Example of how a dividend can grow your holdings

I re-read my previous post and wanted to add an example of how a dividend can help grow your holdings in a stock. I thought that a real world example would make it clearer as to why dividends are beneficial. See below:

Let's keep the math simple....

You buy 100 shares of Washington Mutual when it is at $10. Your original investment is $1,000. Let's assume that the yield of WM is 10%, this means that WM pays dividends that add up to 10% annually. (Usually, dividends are paid quarterly, but they are measured in yield per annum.) Let's also assume that WM stays at $10/share for 5 years with absolutely no appreciation in stock price. This is not really realistic but helps keep my example clear. Even with the share price of WM staying flat over 5 years, you would have increased your holdings because of the compunded dividend growth, assuming you reinvested those dividends. Let me show you.

Year 1: Own 100 shares at $10.
Year 2: (after 10% annual dividend reinvested) Own 110 shares at $10.
Year 3: (after 10% annual dividend reinvested) Own 121 shares at $10.
Year 4: (after 10% annual dividend reinvested) Own 133.10 shares at $10.
Year 5: (after 10% annual dividend reinvested) Own 146.41 shares at $10.

Isn't this crazy? Even with 0% growth in the actual price of a stock, your value of investment went up from $1000 in year 1 to $1464.10 in year 5. A 46% return over 5 years with no growth in the stock OR the dividend. The best part about this is that we all know most stocks will go up over the long term as the business grows and becomes more profitable AND when the businesses become more profitable they in turn usually raise the dividend to share that profit with shareholders. That means that the original investment that you make will grow even more than my example. This just goes to show how powerful dividends are.

Once again, this example was a little extreme, but just goes to show the added value of dividends, if reinvested. I highly recommend that you take some time and research dividend paying companies. Just google dividends and stocks and there will be myriad links to sites listing some good names.

Any questions or comments that you may have are always welcomed, drop a line below.

Dividends. They are a great way to slowly accumulate wealth.

So, dividends are very important. What are they? Here is the simplest definition I can come up with: a dividend is the distribution of additional company shares to its shareholders.

A little overview: Many companies and financial organizations offer shares to generate funds for the company. The investors invest in the company through these stock purchases. The investment decisions also depend on the reputation of the company. Getting some good returns in the form of a dividend is the motive behind these investments.

The shares bought by the investors provide them the status of an owner of the company. When the company makes a profit, a certain percentage of the profit is distributed among the shareholders according to the amount of shares of the company they own. These dividends are provided in cash or in the form of additional shares. These additional shares are known as a stock dividend.

There are several reasons for providing a stock dividend to the share holders. The company may have a shortage of cash. Because of this it becomes impossible for the company to provide cash to every shareholder. On the other hand, it is also possible that the company wants to invest more money from the earned profit into the company to raise the production level, thus they issue stock instead of cash.

There are several benefits of a stock dividend. Most importantly, no tax is charged on such dividends. If a shareholder receives some kind of stock dividend he or she is not entitled to pay any kind of tax on that until the additional shares are sold. On the other hand, this type of dividend provides the shareholder with additional ownership in the company which can provide more profit in the future. These are big pluses and the main reason why investors are attracted to the long term growth prospects of high-dividend yield stocks.

Another form of dividend that is provided to the shareholders is known as cash dividend. This dividend is paid in hard cash form or by check. The rules of this type of dividend is more or less same as the stock dividend. Here also the shareholder receives a certain part of the company's profit, which is decided according to the number of shares the shareholder holds. The investor can then decide whether or not to reinvest the cash into the company, by purchasing more shares, or simplay take the cash as a deposit into the brokerage account. Most of the time, people reinvest the money as to grow their investment, especially if the company's future looks bright.

Here are some dividend paying stocks that are popular buys.

-Pfizer (PFE)
-Duke Realty (DRE)
-Bank of America (BAC)
-Sempra Energy (SRE)
-Johnson and Johnson (JNJ)
-General Electric (GE)
-Pepsi (PEP)

Obviously, there are thousands of stocks that yield dividends. I would suggest doing a google search for dividend paying stocks and go from there.

Good luck!

highly recommended article

Instead of me just writing endlessly about retirement, which I could do, TRUST ME, I am simply going to give you a link to a great article about understanding your retirement. It is short and sweet and to the point, so check it out. There are also many other fantastic articles about all aspects of money and finance that are quite helpful as well.

http://www.fool.com/retirement/retirement01.htm?source=ifltnvsnv0000001

This article is on the Motley Fool website. This site is great. There is a section called 'Caps' that I frequent. It allows you to make stock picks and track your portfolio of picks. I check this site at least once a day and everytime I am interested in a stock for purchase or out of curiosity. Many people use this and present great insight into companies that you may not have been privy to on your own.

I'd recommend taking an hour or so, if you have the time, to navigate the site and see what parts could be useful to you.

Happy Reading,

The Guru