Well, you know how pervasively the catch phrase “Hmmm, that’s interesting” is used? Why? Because something of interest is something of value. Yeah, that’s where the notion of interest came from. So financially speaking, the thing of value you have is your capital…your money...the dough you saved from mowing lawns all summer. And you can use that capital to make more capital for yourself without having to, uh...mow more lawns.
How do you pull off this magic? You invest your money. And one interesting way to invest it is in bonds. Which, conveniently for this video, pay interest.
Interest is just rent on your money. And when you buy a bond, you are the landlord. That is, people will pay you, say, 60 bucks a year to rent a thousand dollars from you. The rate they are paying then is 6 percent a year to rent that lawn-mowing grand. And if you were buying a formal, publicly traded bond, like the ones offered by AT&T and Comcast and Time Warner and others, you’d be paid your interest twice a year. That is, you’d get 30 bucks on Jun 30 and another 30 bucks just before New Year’s Eve. Just in time to buy a bunch of those obnoxious noisemakers. And you’d collect that interest until the bond says it’ll pay you back your original amount, called principal. So if this were a 10-year bond paying 6 percent interest, note how much interest you'd make from the grand you invested in that 6% bond. You did nothing for 10 years, just sitting on your fat butt watching the Cleveland Browns lose football games, and you collected thirty dollars 20 times for a total of 600 bucks in total interest…and then you got your grand back.
600 bucks for doing pretty much nothing. A concept with which the Cleveland Browns are very familiar.
Related or Semi-related Video
Finance: What is Dividend Yield?4 Views
finance a la shmoop what is dividend yield? ah dividends the sign of the truly
well-to-do company well when a company has nothing better to do with its cash
and it has bought all of the corporate jets it wanted put in fountains in the [Fountain of water appears]
executive suite bathrooms and offered massage and dog therapy to all of its
employees it can then at its own discretion pay a dividend to its common
shareholders of record common shareholders yep that's who gets
dividends if you're an employee at a company and got say a bunch of stock [Employee stood beside company]
options when the company signed you you don't get dividends unless you buy out
your stock options and turn them into actual shares or common stock yeah well
dividends get paid quarterly in almost all companies in the US and companies
typically "declare" what their dividend will be a year or two or
three in advance if they can Wall Street does not like surprises so Daddy [Wall Street appears]
Warbucks rifles has made Bank in this neo zombie apocalypse and after buying
all of the anti zombie spray it ever wanted along with the jets and fountain
and doggy meditation classes well the company has extra cash it plans to [Dividends by a company building]
dividend out that cash on a regular basis and just like most companies
it has forecasted earnings three or four years or more into the future and this
dividend payout will be some relatively modest percentage of earnings like if
earnings will be something like 50 million then 70 million then 90 million
x3 years while the dividend might be declared as 25 million dollars a year [Dividend payments appear]
while doing the math here that'd be a 50% of earnings payout ratio in year one
but if they keep the dividend flat and don't raise it well it would just be
then twenty five over seventy or thirty six percent payout in year two and if
they still keep it flat in your three well it would just be a 25 over 90 there
that's a 28 percent payout and in real life odds are good they'd raised their
dividend if their earnings performance was you know this good [Thumbs up appears]
good performance right so what then is the dividend yield here to investors who
own a share of common stock well if the stock was trading for 40 bucks a share
and the dividend was 60 cents than the dividend yield would be 60 over 4000 or
0.6 60 cents there over the 40 bucks or 1.5 percent if the stock ran up to 60
bucks a share and the yield remained 60 cents well than the yield would be one
percent right 60 over 6,000 there yeah and if the stock tanked to be just 10 [Stock plot line crashes]
bucks a share and the dividend was still 60 cents a share the yielded be 6
percent so you can imagine how high dividend yields kind of cushion the
downside of stock like getting 6% it's pretty safe you know people are gonna be
happy to just collect your divvy right all right well that's yield a la
dividend and what should you do with the few bucks you'll make each month from [Man discussing dividends]
your dividends well you might want to stock up on that zombie spray in case
that things go awry [Person spraying zombie with anti zombie spray]
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