“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D. Rockefeller
When it comes to the world of investing, dividends matter. It’s essentially free money similar to how your employer matches a certain percentage of your contributions in a 401k plan. And who wouldn’t want free money!
In fact, including dividends as part of your financial planning is a smart move that will help you reach your monetary goals quicker. To take advantage of dividends, it’s important that you understand some of the basic terms and concepts:
What Are Dividends?
A dividend is essentially a monetary amount paid to investors owning stocks, mutual funds, or even ETFs (exchange-traded funds). For stocks, it’s when a company decides to distribute a portion of their after-tax earnings to shareholders based on the number, and class of shares, held by them.
When it comes to funds, dividends are generally interest or other income earned by the investments in the fund that’s passed along to shareholders. And while most smaller companies distribute dividends annually, larger publicly held firms typically distribute dividends quarterly.
Overall, the board of directors will decide the terms and conditions of the dividend distribution(s).
How Do Dividends Work?
Let’s start with the formula for dividends per share (DPS), which covers an entire year:
DPS = D – SD / S
D = Sum of dividends annually
SD = Special one time dividends
S = Shares outstanding for the period
To see how this works, let’s say that Company X paid a total of $250,000 in dividends annually. Out of that, $80,000 was used as a special one time dividend. With 2 million shares outstanding, Company X would be paying $0.085 per share.
$250,000 – $80,000/ 2,000,000 = $0.085
Another example is if you have the prospectus of the investment that shows the percentage dividend. Pretend that Company X had a 3.25% dividend that’s issued at $25 per share…you would multiply 0.0325 x 25 = $0.8125 per share, or $0.81.
Or if you had 1,200 shares of Company X that paid $0.81 per share, you would earn $972 annually in dividends.
Now, that’s just one company. Imagine owning many stocks or funds that paid out consistent quarterly dividends – that’s a lot of free money that no one should pass up on.
I’m not saying that you should only select investments that offer dividends. Instead, include these investments as part of a diversified portfolio, especially if it’s a solid company that’s endured the test of time – it’s a great source of consistent passive income.
To help you get started, here are some of the more well-known companies that’s been paying dividends for more than 50 years courtesy of Kiplinger:
Chevron (CVX) – Dividends paid since 1912 at an annual dividend rate of $4.28.
3M (MMM) – Dividends paid since 1916 at an annual dividend rate of $3.42.
Johnson & Johnson (JNJ) – Dividends paid since 1944 at an annual dividend rate of $2.80.
Exxon Mobil (XOM) – Dividends paid since 1882 at an annual dividend rate of $2.76.
Pepsi Co. (PEP) – Dividends paid since 1952 at an annual dividend rate of $2.66.
As mentioned, the board of directors have the right to change the dividend amounts at any time, or stop it altogether. But I wouldn’t hold my breathe since the companies listed above have been consistent for more than half a century!!!
So if you haven’t already, you should definitely consider including dividend paying investments as part of your diversified portfolio.