What is a dividend? Someone new to investing and hearing about the word, “dividend”, may ask. Therefore, I thought I would take time, to break down what a dividend actually is, what the benefits are and what it can do for you, as an investor and individual looking to invest.
What is a Dividend?
By sheer definition, a dividend can be two things, simultaneously. A dividend is money paid to a shareholder of a company, whether that be from the net income (profits) or from their reserves (retained earnings/profits). Similarly, dividend has the word, “divide” within the word. One could look at a dividend, as dividing the profits among shareholders and to retain profits within the company. For instance, we will take a look at the company – Johnson & Johnson (JNJ is their ticker symbol) and their recent quarterly financial statement filing from Quarter 1, below:
We can see, above, that the company had net earnings or net income of $4,367, which is actually $4 billion dollars, as this is disclosed in millions. Based on the number of shares that are outstanding to individuals, when dividing the profits by that number, you are calculation earnings per share or EPS. Therefore, JNJ earned $1.63 per share of stock outstanding. How did JNJ “divide” those earnings or profits? The last line, you can see, they had a dividend given to each share of stock owned, in the amount of $0.84. JNJ, then, gave a dividend of cash (money) out of their profits to each share holder of stock in the company. If you owned one share of JNJ stock, you received $0.84. If you owned 10 shares of JNJ stock, you received $8.40 and so forth. Therefore, they divided their earnings in two ways. One was an $0.84 cash dividend and the remaining $0.79 was to keep in reserves or retained earnings. Make sense?
What is so great about a Dividend?
Now that we understand what a dividend is, so what? What is so great about a dividend? Why would you, someone who owns share in a company, care about a dividend?
Healthy: First, a dividend shows (typically) that the company is healthy & profitable. It becomes very insane when companies are paying a dividend that is greater than their earnings per share, consistently. We can touch on more of that later. Therefore, if a company has the ability to pay the dividend, because of earnings, it shows their financial health is “well”.
A Return: Secondly, a dividend payment is a way to return your investment back to you, as a shareholder, in the form of a dividend. You have invested your money to buy and own a share(s) of a company. What better way to reward a shareholder, during profitable years, than the form of a cash dividend?
Income Source: This doesn’t come to a shock to those who frequent our blog, as dividends are one of our main sources for financial freedom. A dividend can be an income source for you. See our monthly income articles or our portfolio page. You’ll see the amount of projected income from our investments, at any given time. A dividend can be a very valid and reliable income source for you. You can use a dividend payment to pay for your living expenses. Further, there is preferential tax treatment to dividends, see this article on what $50,000 in dividend payments looks like!
Reinvestment: When you receive a dividend, and depending on which brokerage you use, you have the ability to automatically reinvestment RIGHT back into the SAME company who paid you, thus, increasing your shares. When doing this, this will ultimately (should, at least) increase your income going forward. The other option you have is to build up cash from dividends and find a new investment. I currently have automatic reinvestment on, but that is based on personal preference.
Now, That’s a Dividend!
I hope that helps answer the question, “What is a Dividend?”, with full details. Who is ready to invest their money into a share of a company, that produces a dividend? Look at those benefits above, it just doesn’t get any better than that. Please do not hesitate to leave a question in the comments below, send us an e-mail or find us on twitter. We are looking forward to what you may have to say and hope we talk soon! Good luck and happy investing to all!
-Lanny