There are really only 2 ways to make money on a stock. The first one is the most common, you buy the stock at $1.00 and it goes up to $2.00. This is called Capital Appreciation, or Fantastic! This is what every investor hopes happens with every stock. And it does, more often than you think. EHT is an example that comes to mind. I bought it in November (2016) for $0.10 a share, I sold it in December (2016) for $0.19 a share.
There is another way of making money off a stock that isn’t as exciting or dramatic. This is with DIVIDENDS. “Dividends are a portion of a company’s earnings paid to shareholders that is proportional to the number of shares owned.” ** Not every stock will pay dividends.
Dividends normally come from well established, profitable, companies. It is a way of rewarding Shareholders with cash while at the same time, often benefiting the company and the price of the company’s shares. There are lots of reasons why companies pay dividends, but most investors, look at dividends as a stable predictable way to generate income. Dividends are normally paid either monthly, quarterly, or yearly. I have to point out that Companies can also stop paying dividends if they choose. As a matter of fact, the company in the example has done just that. Dividends, like everything else about stocks, can change in a moment.
Let’s look at how this works. We will use Noranda Income Fund (NIF.UN) as an example. NIF.UN pays a monthly dividend of $0.025 per share per month. That does not seem like a lot, but as of writing the shares cost $2.50. So if you were to buy 300 shares it would cost you $750.00. Each month you would receive 300 X .025 = $7.50.
So not only do you have a chance of having the stock go up (52 wk hi of $3.50) but you also have the advantage of getting a $7.50 dividend each month. Nice. The advantage of dividends is that say next month, the stock has gone down to $2.25. You are down on the share value of the stock, but, you will still get the $7.50 dividend.
Yes. Dividends go up, and they go down. This makes sense, because dividends are paid out of profits. Normally if a dividend goes down, so does the price of the stock. If the dividend goes up, so normally will the price of the stock.
Many stocks have another big advantage of dividends. It is called a DRIP. Dividend ReInvestment Plan. I call it compound interest on stocks. If you are buying and holding, this can be huge over the course of a few years. Let’s use NIF.UN as an example again. NIF.UN does have a DRIP program. Here is how it works.
Instead of giving you the $7.50 dividend as cash, they sell you more shares. If the Share price was $2.50 you would get 3 shares ($7.50 / $2.50 = 3) instead of the cash. If the price per share was $2.25 you would still get 3 shares plus $0.75 cash. ($7.50 / $2.25 = 3 shares plus $0.75 cash) You also get these shares with no commission or trade fee. (At least you do on my platform.) Some shares even give you a slight discount on the share price as an added incentive to use the DRIP.
The real magic comes in the next month. Now instead of getting dividends on 300 shares you get dividends on 303 shares, or $7.58. That is why I call DRIPs compound interest on stocks. If you decide to sell the shares, you get the sell price on all of the shares you own either bought or DRIPed.
Over the course of a year (using this example) you could have as many 36 extra shares with no trade fees. If you want the advantages of a DRIP make sure you can buy enough shares so that the dividend is higher than the price of one share.
When looking at dividend stocks, it is important to look at the relation of Stock price to Dividend. This is usually displayed as “Yield” and expressed as a percentage. The higher the Yield the better. It might also be wise to look at the “Earnings per Share”. This is basically the company’s earnings divided by the number of shares issued. If they are paying a dividend over the year of $0.25 a share and Earning are $1.00 per share they should be able to keep paying the dividend, since the earnings are much more than the dividend..
If the numbers are EPS of $0.25 and Earnings of $0.15 per share, you might want to think twice about buying this stock. They are earning much less per share than they are paying out. This is not a good long term situation.
If you have several thousand dollars to invest, the price of the shares might not mean as much, you can judge strictly by the yield %. If you are a Micro Investor, it might be wiser to buy a lower priced and possibly lower yield share, and get more of them. It is nice to get a $1.00 a share rather than $0.05. But if you can only afford to buy 3 of the high dividend shares that gives you only $3.00 per year. But if the same amount of money could buy you 100 of the lower dividend shares, you would get $5.00 per year.
If you have a few hundred dollars in a savings account making next to no interest, you might want to move that into an online trading TFSA account and look into some Dividend paying stocks. I publish a list of the top 25 Micro Investor dividend paying Canadian stocks each month in the members section. There is a separate list for Monthly paying and Quarterly paying stocks.
Please note that the TFSA (Tax FREE Savings Account) is a Canadian thing. One of greatest tax breaks we over taxed people have. If you Don’t know what it is and how to use it keep checking out this site. I have several articles on it. It is incredible!
Uncle E.