Homemade Dividends

Finance Allah shmoop what our dividends and how do they

affect stock prices Well guess what People they help That's

how they affect stock prices Well what are they What

are dividends Well they're usually paid in cash to shareholders

of record I legally if you own the stock than

you're entitled to the dividend that is if you were

In fact according to the brokerage where you held these

shares the owner of record as of say June fifteenth

then you too will receive a dividend of twelve cents

for each share you own payable on July twenty eighth

or something like that So dividends are declared at will

by the board of the company and are usually the

domain of well heeled already established large companies with so

much excess cash profits that the more or less don't

know what else to do with it A T and

T Coke Disney Apple They all pay huge dollar amounts

in aggregate total dividends Some have done so for a

hundred years or more like a T Others like Apple

just started Apple had just passed one hundred billion dollars

in cash on their balance sheet when finally shareholders said

Hey what about some of that cash for me So

they're at least two logical ways to think about dividends

offense and defense from an offensive perspective And you know

we love being offensive here It shmoop central dividends Add

to the compound ing of stock returns like Tongue Guards

Inc has grown in share price six percent a year

kind of meth performance flood It has had a three

percent dividend and it keeps raising that dividend each year

So combined that stock is delivering total return of nine

percent better than in ten years The six percent compound

ER would grow to one point Owe six to the

tenth power or about one point eight acts Not quite

double But if it compounded at one point o nine

to the tenth power well it is grown to two

point four acts like before two and a half times

as much money as you started with a decade earlier

right or in an initial thousand dollar investment What you'd

have twenty four hundred dollars minus the eighteen hundred dollars

or six hundred dollars Mohr with dividends in there and

gas were rounding dramatically and the dividends get raised each

year Bottom line Just dividends are good they add to

your total return We're ignoring taxes also here and we're

ignoring the possibility that you could directly reinvest those dividends

Taub I'm or shares of that stock which would then

have even Mohr Power incom pounding All right But that's

offense What about defense Like your young you want to

own stocks for thirty years but you're afraid of the

downside The dark side the century stocks right That's one

of stock goes down one hundred percent Yeah well stocks

that pay a dividend rarely if ever go fully bust

for them to have gotten to that happy place where

they pay a divvy They're probably a pretty well established

domain owner or at least one point had enough excess

cash to distribute back to its owners in the form

of a dividend But there's another even better defensive thing

that dividend paying stocks offer That is they are cushions

in a bad market And the number of feathers in

that cushion is metered or measured by what's called the

payout ratio which is the percentage of earnings that a

company is paying out in dividends That is if the

company is earning a dollar a share in his paying

out thirty cents a share in DV dollars while their

payout ratio is only thirty percent So their earnings could

drop a lot and they'd still easily be ableto pay

their thirty cent dividend But if they're ratio was more

like eighty percent like they earned a dollar and they're

paying eighty cents in dividend dough than Ooh that's tight

If earnings dropped well even a quarter the company would

be paying out Maurin dividend payments than they have earnings

And this has happened in spades with modern day oil

industry who had to borrow money to be able to

continue to pay its dividend and not cut it Why

such a stretch and all the effort to not cut

the divvy Well because Wall Street views a dividend is

a kind of commitment like a promise ring It means

you are fully off tinder and match and J date

So if you ever cut or do away with your

divvy the management is usually all fired with their careers

pretty much oriented toward the uber you know driving them

not running a company like Doria Well look at what

happened to G E in the modern era when they

cut their dividend Yeah Ouch But let's say the whole

market craps out you know bad economic cycle or whatever

and our company goes from earning a dollars shared only

seventy cents and the stock goes from twenty bucks a

share to ten Well then it's payout ratio in that

thirty cent dividend world is now thirty over seventy or

forty three percent payout ratio It's higher payout ratio than

it wass but still presumably really safe to continue going

Maybe they won't raise it again this year but it's

not going away And on twenty bucks a share A

thirty cents of Devi well then was only yielding one

point five percent Pretty small Davey But now at ten

bucks a share and thirty of Debbie Well it's yielding

thirty cents over ten dollars or three percent Well with

Treasury Bills yielding about the same amount they quote on

ly unquote bet you have to make and buying that

stock is if it won't cut The dividend comes up

You get more money and dividends that air pretty safe

Well you feel pretty good about buying stock if you're

gonna hold it along And if they don't cut the

Davy well you not only get a low price to

earnings multiple stock likely with a lot of price appreciation

in the future but you get a more tax efficient

cash piece coming back to you How our dividends Mohr

tax efficient Well bonds or tax as ordinary income think

forty or fifty percent for hire Taxpayers in blue states

while qualified equity dividends are tax that much lower rates

like half that rate in twenty twenty five percent Something

like that So three percent on bonds nets the big

taxpayers one point five percent and three percent on Davies

And that's more like two and a quarter percent something

like that Seventy five more basis points toe like you

know buy a lot with anyway Dividends They're good They

cushion stocks in the bad times and they add your

compound returns and you want to come pound at a

really high rate Kind of like you're compounding your lock 00:06:03.527 --> [endTime] Yeah Yeah