Dividend Investing
Ahh, my favorite topic. I'm sure every time I mention dividends to my wife, her eyes glaze over and her brain goes into autopilot with programmed responses of, "Wow" and "Sounds good hun!". Yes it is boring, but it's relatively safe, and the rewards for your patience are astounding. Now I know most people hate math, so I tried to make this very simple to make it easier to follow.
Behold the 8th wonder of the world, Compound Interest!
Let's look at an example of purchasing a long time dividend paying company, Enbridge. Enbridge is a pipeline company that transports energy, whether it be oil, solar power...heck they can transport water and grains if they wanted to. Currently the stock is selling for 47.26 on the TSX. It pays a dividend of $1.70 per share, per year.
For those who don't know, a dividend by definition is: payments made by a corporation to its shareholder members. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. So basically a company is paying you a small advance to keep using your money to make the company more money. Sounds good to me!
So to find the yield, divide the dividend by the stock price.
1.7/47.26 = 0.03597x100= 3.597%
These days that's a pretty decent return. Most banks pay you .75%, and that's in a so called "Hi interest account".So if you bought 100 shares of ENB, you would pay $4726 and get paid $170 every year. Put $4726 in an savings account at .75%, and you would get $35.45 every year minus capital gains.
Now there is some risk involved in buying stocks. A company could go broke and you could lose your money. That is why it's important to pick solid companies that have been in business for a long time and always increased their dividend. I'm talking blue chip stocks, or the Canadian big banks. Your stock value may go down, but who cares! Your in it for the long run. The last few weeks the stock market went down 5-10%. Was I scared and sold all my stocks at a loss to save the remainder of money? Hell no! I bought more stock at a discount and increased my overall yield. It was like the stock market was on sale!
Good, solid companies usually increase their dividend each year by 5-10%. Enbridge increased their dividend by 15% this year, which is huge! So lets say you have had these Enbridge stocks for a year, and they increase there dividend by 10%. You would now be paid $1.87 per share for that same $4726 investment and would be yielding 3.95%. Now imagine that growth over a 30-40 year time frame.
After 30 years of reinvesting the dividends, and with a increase of a conservative 5% per year on an average stock price of $45 per share, you would be getting paid $6643 per year in dividends. Some people would say " Pfft, it doesn't sound THAT great..". But if Enbridge increased there dividend by 6% every year, you would be paid $12,800 in dividends after 30 years. If you kept re-investing the dividends for 10 more years, you would receive a dividend of $248,266 every year. Imagine if you kept buying more stock every year on top of that...
Do I have your attention now?
(This is just an example, I am not an investment professional. This is just to show how compounding interest on dividends paid by companies can add up over the years.)
Behold the 8th wonder of the world, Compound Interest!
Let's look at an example of purchasing a long time dividend paying company, Enbridge. Enbridge is a pipeline company that transports energy, whether it be oil, solar power...heck they can transport water and grains if they wanted to. Currently the stock is selling for 47.26 on the TSX. It pays a dividend of $1.70 per share, per year.
For those who don't know, a dividend by definition is: payments made by a corporation to its shareholder members. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. So basically a company is paying you a small advance to keep using your money to make the company more money. Sounds good to me!
So to find the yield, divide the dividend by the stock price.
1.7/47.26 = 0.03597x100= 3.597%
These days that's a pretty decent return. Most banks pay you .75%, and that's in a so called "Hi interest account".So if you bought 100 shares of ENB, you would pay $4726 and get paid $170 every year. Put $4726 in an savings account at .75%, and you would get $35.45 every year minus capital gains.
Now there is some risk involved in buying stocks. A company could go broke and you could lose your money. That is why it's important to pick solid companies that have been in business for a long time and always increased their dividend. I'm talking blue chip stocks, or the Canadian big banks. Your stock value may go down, but who cares! Your in it for the long run. The last few weeks the stock market went down 5-10%. Was I scared and sold all my stocks at a loss to save the remainder of money? Hell no! I bought more stock at a discount and increased my overall yield. It was like the stock market was on sale!
Good, solid companies usually increase their dividend each year by 5-10%. Enbridge increased their dividend by 15% this year, which is huge! So lets say you have had these Enbridge stocks for a year, and they increase there dividend by 10%. You would now be paid $1.87 per share for that same $4726 investment and would be yielding 3.95%. Now imagine that growth over a 30-40 year time frame.
After 30 years of reinvesting the dividends, and with a increase of a conservative 5% per year on an average stock price of $45 per share, you would be getting paid $6643 per year in dividends. Some people would say " Pfft, it doesn't sound THAT great..". But if Enbridge increased there dividend by 6% every year, you would be paid $12,800 in dividends after 30 years. If you kept re-investing the dividends for 10 more years, you would receive a dividend of $248,266 every year. Imagine if you kept buying more stock every year on top of that...
Do I have your attention now?
(This is just an example, I am not an investment professional. This is just to show how compounding interest on dividends paid by companies can add up over the years.)
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