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Discussion Starter #1
I've learned a few things along the journey of life, but there are some things I just don't get. I'm great at saving, very bad at investing. Mostly because I just don't get it. And yes, I've tried to read up on this but right away the terminology causes my eyes to gloss over.

Can someone here please not pass judgement, but explain to me what a dividend is, in very simple terms? Please do not post links (which are normally plastered with distracting ads) or recommend that I buy books. That stuff puts me to sleep. So I'm hoping someone here can provide a basic explanation so I can interact and ask questions and ultimately know what people are talking about.
 

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I've learned a few things along the journey of life, but there are some things I just don't get. I'm great at saving, very bad at investing. Mostly because I just don't get it. And yes, I've tried to read up on this but right away the terminology causes my eyes to gloss over.

Can someone here please not pass judgement, but explain to me what a dividend is, in very simple terms? Please do not post links (which are normally plastered with distracting ads) or recommend that I buy books. That stuff puts me to sleep. So I'm hoping someone here can provide a basic explanation so I can interact and ask questions and ultimately know what people are talking about.
http://www.abcsofinvesting.net/what-are-stock-dividends/
 

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Simplified version:


1. Company makes money.

2. Rather than keep all of its money for itself, Company decides to give a little bit of what it earned back to its owners/shareholders.

3. It might do this "regularly" (like, every quarter); or it might be a one-time thing. (When you own a dividend-paying stock, the cash money will appear in your trading account.)


General points to consider:

A. Some companies don't pay dividends. They keep the money, and "reinvest" it for themselves. The argument being that, by keeping the money within the company (and not giving it to the shareholders), it will be better for shareholders in the long run.

B. The dividends that you make are taxed really favourably in Canada.

C. Dividends "smooth out" the bumps. What I mean is, your stock will go up and down regularly, and that ~2% dividend that it pays acts like a bit of a "buffer" against minor drops in price at any time. It turns out that, in the grand scheme of things, dividends are actually pretty important in achieving good long-term returns. So it's a good idea to look for companies that pay some dividends.

K.
 

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Discussion Starter #4
Bless you.

>1. Company makes money.

What if it does not?

>2. Rather than keep all of its money for itself, Company decides to give a little bit of what it earned back to its owners/shareholders.

Why would it not keep all the money for itself? Aren't they in biz to make money?

>3. It might do this "regularly" (like, every quarter); or it might be a one-time thing. (When you own a dividend-paying stock, the cash money will appear in your trading account.)

I see - sounds interesting. So not all stocks pay dividends?

How does the average person access these? I imagine the best thing would be to shelter them in an RRSP or TFSA?
 

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What if it does not?
Sometimes, companies pay out too much in dividends -- they pay out more than they have made. This can happen, for example, if a company has been paying a dividend every quarter for the last 20 years, but let's say they've had a bad fiscal year, and they haven't made any money.

In that case, the company may still keep paying out the dividend because they don't want to "spook" investors by cutting it. Some may consider the dividend to be "at risk of being cut" (either reduced or eliminated). This can have a detrimental effect on the stock price....

One way of looking at it is: there are all sorts of people who buy the stock purely for the dividend. Consolidated Edison (symbol: ED) is an electricity company that pays out a ~5% dividend yield, which sure beats GICs; it's a stable company, but it isn't really growing too fast, because it's tied (in effect) to the number of people living in the state of New York. If ConEd cut their dividend ... people would no longer have any reason to hold the stock. There would likely be a massive sell-off, and the share price would plummet.


Why would it not keep all the money for itself? Aren't they in biz to make money?
Well, that's Buffett's philosophy. The company that he runs (Berkshire Hathaway) doesn't pay dividends for basically this reason.

My view -- and the views of many others -- is that dividends are a way of giving shareholders back a little bit of money as compensation for the risk that they take in holding the stock.

Also, many companies distribute dividends because they believe that they're already as big as possible, and that there isn't much (big) upward movement left in their stock price. So again, to "compensate" shareholders (for likely not having big-time stock movements), they give out juicy dividend yields.

I see - sounds interesting. So not all stocks pay dividends?
Correct. It used to be that almost all stocks paid dividends. Nowadays, there are plenty of companies which don't. Usually, dividends are a sign that a company is pretty healthy. (They have some extra cash to give back to the owners.)

How does the average person access these? I imagine the best thing would be to shelter them in an RRSP or TFSA?
If you have a trading account, you just buy a stock that has a good track record of offering dividends. Let's say you buy 100 shares of company X, and that they pay $1 per share in dividends every quarter. What you'll find is that, if you hold the company for a few months, $100 will be deposited into your account.

There are also dividend-paying mutual funds -- the mutual funds hold a basket of stocks, some of which pay dividends, and they pass these dividends on to you. That's another way to get access to dividend income.

K.
 

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Discussion Starter #6
Fascinating. I have read every word. Thank you so much.

I have mutual funds sheltered in my RRSP. How would I know if they pay dividends? I noticed my account value has been going up for the past few months, finally.

Sooo isn't this dividend thing what all investors do? Sounds to me like dividend-paying stocks are a great thing. Why would a person NOT invest in such stocks?

And is there a clear way of knowing whether or not a given stock pays dividends? Is that info clearly disclosed upfront when you go to choose them?

(I must admit I've never invested in terms of stocks. Though I note CN Rail has done very well since privatization in 1995, FWIW.)

I have my mutual funds at the bank, during good economic times (I'm rated as aggressive) the returns on these are excellent. Would I have access to one of these trading accounts you mention? Can anyone sign up for one of those? I guess I have to give SIN number and all that stuff so they can tell CRA about me?
 

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Fascinating. I have read every word. Thank you so much.

I have mutual funds sheltered in my RRSP. How would I know if they pay dividends? I noticed my account value has been going up for the past few months, finally.

Sooo isn't this dividend thing what all investors do? Sounds to me like dividend-paying stocks are a great thing. Why would a person NOT invest in such stocks?

And is there a clear way of knowing whether or not a given stock pays dividends? Is that info clearly disclosed upfront when you go to choose them?

(I must admit I've never invested in terms of stocks. Though I note CN Rail has done very well since privatization in 1995, FWIW.)

I have my mutual funds at the bank, during good economic times (I'm rated as aggressive) the returns on these are excellent. Would I have access to one of these trading accounts you mention? Can anyone sign up for one of those? I guess I have to give SIN number and all that stuff so they can tell CRA about me?
The purpose of a corporation is to create value/return on investment for shareholders. Corporations aren't supposed to make money for the corporation's sake (and when this does happen, this is considered a problem--management not acting in the shareholders' interest). There are three ways for a company to produce value for shareholders:

- use today's profits to invest more, grow and increase future profits
- use today's profits to pay dividends
- use today's profits to buy back shares, decreasing the number of shares and increasing the value of the shares that remain (since they represent a larger proportion of ownership in the company).

The reason why a company might not pay dividends is that it is often more tax efficient for the shareholder to go with the first or third option since these will result in capital gains, but that capital gain will only be taxable upon sale, which could be twenty years from now. It is a way of deferring taxation.

The reason a company pays out dividends or buys back shares rather than further investing in its operations may be because there are few investment opportunities that offer good rates of return. You could think of the company's shares as an investment. If the return on those shares is higher than the company's investment opportunities, it might make sense to 'invest' in those shares by buying them back for the remaining shareholders.

If you don't want a margin account (one with credit), it should be pretty easy for you to get a brokerage account. You just need to deposit the minimum to start the account, which is usually $2000 - $5000.
 

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Why would a person NOT invest in such stocks?
Lots of reasons. The risk profile of dividend-paying stocks is quite different from non-dividend-paying stocks. Prudent investors will be aware of the tradeoffs they are making when they purchase dividend-paying stocks vs. non-dividend-paying stocks.

Also, if you don't need income from your portfolio, you don't need dividends. Dividends do not equal growth - they are income (unless you receive stock dividends, which are less common; but that's still not income - it's more like a stock split).
 

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Lots of reasons. The risk profile of dividend-paying stocks is quite different from non-dividend-paying stocks. Prudent investors will be aware of the tradeoffs they are making when they purchase dividend-paying stocks vs. non-dividend-paying stocks.

Also, if you don't need income from your portfolio, you don't need dividends. Dividends do not equal growth - they are income (unless you receive stock dividends, which are less common; but that's still not income - it's more like a stock split).
I don't need income but I will still accept my growing dividends.

With dividends you don't have to sell capital to eat.
Dividends provide a floor to your stock price.
As dividends grow so will the stock price.
Dividend stocks tend to do well in bad times because people perceive them to be safe.

Dividends are not just about income, and have a place.
 

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All valid points Bean, but I respectfully disagree.

I don't need to sell anything to eat. I'm living off my salary, not investments.

Your next three points are assertions that I'm not personally betting my future on.

Don't get me wrong. I have lots of dividend-paying stocks in my portfolio - but mostly because I mostly use index funds.

I also do some active trading, but don't have any dividend-payers in that tranche, nor do I ever anticipate putting dividend-paying stocks in that portion of my portfolio.

I disagree with the floor theory; while your second assertion may be true it is too conditional for me; and I've never been all that interested in following strategies based on what other people may think or do. ;)
 

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I don't need income but I will still accept my growing dividends.

With dividends you don't have to sell capital to eat.
Dividends provide a floor to your stock price.
As dividends grow so will the stock price.
Dividend stocks tend to do well in bad times because people perceive them to be safe.

Dividends are not just about income, and have a place.
I also disagree with the basic thesis of what you write here Bean.

While I agree with the benefits you outline, I don't believe paying stable and growing dividends are the cause, just the side effect of strong company philosophy. The companies and their stocks do well because of other reasons, most notably cost control and ability to generate real organic growth.

But these same companies don't have the same potential for capital appreciation - many small cap stocks I follow have the earnings growth and income to pay out sizeable dividends, but I am happy they don't. I find different importance in companies that don't pay dividends.
 

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There is also a strain of thought which suggests that increasing dividends means a company is "out of good ideas."
 

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Fascinating. I have read every word. Thank you so much.
Any time.

I have mutual funds sheltered in my RRSP. How would I know if they pay dividends?
I don't have a lot of familiarity with mutual funds any more, but I'm guessing that the account has both a cash component and a component allocated to mutual funds. You may be able to see that your cash is going up. Thinking back to when I used to hold some funds (10+ years ago), I seem to recall that my mutual funds paid a regular "distribution", which is kind of like a dividend -- it's basically where they bundle together all of the dividends and other income that they made, and then distribute them to the mutual fund holders.

Sooo isn't this dividend thing what all investors do? Sounds to me like dividend-paying stocks are a great thing. Why would a person NOT invest in such stocks?
I like dividends, and generally look for stocks that pay them. I don't need a lot -- a little is fine. Just enough to "smooth the bumps", as I say. (Aside: Dividends are a requirement of Ben Graham's Defensive Investor stock criteria, which is what I use for establishing whether or not I want to buy a particular stock, and so seeing a company that provides a small but reliable dividend payment is a sign of strength for me.)

Anyway, as for why you wouldn't want to own such stocks -- there are a lot of reasons which I probably can't all enumerate ... things like:

  • the company is paying more than what it earns (so the dividend likely to be cut in the near future)
  • very high-paying dividend companies may not accrue much in terms of their stock price. So, while a 6% dividend yield is nice, people who can take more risk would probably be happier assuming a bit more risk by buying a company that pays a 1% dividend yield but has a higher chance of the stock doubling in value.
And is there a clear way of knowing whether or not a given stock pays dividends? Is that info clearly disclosed upfront when you go to choose them?
Yes. The historical dividends are listed on things like annual reports, and are also available for free online. e.g., Walmart (look for the box saying "trailing dividend yield"), and compare this versus AT&T.

Would I have access to one of these trading accounts you mention? Can anyone sign up for one of those? I guess I have to give SIN number and all that stuff so they can tell CRA about me?
Pretty much anyone can sign up for a regular discount brokerage trading account at, say, TD Waterhouse. (That's who I use.)

Caveat: Going from buying funds to investing in stocks is a big step, and requires devotion to a lot of reading & learning, in my opinion. For many people, "couch potato portfolios" using index funds or ETFs work very well. This is another topic unto itself.


K.
 

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And yes, I've tried to read up on this but right away the terminology causes my eyes to gloss over.
That's how most of us felt when we first started out, so don't feel bad.

Since you're new at this, if you haven't already, you might want to read 'The Lazy Investor' by Derek Foster, which is a straight forward read. Also, 'The Intelligent Investor' by Benjamin Graham & 'The Single Best Investment' by Lowell Miller.

I know you did not want any book recommendation, but they are at the library and the 1st one answered many of my questions, easiest book I ever read!.

Happy learning & good luck investing.:)
 

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Discussion Starter #16
You are all amazing. Thank you DRV and toronto and everyone else.

gal, thanks for your understanding. I know what you mean and I'll check out those books at some point. I just wanted the ability to interact with someone and ask questions and have them answered one point at a time, like DRV has done, in this forum. I find a lot of the websites linked to from this forum are absolutely covered in advertising and sidebar distractions. These are extremely irritating to me, especially when I'm trying to learn and read and have to keep dodging the advertising. Most times I just give up in frustration. I'm also trying to eliminate bias by asking questions in a plain text forum such as this. I think I'm getting the hang of this, fortunately I can re-read some of the posts and comments by Dr V.

Again, you guys and this forum are amazing. I really appreciate it.
 

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Royal, if you want free content then you have to put up with the ads. :)
This is probably off-topic, but I've been using FireFox + AdBlockPlus, and haven't seen ads online in a long time.
(For reference, I believe that Chrome also supports these add-ons.)
 

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Just to let you know.... more is not necessarily better with dividend paying stocks.

I had the bright idea of more is better but dividend stocks are more like vitamins than chocolate cake.

I picked the top paying dividend stocks all over 20% payout. The dividend was the only criteria I used.

That portfolio is down 10% including the dividends payed out.

If a stock you own has a dividend and the dividend is cut you can look forward to it dropping through the floor. So that sucks.
 

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Discussion Starter #20
Thanks Berube - good point.

Would you say that dividend cuts are a fairly common occurence?

P.S. Yeah I have Firefox with all the ad and spyware and trackware blocked on one computer but the 2nd computer I use can't be modified thusly. So I just don't visit websites that are plastered with ads.
 
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