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 a Dividend?1774 Views
Finance a la shmoop what is a dividend? well let's start with how [Bird flying with a bag]
dividends came to be well dividends are the result of a great and awesome quote
problem unquote.. what happened to corporations is they grew and became
dominant in their respective industries they retained so much cash profit even [man as a giant corporation crushing city buildings]
after building factories digging mines and smelting whatever they smelted well
that they couldn't figure out what to do with the cash so under a lot of [man with an open briefcase full of cash]
shareholder pressure and that is the common shareholders would threaten to
fire the Board of Directors, the fat and cash happy corporations just to begin to [common shareholders hitting the board of directors]
give it back to shareholders their owners who were in turn made happy by
that event and in many cases on the announcement of an increased dividend [share prices increasing and man shouts into a speaker]
policy share prices went up because of that whole investor happiness thing
there's a good structural reason for dividends to exist however they force [men bricklaying]
companies to be disciplined in their spending that is if companies aren't
disciplined, they don't have the money to pay the dividend and well when that
happens to a company basically everyone gets fired in most public companies [Donald Trump firing an employee]
dividends are viewed as a long-term commitment not as like a one-time thing
in fact during the Great Depression AT&T famously continued paying its dividend
without fail and many families relied on that dividend to make ends meet in the [family together eating dinner]
modern era companies in financial stress have even borrowed money just to make
sure they can pay their dividends to investors why well they believe that
when they get through the tough times they'll return to that massive [man running down a road sign posted under tough times]
profitability and they'll have a track record of continuing to pay dividends [oil machine working as cash piles up]
and that love is worth taking out a loan to pay a dividend the other big thing to
consider is that dividends are a very meaningful part of investment returns [dividends arrow pointing to investment returns]
which lousy financial journalists so often seem to forget many will decry the
era of the 70s as a lost decade looks like the stock market went nowhere from [man fumbling through a skip]
1968 to about 1980 right? well no it didn't go up but during that
period company's continued to pay their dividends and for the decade the [money going into a shareholders window]
dividend rate of the average S&P 500 company was about six percent so if
you've done nothing other than collect your six percent a year in dividends [Man collecting a 6% dividends]
well you would have been just fine you would have almost doubled your
investment money this way ignoring taxes from about nineteen sixty eight to [Man doubling his investment money from 1968-1980]
nineteen eighty and that's not bad for a lost decade
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