Hey Bowtie Nation, Joseph Hogue here and all you out there in the Nation know how much I love dividend stocks. I’ve shared how much I make on dividend stocks each month, how to live off your dividends and know there are a lot of you out there with questions on dividend investing. So I’m putting together a complete series, dividend stocks for beginners, answering your biggest questions to get you started making money with these income investments!
In this video, we’ll start with the dividend basics every investor must know. What is a dividend and dividend yield? How do you calculate dividends and when do you get paid?
Make sure you join the community and look for the dividend stocks for beginner’s playlist in the channel menu because I’ll be following this one up with your questions on dividends and taxes and dividend strategies you don’t want to miss!
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If you clicked through a dividend stocks video, I’m assuming you already know the power of dividend investing. This graphic shows how much of the total stock market return was from dividends, in orange, versus price gains in blue. Nearly half, 42% of the total return to stocks for investors comes from dividends. In decades with major stock crashes like 2000, dividends might be the only positive return you make so investors without a dividend strategy could be missing out.
One of the most important things to understand about dividend stocks is just what it is, and bear with me because this is more important than you might think. A dividend is a decision made by the company to return cash to shareholders rather than keep it to invest in the company’s growth.
So, every few months, the Board of Directors gets together with management to look forecast cash flow and determine how much the company needs to reinvest in projects and expenses and how much excess cash it has that can be returned to shareholders. With this, the Board makes the decision for how much cash to pay out and when…that’s the dividend paid out per share of stock.
That’s hugely important in a way most investors don’t realize. I’ll show you the step-by-step to how a dividend is paid later but it comes down to that decision by the company to return investor money rather than reinvest.
This is why most fast-growing tech companies don’t pay a dividend. Companies like Tesla, growing sales at 70% a year, and even older Amazon, don’t pay dividends because there are so many growth projects to reinvest that money. Management has prioritized growth over shareholder cash return.
This means two important things you need to remember about dividend stocks. First, accept that the share price is probably not going to increase as fast as it might on other stocks. Investors are taking some of their money now rather than letting the company reinvest it for the future…and that’s the tradeoff you have to make.
Also though, for many of the really high yield dividend stocks, the share price may even fall over time. This is one of the biggest problems in dividend investing, investors chasing those stocks with dividends of 10- and 15% and then wondering why the share price falls. I’ll show you what a good dividend yield looks like later but remember, if a company is paying out a double-digit dividend yield, that money has to come from somewhere and it’s probably going to destroy shareholder value in the long-run.
One of the most misunderstood parts of dividend investing is the dividend yield so I want to take you through this with some examples.
The dividend yield is the dividend amount per share divided by the share price, it’s a percentage return on the stock. For example, Apple pays a dividend of $0.92 a year on a stock price currently at $150 per share. So, if we divide $0.92 by $150, we get a dividend yield of 0.0061 or 0.61% yield.
Where the confusion comes in for investors is not understanding if this is a monthly return or quarterly or annual and how changes in the price affect the yield.
Nation, all dividend yields are shown on an ANNUAL basis. Anytime you see a dividend yield percentage, that is the percentage return you would earn over the next year if you invest at the current price.
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Now, most dividend stocks pay every three months. So, when you see that percentage, so 0.61% annual yield in the case of Apple, you are going to be receiving one-fourth that amount every three months. Let’s look at the quarterly amount paid and this gets a little less confusing. If we click through the Historical Data tab on Yahoo and change it to show dividends, we can see all the dividends paid by the company. We see that Apple just increased its dividend to $0.23 per share in May and since companies rarely cut the dividend once it’s increased, that’s the amount you’ll receive per share every three months.
So, if we take that $0.23 per share dividend payment and get it every three months, or four times per year, we’ll receive $0.92 a share over the next year. That divided by the current stock price gives us that 0.61% dividend yield.
I want to show you one more example and then reveal how a falling stock price can trick dividend investors. Here we see shares of Coca-Cola, ticker KO, arguably one of the most popular dividend stocks pays a dividend of $1.76 and a dividend yield of 2.83% on its shares, now at $62.50 each. We can click through to see the dividend information and confirm that every three months, Coke pays a $0.44 per share dividend so every year that amounts to $1.76 per share. Take that $1.76 divided by the current share price and you get the 2.83% yield return on an annual basis.
So, I’ve warned you about high dividend yields and we’ll talk more about that but then what is a good dividend yield, what’s that perfect number that balances shareholder cash return and being able to reinvest enough to grow the company?
You can get some perspective by looking at the market average, the SPDR S&P 500 ETF, ticker SPY that tracks the market index, pays a dividend just over 1.5% a year. Now a lot of the stocks in the overall market don’t pay a dividend so if we just look at dividend stocks with the Schwab U.S. Dividend ETF, ticker SCHD, we see stocks in the fund pay an average 3.4% dividend yield.
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Then looking at dividend stocks, anything around 3% is going to be average and anything above four- or five-percent is really good. But here, we need to remember that more isn’t always better.
For example, researching for a dividend stock video last month, I found the highest total return dividend stock was NOT the one with the highest yield. Ares Management, ticker ARES, has produced a 285% total return over the last five years…that’s 30% a year but the dividend yield is only 4.5%…not bad but not even close to the highest yield you can find.
In fact, MFA Financial, one of the highest yielding dividend stocks with a 15.6% yield has destroyed investor value over the last five years. Even as investors have collected $11.70 in dividends, the share price has plunged 68% from $35.12 to $11 per share and the dividend has been cut from $0.80 to just $0.44 per share.
And that’s the real danger of chasing high dividend yield stocks. If you had invested in MFA five years ago on what was then a 9.1% yield, the $0.80 per share quarterly dividend divided by $35.12 per share…you would be shit out of luck today. You would now be collecting that current $0.44 per share dividend each quarter or $1.76 per year for a yield of just 5% on what you paid for the shares and the value of those shares has been cut in half.
This is why, whenever you’re looking for dividend stocks, you need to look for a history of dividend increases and a rising share price.
I’ll show you how to calculate your dividends and exactly when you get paid next but first, I want to personally invite you to get the Weekly Bow Tie, our free weekly newsletter with all the stock market news, strategies and trends you need to know. Each week, before the market opens, I’ll show you what I’m watching and the stocks that could highlight the week. It’s all totally free, just something I like to do for you out there in the community so look for the sign-up link below.
One of the most frequent questions I get about dividend stocks is how to calculate dividends…not the yield but the actual payment amount, how much the company pays and how much you get.
You can always look for how much a dividend stock has paid by looking at the dividend history on Yahoo Finance. Again, that’s here in the historical data tab and shows all the dividend payments made. Remember, that’s a per share amount so for every share of stock you own, you’ll receive that dividend amount.
Using Apple as an example again, if the company pays a dividend of $0.23 a share every three months and you own 100 shares, then you’ll get $23 deposited into your investment account. If the company increases its dividend to $0.25 a share, then you’ll get that new amount times the number of shares.
You can also find the dividend amount you’ll get by using the dividend yield. If you see Apple pays a 0.61% yield, then times the stock price of $149.50 is $0.91 per share. Remember, that’s the yearly amount so you have to divide by four to find how much you’ll get per share every three months.
Now that you know how much you’ll get, you’re probably thinking, OK so when are dividends paid…where’s my money man?
Whether they pay monthly or quarterly, companies pay dividends on an extremely consistent basis. You see here in Apple dividends back to 2018, the company always goes ex-dividend in the first week of February, May, August and November.
Investors love that consistency, knowing when a company is going to pay dividends, and companies try to keep that schedule. Not only does that help investors plan and pay bills with the cash flow but it also sets up lots of great dividends investing strategies like the 12-stock portfolio I highlighted last month that will pay you every single week that I’ll link to in the description below.
The actual process companies use to pay dividends is pretty straight forward. The board of directors will figure out how much cash the company wants to return to investors and sets the per share dividend. In what’s called the declaration date, they’ll also set the day for this next date, the ex-dividend.
Now the ex-dividend date is the most important date for investors. This is the first day the stock trades WITHOUT the dividend. I’m going to say that again because it means you’ll either get the dividend or not. The ex-dividend date is the first day that investors buying that stock will not get the dividend so if you want the coming dividend payment, you need to buy the shares before that day.
Of course, even if you wait, you’ll still get all the dividends declared in the future if you still own the stock but you just won’t get this current upcoming dividend if you buy the stock on or after the ex-dividend date.
That ex-dividend date is usually about 30 days after the declaration, so investors know who is about to pay a dividend on the stock. In fact, a lot of investors will buy the stock before this ex-dividend date just to collect the dividend.
It takes a couple of days to record all the investors that owned the stock on the day before the ex-dividend date and should get the dividend so this is followed by the date of record. It’s not really a day that means anything, just internal accounting for the dividend.
Finally, payment usually goes out about 10 days from the record date and you can expect your investing account to show the dividend within a few days after this.
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