Because I have told so many people to invest directly in companies they understand and are comfortable with, they always have several questions for me. The overwhelming question is, what’s a dividend?
As I teach people and financial professionals all over America about how to make money work for them, I often recommend they buy stocks that pay high dividends. You can see people’s eyes glass over as I start talking about this issue because so many people just don’t have a clue of what I’m talking about.
Unfortunately, in America we’ve been programmed to think that the only financial tool that will work for us is a mutual fund
. The fact is, as I’ve mentioned before, mutual funds typically do not pay dividends, and if they do they’re so small you never see them. When they do pay dividends, you’ll notice that the fees charged to manage the fund are often more than the dividend earned.
Because I have told so many people to invest
directly in companies they understand and are comfortable with, they always have several questions for me. The overwhelming question is, what’s a dividend?
Even those who know what a dividend is often don’t understand how they work. One thing that makes investing
so confusing is the difference between dividend rates and dividend yields.
So what am I supposed to do, you might ask? First of all, you need to do what’s right for you and your specific situation. To help you understand a little more about dividends, I’ve given you a step by step look at how they work. For this demonstration, let’s assume your dividends are paid quarterly like most companies do.
- Multiply the number of shares by the annual dividend to find out how much the dividend payment will be (companies will provide you with this information if you are considering buying their stock). For example, if you own 1,000 shares of ABC Corporation and the dividend is $1.50 per share, your annual dividend payment is $1,500. Divide this figure by four to find the quarterly payment, which comes out to $375.
- You want to know the yield on investment a dividend payment represents. The yield is simply the annual percentage of your investment paid to you in dividends. For example, if you paid $10 a share for a stock and the dividend is $1.50, your yield is $1.50 divided by $10 (multiply by 100 to get the percentage). The yield in this example works out to 15 percent. But if you paid $100 per share, your yield works out to only 1.5 percent. Yield is important to investors who are looking for stocks that will provide good income.
Please remember that investing can be confusing and lead to the loss of your money; in other words you’re gambling with that money. Only invest after you have the basics covered, and you have a strong financial foundation earning interest for you.
Don’t gamble the grocery money! If it’s not money you would place on the blackjack table in Las Vegas
, do not invest it in the stock market
Many people today are asking me how to know if a company or mutual fund supports lifestyles that they find objectionable because of their religious beliefs. If you truly want to understand what your investment dollars are being used for, you can look to websites like http://www.humanrightscampaign.com. Sites like this review how a company ranks with their criteria regarding certain lifestyles that are opposite of their moral beliefs.
I find it perplexing that so many people will not buy a lottery ticket because it goes against their religious beliefs on gambling. Those same people have their retirement money gambling in the stock market. This is a clear example of just how well people have been sold on the thought that we can’t make any money unless we’re investing.
Be careful not buy something that you would find objectionable if you really understood what you were doing. There are financial tools that can provide as good as or better returns for you without gambling or jeopardizing your religious convictions.