Rob Coyte's Blog
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- Pardon? 15-May-2012
- Bank practices during the GFC 12-Apr-2012
- Current State of Dividends for Shares 19-Mar-2012
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What Is A Dividend; The Basics
Some people know that a dividend is paid into their bank account when they own shares but they do not really understand where it came from. The easiest way to do explain this is by way of example.
Let's assume we start a company ABC Ltd (ABC) that sells “widgets” by investing $1 million between all is shareholders. In the first year of operation ABC makes a profit of $150,000.
Now, management decide they need to retain $100,000 to grow the business by putting on more staff and marketing etc. The other $50,000 is not required so management pay this back to their shareholders as a dividend. The theory is that if the company cannot use it in a “meaningful” way they pay back to the investor to choose what to do with it.
If you are a shareholder in a successful business they will continue to grow profits each year which over the long term result in a growing stream of dividends being paid each year. Contrast this to a term deposit where the rate of interest remains constant (depending on level of interest rates) from year to year. If you are looking to grow your wealth or indeed retire off your financial assets we need to look at how can we generate the most income (over a long period of time). Being the owner of a successful business (or shareholder) is a great way to achieve this.
Did you know that Commonwealth Bank paid an annual dividend to shareholders of 44 cents in the year 1993 whilst in 2007 the annual dividend paid to shareholders was $2.56?
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