To The Moon

Introduction to Dividends and Dividend Yields

Dividends are a way companies share their profits with shareholders, offering a steady income stream alongside potential stock price gains. Dividend yields, meanwhile, tell you how much bang you’re getting for your buck. Together, they’re key for investors who want cash flow or a signal of a company’s health. Let’s unpack the basics.

What Are Dividends?

A dividend is a payment a company makes to its shareholders, usually in cash, but sometimes in additional shares (stock dividends). It’s like a “thank you” for owning the stock, drawn from the company’s earnings. Not all companies pay dividends—some, like Amazon or Tesla, reinvest profits to fuel growth—but those that do (e.g., Coca-Cola, ExxonMobil) often have stable, mature businesses.

How It Works: 

Companies decide on a dividend amount per share (e.g., $0.50).

If you own 100 shares, you get $50.

Payments typically happen quarterly, though some are monthly or annual.

Key Dates:

Declaration Date: Company announces the dividend.

Ex-Dividend Date: You must own the stock before this date to get the payout. After, the price often drops by the dividend amount.

Payment Date: Cash hits your account.

Example: If Johnson & Johnson (JNJ) declares a $1.13 quarterly dividend and you own 200 shares, you’d receive $226 every three months, or $904 yearly.

Types of Dividends

Cash Dividends: Most common—straight money to your brokerage.

Stock Dividends: Extra shares instead of cash (e.g., 5% more shares).

Special Dividends: One-time payouts, often from windfalls (e.g., Microsoft’s $3/share special in 2004).

Why Companies Pay Dividends

Signal Strength: Consistent dividends show confidence in steady profits.

Attract Investors: Income-focused folks (e.g., retirees) love them.

Return Excess Cash: If a company can’t reinvest profitably, it pays out instead.

What Is Dividend Yield?

Dividend yield is a percentage that shows how much a company pays in dividends relative to its stock price. It’s a quick way to compare income potential across stocks.

Formula:

Dividend Yield = (Annual Dividend per Share ÷ Stock Price) × 100

Example: 

Verizon (VZ) pays $2.66 annually per share. At a $40 stock price:

Yield = ($2.66 ÷ $40) × 100 = 6.65%.

For every $1,000 invested, you’d get $66.50 yearly.

Real-Time Twist: Yield changes as stock prices move. If Verizon’s price jumps to $50, the yield drops to ($2.66 ÷ $50) × 100 = 5.32%.

Why Dividend Yield Matters

Income Gauge: Higher yields mean more cash per dollar invested. A 5% yield beats a 2% one for income seekers.

Value Clue: Low yields might signal growth stocks (e.g., Apple at 0.5%); high yields often mean mature firms (e.g., AT&T at 6–7%).

Risk Check: Sky-high yields (10%+) can flag trouble—maybe the stock price tanked because the dividend’s at risk.

Dividend Stocks in Action

Blue-Chips: Think Procter & Gamble (PG), paying $3.76/year at $160/share (2.35% yield). Steady, reliable.

High-Yielders: Realty Income (O), a REIT, pays $3.08/year at $55/share (5.6% yield), monthly.

Growth Stocks: Netflix (NFLX) pays zero—profits go to expansion.

Pros and Cons of Dividends

Pros:

Passive income without selling shares.

Stability—dividend payers often weather downturns better.

Compounding: Reinvest dividends to buy more shares, snowballing returns.

Cons:

Lower growth potential—dividend cash isn’t reinvested by the company.

Taxes: Dividends are taxable income (unless in a tax-advantaged account).

Cuts: If profits dry up, dividends can shrink or vanish (e.g., Ford cut its dividend in 2020).

Dividend Aristocrats

These are S&P 500 companies that’ve raised dividends for 25+ years—like Walmart or 3M. They’re prized for reliability, often yielding 2–4%.

Why Investors Care

Income Investors: Retirees might pick a 5% yielder like Chevron over a 1% tech stock.

Total Return: Dividends plus price gains = full payoff. A $100 stock with a 3% yield that grows to $110 returns 13% in a year.

Market Signal: Rising dividends hint at optimism; cuts scream caution.

Example in Context

Coca-Cola (KO): Pays $1.94/year at $65/share = 2.98% yield. You invest $6,500 (100 shares), get $194 annually, and if the price hits $70, you’ve got $500 in gains + dividends = $694 total return (10.7%).

In short, dividends are profit shares that reward you for holding stock, and yield measures their efficiency. They’re a lifeline for income or a signpost for value—depending on your goals.