THE BASICS OF INVESTING WITH RYAN JAMES: DIVIDENDS

By Ryan James

Dividends

A dividend is a payment that public companies distribute to shareholders as a reward for holding their stock. Not all companies do this, for they will typically achieve profitability before providing a dividend. Investors receive these annually, semi-annually, or quarterly based on the number of shares owned.

The dividend yield is the amount a company pays investors, displayed as a percentage; this percentage is the amount shareholders receive, multiplied by the number of shares held.

The investors who receive the dividend must own the stock on the record date. One must retain the security two days before this date. The day before the record date is the ex-dividend date, on (and after) which new investors will not possess the right to distribution. Investors receive the dividend payment on the payable date.

A corporation’s dividend payout ratio (DPR) informs shareholders of the abundance of funds returned to investors via dividends compared to the money spent on company development. The formula is DPR = DP/NI, where DP represents dividends paid, and NI represents net income.

REITs

Pronounced /rēt/ (rhyming with Wall Street), a real estate investment trust is an alternative form of real estate investment in the form of stock. These companies own or finance real estate projects that produce income for themselves and investors. REITs are a form of indirect real estate investment because the company owns the real estate rather than the shareholders. REITs must have high dividend yields, assisting in their overall returns. They are required to provide at least 90% of all taxable income to shareholders in their dividends.

As of the writing of this article, real estate investment trusts collectively own 516,000 real estate assets, finance 2.7 million homes, and are held in the retirement portfolios of 145 million Americans.

More on Dividends

Dividends can be used as a tool by corporations, as they are leverage to attract investors. Because dividends are passive income and can add to profits, many prospective investors look for viable companies that provide dividends. Companies such as Coca-Cola CO ($KO) with yields of at least 3.00% can attract more attention than others.

Principal

The principal is the initial investment. A trader who starts with a principal of $2000 and makes $400 of capital gains during the initial year would have $2400; that original $2000 is the principal.

Summary and Bottom Line

This article focused on dividends, REITs, and their relationship. It also introduced the concept of a principal.

Disclosure: All statements and opinions expressed in this article are objective and my own. I am not a financial advisor. I do not recommend the trade or use of any particular stocks or services. I acknowledge the risks of investing.