Ahhhh dividends. The sign of the truly well-to-do company.
When a company has nothing better to do with its cash…and it has bought all of the corporate jets it wants, put in fountains in the executive suite bathrooms, and offered massage and dog therapy to all of its employees…it then can, at its own discretion, pay a dividend to its common shareholders of record.
Common. Shareholders.
Yep. That's who gets dividends. If you are an employee at a company and got, say, a bunch of stock options when the company signed you, you don't get dividends unless you buy out your options and turn them into actual shares. Dividends get paid quarterly in almost all companies in the U.S., and companies typically "declare" what their dividend will be a year or two or three in advance.
The Street doesn’t like surprises. So DaddyWarbux Rifles has made bank in this NeoZombie Apocalypse, and after buying all of the anti-zombie spray it ever wanted…along with the jets...and fountain…and doggy meditation classes…it has extra cash.
It plans to dividend out that cash on a regular basis, and just like most companies, it has forecasted earnings 3-4 years or more into the future. This dividend payout will be some relatively modest percentage of earnings.
Like…if earnings will likely be something like 50 million then 70 million then 90 million the next 3 years, the dividend might be declared as 25 million .
Doing the math here…that’d be a 50 percent of earnings payout ratio in year one...but if they keep the dividend flat and don't raise it, it'd be just 25 over 70 or 36 percent payout in year two…and if they still keep it flat in year three it’d be just 25 over 90, or 28 percent.
And in real life, odds are good they’d raise their dividend if their earnings performance was this good. So what then is the dividend yield here to investors who own a share of common stock?
Well, if the stock was trading for $40 a share and the dividend was 60 cents, then the dividend yield would be 60 over 4,000, or 1.5%. If the stock ran up to 60 bucks a share and the yield remained 60 cents, the yield would be 1%.
And if the stock tanked to 10 bucks a share and the dividend was still 60 cents a share, the yield would be 6%. Yield a la dividend.
And what should you with the few bucks you’ll make each month from your dividends? Might want to stock up on that zombie spray.
Related or Semi-related Video
Finance: What is an Accumulated Dividend...9 Views
finance a la shmoop what is an accumulated dividend okay you know what
a dividend is companies generally commit to paying it when they have so much [Example of dividend meaning on a 100 dollar bill]
extra cash profit that they really don't know what to do with the dough yeah nice
place to be in the case of a preferred stock the dividends aren't just a
optional-ish they operate more like bond interest only with a catch
that is dividends on preferred stock can in fact be halted without the company
being repossessed by the debt holders like in the case where the company falls [Prize wheel lands on hard times]
on hard times or it wants to preserve its cash to buy a competitor or it just
wants another jet with a water slide thing on it well yeah it can halt its [Person slides down a jet slide]
dividend in those cases and well there are two types of preferred stock in this
realm the ones that pay cumulative dividends and the ones that don't
cleverly named non-cumulative say a company has halted dividends from its
preferred for three and a half years and it was paying five bucks a quarter in [Dividend distribution graph]
dividends from those cumulative preferred well if it was to resume
paying dividends on them it would first have to pay all back fourteen quarters
worth of dividends before it began to issue more dividends or pay them to its
preferred holders that is it owed three years times four quarters or twelve
quarters plus half a year or two quarters for a total of fourteen
quarters at five bucks a quarter a share that's five times fourteen or seventy [Formula of non-cumulative dividends]
dollars a share in back cumulative dividends big obligation but it has to
pay that amount before it can resume dividend payments why would a company
have a cumulative feature in its preferred dividend obligation well
because investors forced it to do so or they wouldn't invest they were worried [Person swipes away stacks of money]
that the preferred dividends might be just some merrily stopped and then the
investors would have little or no return on their investment in the preferred and
this can be a problem for companies that have fallen on hard times they are
essentially made illiquid in that they can't afford to pay the back dividends [Example of illiquid meaning]
on the preferreds and they can't raise more capital with this blight on their
record of having stopped paying a divvy well most [Non cumulative stock stickers appear on a table]
furred stocks are non-cumulative and if companies decide to just stop paying
them they can but if they do it's kind of like they've reneged on a handshake [Two guys giving a handshake]
and you know investors talk so like good luck to the company ever trying to raise
capital again from the cold cruel outside world yeah welcome to Wall
Street [Wall Street road sign]
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