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Finance: What is a Dividend? 1777 Views


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Description:

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of earnings. Dividends are viewed as a commitment, or marriage, not a hot weekend date.

Language:
English Language

Transcript

00:04

Finance a la shmoop what is a dividend? well let's start with how [Bird flying with a bag]

00:10

dividends came to be well dividends are the result of a great and awesome quote

00:15

problem unquote.. what happened to corporations is they grew and became

00:19

dominant in their respective industries they retained so much cash profit even [man as a giant corporation crushing city buildings]

00:25

after building factories digging mines and smelting whatever they smelted well

00:30

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]

00:33

shareholder pressure and that is the common shareholders would threaten to

00:37

fire the Board of Directors, the fat and cash happy corporations just to begin to [common shareholders hitting the board of directors]

00:42

give it back to shareholders their owners who were in turn made happy by

00:46

that event and in many cases on the announcement of an increased dividend [share prices increasing and man shouts into a speaker]

00:50

policy share prices went up because of that whole investor happiness thing

00:54

there's a good structural reason for dividends to exist however they force [men bricklaying]

00:59

companies to be disciplined in their spending that is if companies aren't

01:03

disciplined, they don't have the money to pay the dividend and well when that

01:08

happens to a company basically everyone gets fired in most public companies [Donald Trump firing an employee]

01:12

dividends are viewed as a long-term commitment not as like a one-time thing

01:16

in fact during the Great Depression AT&T famously continued paying its dividend

01:21

without fail and many families relied on that dividend to make ends meet in the [family together eating dinner]

01:26

modern era companies in financial stress have even borrowed money just to make

01:30

sure they can pay their dividends to investors why well they believe that

01:35

when they get through the tough times they'll return to that massive [man running down a road sign posted under tough times]

01:38

profitability and they'll have a track record of continuing to pay dividends [oil machine working as cash piles up]

01:42

and that love is worth taking out a loan to pay a dividend the other big thing to

01:47

consider is that dividends are a very meaningful part of investment returns [dividends arrow pointing to investment returns]

01:50

which lousy financial journalists so often seem to forget many will decry the

01:56

era of the 70s as a lost decade looks like the stock market went nowhere from [man fumbling through a skip]

02:01

1968 to about 1980 right? well no it didn't go up but during that

02:06

period company's continued to pay their dividends and for the decade the [money going into a shareholders window]

02:11

dividend rate of the average S&P 500 company was about six percent so if

02:16

you've done nothing other than collect your six percent a year in dividends [Man collecting a 6% dividends]

02:20

well you would have been just fine you would have almost doubled your

02:23

investment money this way ignoring taxes from about nineteen sixty eight to [Man doubling his investment money from 1968-1980]

02:27

nineteen eighty and that's not bad for a lost decade

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