Today I’d like to touch on a subject that I feel commonly gets misunderstood about dividends and this misconception makes a huge impact on how investors view dividend investing.
What we’re going to talk about is dividend payout, and more specifically the yield of a stock vs the cash payout dollar amount for a given share.
First: the mistake some investors are making. I’ve heard many investors make a statement like “I don’t understand why you invest for dividends, when the share price drops your dividend drops anyways so where’s the advantage?” or they’ll ask questions like “so if the stock loses 50% I then only get 50% of the dividend payout right?”
Basically the thought process is that the cash you receive is tied to a yield in % rather than a dollar amount/ share and while I can see how this confusion occurs it is completely false and can turn off the investor before they even begin.
Now let’s take a look at the math behind both scenarios and how significant this difference could become:
SCENARIO: To make this as simple and clear as possible we will use round numbers. Let us assume you bought 1 share of ‘Company A’
Share price: $100
Dividend yield: 5%
Dividend payout: $5 per share.
How some think this works is when our share price drops from $100 to say $50, we now keep a 5% yield and instead of receiving $5 we receive ($50 x 0.05)= $2.50 per share.
This is FALSE.
The actual math looks as follows: Our $100 share pays us $5 per share, when this share price drops to $50 we still receive the same dollar value of $5 and the new dividend yield will change to 10%.
So another simplified look at a portfolio as a whole would be:
Portfolio Value: $100,000
Dividends: $4,000.00
Portfolio Yield: 4%
When our portfolio takes a 25% hit like during say a recession, we end up with
Portfolio Value: $75,000
Dividends: $4,000.00
Portfolio Yield: 5.33%
Hopefully that’s clear and understandable, if there are any questions or follow up required then please leave a comment below or contact us on Instagram at FindependenceCanada
Thanks for stopping by,
Mr. FIC