QIFL | The Beautiful World of Dividends

Never depend on a single income. Make investments to create a second source. –Warren Buffett

Close your eyes and imagine: the CEO of a major company waking up early in the morning and thinking, “How can I make ____________(insert your name here) money”. That would be pretty awesome right! Turns out, that is a simplified version of how dividends work.

It starts with you doing some stock research. You find a company you like so you decide to buy some shares. Shares are just word that means a tiny part of the company. Let’s say that the stock is being sold for $10 per share, and you buy 100 shares. The total cost to you will be $1000. Now you own those shares. If the stock goes up in price you can sell them for even more money. But let’s put that aside for now.

You also notice that the company offers a thing called dividends. This is a portion of the stock paid out to you in cash. So this stock that you bought has yearly dividend yields of 4% paid out quarterly. There’s a lot of jargon in that sentence so lets unpack it a little. A dividend is a sum of money paid out to you, the shareholder per stock you own. Since we see that it is 4%, that means every year the company will pay you 4% of the value of the stock. It is paid out quarterly this means that this 4% is divided in 4 and paid out every 3 months.

Let’s see the math behind this. We know our dividend yield, the percent of the stock we get paid, is 4% every year. 4% of $10 (stock value) is $0.40. This means every year for each share you own you will get paid $0.40. But the $0.40 is paid out quarterly. $0.40 divided into 4 is $0.10. This means that every 3 months the company will pay you $0.10. That’s for one share but remember you bough 100 shares. So $0.10 times 100 shares is $10. Every 3 months this company will pay you $10, that’s $40 every year. You made that free money and all you did was chill.

Published by the Queen’s Initiative for Financial Literacy

Article Author: Mackenzie Ferreira, Senior Analyst