Ahhhh dividends. The sign of the truly well-to-do company.
When a company has nothing better to do with its cash…and it has bought all of the corporate jets it wants, put in fountains in the executive suite bathrooms, and offered massage and dog therapy to all of its employees…it then can, at its own discretion, pay a dividend to its common shareholders of record.
Common. Shareholders.
Yep. That's who gets dividends. If you are an employee at a company and got, say, a bunch of stock options when the company signed you, you don't get dividends unless you buy out your options and turn them into actual shares. Dividends get paid quarterly in almost all companies in the U.S., and companies typically "declare" what their dividend will be a year or two or three in advance.
The Street doesn’t like surprises. So DaddyWarbux Rifles has made bank in this NeoZombie Apocalypse, and after buying all of the anti-zombie spray it ever wanted…along with the jets...and fountain…and doggy meditation classes…it has extra cash.
It plans to dividend out that cash on a regular basis, and just like most companies, it has forecasted earnings 3-4 years or more into the future. This dividend payout will be some relatively modest percentage of earnings.
Like…if earnings will likely be something like 50 million then 70 million then 90 million the next 3 years, the dividend might be declared as 25 million .
Doing the math here…that’d be a 50 percent of earnings payout ratio in year one...but if they keep the dividend flat and don't raise it, it'd be just 25 over 70 or 36 percent payout in year two…and if they still keep it flat in year three it’d be just 25 over 90, or 28 percent.
And in real life, odds are good they’d raise their dividend if their earnings performance was this good. So what then is the dividend yield here to investors who own a share of common stock?
Well, if the stock was trading for $40 a share and the dividend was 60 cents, then the dividend yield would be 60 over 4,000, or 1.5%. If the stock ran up to 60 bucks a share and the yield remained 60 cents, the yield would be 1%.
And if the stock tanked to 10 bucks a share and the dividend was still 60 cents a share, the yield would be 6%. Yield a la dividend.
And what should you with the few bucks you’ll make each month from your dividends? Might want to stock up on that zombie spray.
Related or Semi-related Video
Finance: What is a Dividend?1774 Views
Finance a la shmoop what is a dividend? well let's start with how [Bird flying with a bag]
dividends came to be well dividends are the result of a great and awesome quote
problem unquote.. what happened to corporations is they grew and became
dominant in their respective industries they retained so much cash profit even [man as a giant corporation crushing city buildings]
after building factories digging mines and smelting whatever they smelted well
that they couldn't figure out what to do with the cash so under a lot of [man with an open briefcase full of cash]
shareholder pressure and that is the common shareholders would threaten to
fire the Board of Directors, the fat and cash happy corporations just to begin to [common shareholders hitting the board of directors]
give it back to shareholders their owners who were in turn made happy by
that event and in many cases on the announcement of an increased dividend [share prices increasing and man shouts into a speaker]
policy share prices went up because of that whole investor happiness thing
there's a good structural reason for dividends to exist however they force [men bricklaying]
companies to be disciplined in their spending that is if companies aren't
disciplined, they don't have the money to pay the dividend and well when that
happens to a company basically everyone gets fired in most public companies [Donald Trump firing an employee]
dividends are viewed as a long-term commitment not as like a one-time thing
in fact during the Great Depression AT&T famously continued paying its dividend
without fail and many families relied on that dividend to make ends meet in the [family together eating dinner]
modern era companies in financial stress have even borrowed money just to make
sure they can pay their dividends to investors why well they believe that
when they get through the tough times they'll return to that massive [man running down a road sign posted under tough times]
profitability and they'll have a track record of continuing to pay dividends [oil machine working as cash piles up]
and that love is worth taking out a loan to pay a dividend the other big thing to
consider is that dividends are a very meaningful part of investment returns [dividends arrow pointing to investment returns]
which lousy financial journalists so often seem to forget many will decry the
era of the 70s as a lost decade looks like the stock market went nowhere from [man fumbling through a skip]
1968 to about 1980 right? well no it didn't go up but during that
period company's continued to pay their dividends and for the decade the [money going into a shareholders window]
dividend rate of the average S&P 500 company was about six percent so if
you've done nothing other than collect your six percent a year in dividends [Man collecting a 6% dividends]
well you would have been just fine you would have almost doubled your
investment money this way ignoring taxes from about nineteen sixty eight to [Man doubling his investment money from 1968-1980]
nineteen eighty and that's not bad for a lost decade
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