Another post in the Teaching my kids series. This time a post were I try to explain to my kids what dividends are.
As frequent reader of my blog you know that I’m writing some posts to try to financially educate my kids. I know they are still very young (7 and 9) but it is never too early to start. And they can read these blog posts later on in life 😉 (This is probably the case, because they don’t speak or read English very well at this moment – You got to love an understatement!).
This is another blog post to keep the “snowball of knowledge” rolling.
I think when you educate kids about money, they will benefit from it for the rest of their lives. Or as the saying goes: “What is learned in the cradle is carried to the tomb”. And to educate your kid is your responsibility as a parent.
My youngest one asked me what I was doing yesterday, when I sat behind the computer. I told her that I was writing a post about dividends. She looked at me a little bit puzzled and asked me what dividends are and if I like it.
What is dividend?
Dividend is a distribution of a portion of the company’s earning to the shareholders. If you have bought shares of a company through one of the stock markets (e.g. Amsterdam, London or New York) you own a small part of the company. See my post about What is a stock for more information. You can say that shareholders are in fact co-owners of the company. If the company makes a profit, the board of directors of the company can decide to pay out a portion (or all) of that profit to the owners (read: shareholders). This is called dividend.
Why pay dividends?
The purpose of paying dividends is to attract investors: dividend can therefore be seen as a reward for people who hold the shares for a longer period of time. The board of directors of a company can choose to pay a dividend or not.
A healthy company with good management will never pay out the entire amount of profit as a dividend. The company also needs money to grow or for R&D. The payout ratio is the percentage of the profit that the company pays out as dividend. For more information about the payout ratio read my post.
Dividend is normally paid out on a regular basis. In Europe most companies pay an annual or bi-annual dividend. In the United States of America dividends are typically monthly of quarterly.Companies find it important to pay a regular dividend. Because if a company decides to stop paying dividend, the stock isn’t much attractive anymore for most shareholders. And if this is the case, most shareholders will start to sell their stokes which results in a fall of the stock price.
As a Dividend Growth Investor (DGI) I like companies that pay dividend. And I like especially companies that increase their dividend every year 🙂 .
How is the amount of dividend determined?
The board of directors determines the amount of dividend. They submit their dividend proposal for approval to the annual shareholders meeting. There are two possible ways to pay a dividend. It is possible to pay out in cash (cash dividend) and in shares (stock dividend).
Dividend and the share price
Of course, the payment of dividend affects the stock price. If you own the stock on the so-called ex-dividend date, you are entitled to a dividend. On this day the stock price often drops immediately, the decrease is usually related to the value of the dividend. More information about the important dates regarding dividend can be found in my post 3 important dates for dividend investors.
Dividend investing is like watching paint dry of seeing grass grow – Charlie Munger
Investing for the dividend
With investing you can earn money if the price of the stock rises and you sell the stock at a higher price than for which you have bought the stock. If you want to keep the stock, you can still make money, just by collecting the dividend that the company pays out. Dividend is therefore another way in which you can earn money. Despite a stock price decrease, it is thus possible to achieve a positive return on your shares.
As mentioned above, as DGI I am focusing on these dividend stocks. Why are you wondering? Then read my post about Why dividend investing?
This is my nineteenth post about teaching my kids. I hope my kids at the age of say 18, have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.What do you tell your kids about money and investing? What do you like about dividends? And what are your thoughts about dividend growth investing?
I like to hear from you!
Help me get the “snowball of knowledge” rolling and be so kind to share this post.
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