Rob Coyte's Blog

What many clients don’t understand before we purchase shares for them is that they are actually buying part of a business. Over time, if the business they have invested in is profitable, the business will pay out dividends to investors and retain money to invest in the business to grow profit in future years. Here is an example:

Let’s start a company named ABC. You are there only shareholder who tipped in $100. Your share would be worth $100 and it would be backed by the cash in the company’s bank account.

ABC wants to start a business selling ‘widgets’. In the first year if ABC makes a 10% profit they will make $10. They may pay half as a dividend ($5) to the shareholder and retain the other half ($5) to grow the business. This means ABC will now have assets of $105 making your one share worth $105.

In their second year, if ABC make a 10% profit they will make $10.50 (10% of $105). They may pay half as a dividend ($5.25) to you, the shareholder, and retain the other half ($5.25) to grow the business. This means ABC will now have assets of $110.25, making your one share worth $110.25.

As you can see this process continues. This is how investors can get increasing dividends as well as capital growth over time by holding profitable companies.

Our office will be closed this coming Friday and Monday for the Easter long weekend.

Have a safe and relaxing weekend!

Rob