13 Jun What The Heck Is A Dividend And What’s The Big Deal?

So on my Instagram handle @everythingmoneyofficial, I recently did a poll amongst my users and asked if they knew what a dividend was and why certain companies do them.

Keep in mind, I did a hashtag for #investing. That drew an additional 121 people to the story. Amongst the 524 people that saw the story according to the metrics (including the people actually looking at #investing feeds), only 34% knew what a dividend was and why they are important!

Well I figured I’d be doing a disservice not to help everyone understand what a dividend is and why they freakin rock and can make you rich if you follow a simple, consistent strategy! So as always, let’s get to the money!

What the heck is a dividend?

A dividend is a sum of money paid regularly by a company to its shareholders out of its profits or reserves. So in normal speak, it’s a company writing a check to people who hold stock in the company regardless of the performance of the stock. So it doesn’t matter if a stock is up 10% or down 20%, the dividend still gets paid to shareholders!

Most companies choose to do this on a quarterly basis but there are companies who do it monthly, bi-annually and annually. The point is, whenever they decide to do a payout, it remains on a consistent schedule so shareholders know when they are getting paid.

Now, a dividend is different than stock. When you are a shareholder in a company, you own a piece of how much that company is worth. For example:

I own 30% of my company Courson’s Doggie Stylers, the best doggie style in town! My friend, Samantha, is a shareholder in the company for 5% of the company. If the company had $1,000,000 in revenue last year, then my 30% is worth $300,000 and Samantha’s is worth $50,000. 

Now, let’s stick with Samantha on this example since she’s an investor. She doesn’t get paid $50,000/year for owning stock. She would only get paid $50,000 in full if she sold all of her stock in the company to someone else. She could even opt to only sell half of her shares and get paid $25,000 and hope that the company continues to grow and make her remaining shares worth more over time. But that is the only way she can get paid with stock.

Now, let’s say that Courson’s Doggie Styles was doing very well and to incentivize people to keep their stock and not sell it, I told them I would pay a dividend every three months (known in the financial world as a “quarter”) out of the profit. Well, let’s say the company is earning profits of 10%, that means we are making $100,000 of pure profit every year. People apparently pay big bucks for personalized dog grooming!

Another reason companies pay a dividend is to reassure their shareholders that the company is doing well and encourage them to keep investing more money to help the company grow!

Anyway, a dividend payment depends on how many shares you own in a company at the time of the payment. So for the sake of simple math, let’s say Samantha’s $50,000 purchased 500 shares. That means she would be paid 500 x the amount of the dividend. So le’t’s say the dividend is $0.75 per share. That means it would like look this.

500 shares x $0.75 per share = $375 dividend payment

So every 3 months, just for having shares in the company, Samantha is going to get paid $375. In a year, that’s $1500!

The strategy to become a dividend millionaire

If you haven’t heard of Warren Buffett, you must not pay attention to the stock exchange or investing news. He is one of the richest men in the entire world and he did it through investing in other companies. He is notorious for collecting hundreds of millions of dollars every quarter from companies like Apple.

Jeff Bezos, the founder of Amazon and currently the richest man in America, once asked Warren Buffett why more people didn’t use his investing strategy because of its simplicity.

Buffett famously replied “Because no one wants to get rich slowly.”

Ain’t it the truth. I just wanna be a damn billionaire by 40 like these other guys…without all the work and risk, of course. Is that too much to ask?!

Yes. Yes, it is too much to ask. But you can be a millionaire over time by copying them and here’s how! Behold! The power of reinvesting your dividends! (Yes, we have to do basic math again. Sorry, not sorry.)

Some super easy 4th grade math

There are companies called “dividend kings” because they pay an unusually high dividend compared to most companies. Now their stock is not likely to grow leaps and bounds over the years, but it’s a great, surefire bet for a long-term strategy. Here’s why.

Seriously, stop scrolling so fast and pay attention to this.

Let’s say I make a $20,000 initial investment into a company and it pays a 6.37% dividend (yes, I’m using an actual publicly traded stock that is a company everyone knows as this example). If I NEVER BUY ANOTHER SHARE of the stock but I REINVEST THE 6.37% DIVIDEND every time I get paid on it…in 20 years…my $20,000 is now worth…

$64,172.71.

Keep in mind that this is if the stock never goes up in price and stays flat. This is just your dividend value compounding on top of itself. No wonder Einstein called compound interest the eighth wonder of the world!

There are a few more considerations to be made with this strategy but in general, it really is that simple. What makes it difficult is the self-control and discipline to do this. Most people want to pull out their money and go spend it. The reality is once you start, it gets much easier over time so give it a go!

The end…yeah that’s basically it

Hopefully that was simple enough. If you feel intimidated, don’t. With all the math (it’s like 4th or 5th grade level stuff) and financial terms, people can want to shut down learning this stuff. If that’s the case, consult with a certified financial professional and they can walk you through this.

It’s not hard and it’s a fantastic strategy if you don’t have one. Honestly, it can be a fantastic strategy even if you do have a strategy!

I’ll get into more numbers around how this compares to average market returns on a later date, but know that it’s extremely competitive and often beats averages depending on the time frame.

Keep studying up on this and remember, if a basic guy like me can do this, so can you!