Originally Posted by Adraco
(Post 21129334)
Dividends are paid to share holders as your part of the ongoing profit in the company.
Let's take Johnson&Johnson (JNJ) as example.
At closing of the Nasdaq stock exchange Friday August 26th, a JNJ share cost $119.04
That is the price you pay for 1 share.
Depending on your bank or broker, there will also be a small commission.
In general and for big stock exchanges like the Nasdaq that commission is fairly small, but for the sake of the argument and to not forget about it, let's say in this example that the commission is 1%.
It will generally, in real life, be less but 1% is easy to calculate.
So, say you have your $10 000 USD to invest.
$10 000 / $119.04 = 84.005
(since you can't buy 0.005 parts of a share, you can buy 84 shares)
84 x 119.04 = $9999.36
But since we need to pay 1% commission, 1% of $10 000 is $100
you will effectively have money to buy 83 shares of JNJ.
For that you will have paid:
83 shares x $119.04 = $9880.32
plus 1% commission = $9880,32 x 0.01 = $98.81
Total cost: $9880.32 + $98.81 = $9979.13
Total cost per share: $9979.13 / 83 = $120.23
Ok, so far so good.
Since JNJ is a long term company, they also want long term owners.
So to promote long term ownership, they pay out dividends, profit share, four times per year, at the beginning of each quarter of the year, see in the column "payment date" and you see for 2015:
12/8/2015 (December 8th), paid $0.75 per share
9/8/2015 (September 8th), paid $0.75 per share
6/9/2015 (June 9th), paid $0.75 per share
3/10/2015 (March 10th), paid $0.70 per share
Total paid in 2015
$0.70+$0.75+$0.75+$0.75 = $2.95
Take the total amount of dividends and divide it over the purchase price per share
$2.95 / $120.23 = 0.02453631
Which comes out as 2.45% yearly interest rate.
Now, this is not exaclty true, since dividends are paid out quarterly.
And with those dividends, you can, if you want, buy more share and continue to earn dividends.
In this example our first dividend (March 2015) was for $0.70 times the number of shares we own, 83 = 83 x $0.70 = $58.10
After the second dividend payment, 83 x $0.75 = $62.25
we then have $120.35 in cash dividends paid out, and that is enough to purchase one more share and have a total of 84 for next dividend payment in September.
Also note, that since JNJ has raised their dividends 43 years in a row,
next year, you will still have purchased your shares at the above price of $120.23 but will receive
4 x $0.80 = $3.20
$3.20 / $120.23 = 0.02661565
Which comes out as 2.66% interest rate, since the dividend went up and you did not have any added or running costs of ownership.
Now, there are some more advanced ways of calculating dividends and there is a tax factor to be taken into account too. But in this example, let's leave those out. The above is "fairly accurate" in proving the point and explaining.
The key point is that you make the purchase of the shares once.
Then there is no payment needed to continue to own them for the rest of your life and as long as the company is healthy and turns a profit, you will get your share of dividends paid out.
If you do not need the money when the dividend is being paid out, then re-invest it by buying more shares and you will get a higher dividend amount next time. Basically, getting paid just for owning a small part of the company!
Now, remember,
Nothing in this world ever worth having, never comes easy!
There is always a risk in the stock market. It could, potentially, crash and the company could go bankrupt. Then your shares, your initial investment will lose its value or even become absolutely worthless!
With a stable and well run company like JNJ that risk is farily small and acceptable,
but still has to be taken into account!
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