend is a cash payment paid to you for holding an investment. I will use Apple stock as my example. If you look up Apple's Stock Price on Google (Just search Apple Stock Price), you will see a little chart with a whole bunch of financial information right beneath it.

The stock chart shows you the current price and all previous prices in the specified timeframe. You can click to see how volatile the stock has been over one day, one year, or even throughout the whole life of the investment. (Hint: If you consistently invested in Apple, you would have done exceedingly well)

Anyway, right below the stock chart you will see all of that financial info I mentioned previously. One of those labels will read "Div yield" or something along those lines. This percentage tells you how much (as a percentage of the stock price) will be paid out to you as cash on an annual basis. As of the writing of this article, Apple's dividend yield is 1.31% and the stock price is $222.11. This means that if you buy 1 share of Apple stock, you will be paid $2.90 per year PER SHARE of stock you own.

Usually stock dividends are paid quarterly, so you will receive about 72 cents per share every three months.

Now, I know that getting paid 3 bucks a year doesn't sound like much, but remember that this is PER SHARE. If you own 100 shares, you will receing $300, if you own 1000 shares, you will get paid out $3000. You can easily see how ridiculous these numbers can get if you invest enough money. There will come a point that just by owning a stock, it will pay you significant amounts of money before its price never even goes up by one cent.

Two words of caution: Not every business pays a dividend, and businesses that do currently pay a dividend can stop at any time. Do a google search for "Amazon Stock Price" and you will notice that as of late 2018, Amazon is not paying cash dividends to its shareholders. Why is that? The people operating Amazon believe that they would be better suited to invest all of the cash the business throws off BACK into the business (buying more inventory, hiring more workers, building more warehouses, etc. etc..) and that MIGHT MAKE SENSE from a business perspective.

However, there is a lot MORE risk associated with investing in a business that is trying to grow versus a business that is solidified in its market AND profitable AND growing AND paying a dividend. I hope you can see the difference.

This whole article does not mean that you can't do well investing in businesses that do not pay a dividend. To the contrary, there are entire professional investment funds that invest in "Growth" businesses, businesses that are reinvesting their cash flows heavily in growth and scale rather than in paying cash to their shareholders.

You CAN do well investing in those types of businesses, just like you CAN do well investing in penny stocks or garbage cans or crypto currencies, but I like to invest where I have the HIGHEST PROBABILITY of long-term success. I personally believe that I can maximize my probability of succeeding by using the Long-Term Dividend Investing strategy.

If you are interested in learning more about this type of investing, commonly referred to as "value investing", check out The Little Book That Still Beats the Market by Joel Greenblatt. Joel is one of the most successful investors of all-time, so learning from him is definitely not a bad idea!

Dividend investing is something I have come to really enjoy and love. I think you will find great success and prosperity by using this strategy, or something similar that you develop yourself. Either way, feel free to reach out and let me know what works for you!

MDAS

If you thought this was helpful, terrible, or somewhere in the middle, please leave me feedback in the form of a Direct Message on instagram @MakeDollarsAndSense, or feel free to send me an e-mail/text to the information on my Home Page. I truly appreciate constructive criticism and opposing views, so bring em on!

P.S. New blog posts coming your way every Monday!

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