Last week we answered the question, what is a stock? This week, lets look at one of the biggest benefits of owning stocks; getting paid a dividend. So what are dividends? Dividends are a portion of a company’s earnings that are distributed to shareholders.
Dividends are paid as a dollar amount per share, so if you own 100 shares in a company and they pay a $0.25 dividend per share (DPS) each quarter, in one year you will have received $100. If the shares were bought at $15, for a total price of $1,500, then the dividend yield would be 6.6%.
Dividends play a major part in the Smith Manoeuvre, where you can make more (after tax) than the cost of the interest on your home equity line of credit (after tax deduction). This can help to pay off your mortgage sooner and convert your debt to a tax-deductible investment loan.
Watch out for any dividend funds that may not be adding what you would expect to your portfolio. Some fund managers may use practically any other form of investment to try to increase their gains. Some of this is due to the need for the fund manager to attempt a larger gain to outperform the relatively high Management Expense ratio (MER) on these funds.
This infographic created by Mint answers the question, what are dividends? Check back the next next Monday for the third investing infographic from Mint. (click image to enlarge)