Bitesize: What’s a Dividend?

Alec: [00:00:07] Welcome to Bitesize on Get Started Investing feed. In this series, we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes. Investing one one. Why do we invest To make money? And there are two ways that we can make money from stocks. The main one that everyone talks about is the share price going up. So you buy a stock of Amazon and it goes from 100 bucks to a thousand bucks. You've made $900. Right? But there's another way that you can make money from stocks. And this is what we're talking about today. It's dividends and that dividends are income distributed to shareholders. Out of the net profits from a publicly listed company. 

Bryce: [00:01:00] So it's a cash payment from your earnings paid to those shareholders. And it's usually paid in the 20 annually to every six months. The Quarterly And that's how it straight the bank account. 

Alec: [00:01:17] The way to conceptualise this is when we talk about buying a share, we always talk about you become a part owner of that company and so as the company does whatever it does, sell stuff, offer services, you know, whatever it does, it makes money and it makes profit on whatever money it's making. And then you, as the business owner, are entitled to some of that profit. So let's say a business makes $1,000,000 in profit, decides to keep 500,000 of it for its operations, and then there's 500,000 that it decides to give to the owners of the business. If you own one of the 500,000 shares out there, then you will be paid a $1 dividend as your share of the profits of the company. 

Bryce: [00:02:05] Yeah. So historically, we've gone back the 20th century. Dividend stocks were actually a major focus for investors because of this reason, because they generate a consistent return income. And more often than not, as people got close to retirement age, these are the sorts of stocks, often blue chip stocks that super funds and the mom and dad look to buy because they're not necessarily after the capital growth that you talked about at the start, Glenn, which is one way to make money stocks. But they're more looking for the income that that stock provides. And so obviously, the more shares you buy as you know your product and the more shows you follow in the company, the more you'll get paid out. What I want to point out there as well, I think we mentioned that Forbes not all companies pay a dividend and you will find that the companies that are usually in their own growth phase of the business cycle, so they are young companies that are rather than paying out their profit and earnings to their shareholders, they are withholding that and reinvesting it back into the business so that they can grow at a much quicker right and use that capital more effectively than giving it out to the shareholders. Now, obviously, shareholders are fully aware of the fact that this is the case when they're investing and growing more than happy for the company to do so because they will be wanting the company to grow and give them some capital gains. And obviously at some point they will expect to see the money that they have invested, the returns in the form of dividends. So to give you an example, Amazon, which you would be surprised still to this day doesn't pay a dividend and I'm not sure about Facebook. I'm pretty sure if. 

Alec: [00:03:51] I don't think so. 

Bryce: [00:03:52] You would think that both of them are in positions to certainly pay dividends because they have such high earnings, but they still firmly believe that they're in the tech sector and they're still in the I guess, in the growth phase of their business that I feel that they have hit maturity yet. And so they haven't been paying their shareholders dividends, although their shareholders have been rewarded handsomely with capital growth. So you do hear some calls from investors for them to stop paying dividends, but they're not. So those are probably two more outlying examples. But a lot of the smaller companies don't pay dividends. The ones that, as I said, run, you know, Sydney Airport, Woolworths and BHP, those that are there, they're not going to blow up, they're not going to fail. They're the ones rewarding their shareholders with them. 

Alec: [00:04:37] And we should also talk about Australia versus the rest of the world, I guess, because Australian investors love dividend. Hey, hey, the average of the S&P 500, so that's the 500 biggest companies publicly traded in America. The average dividend is 2%. So and the way that dividend yield is calculated is dividend divided by share price as a percentage. So. If I had my share prices $100 and I pay a dividend of $2 per share. My dividend yield is 2%. So in America, the average of the big companies over there is 2%. In Australia, the top 200 companies, in Australia the average is 4.7%. Without franking credits, which is something we'll touch on later. But yeah, so it's more than double America, the amount that Australian companies pay in dividends.

Bryce: [00:05:36] But if you enjoyed that bite size, you'll find a link to the full episode in the shownotes.