What is a Dividend

Troy Sharpe: Dividend investing is one of the most powerful ways, in my opinion, to grow your wealth over time. I’m going to teach you in this video, the basic concepts of how when you reinvest your dividends, you create growth potential by accumulating shares. I think that is going to lead to confidence and financial security for you and your family.

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Troy: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of The Retirement Income show. I absolutely love dividend stocks and it’s a primary way that I invest a lot of my money. I think once you understand the power behind dividend investing and dividend reinvestment, you’ll want to learn more about investing your money this way as well. We do this for clients and we think it is a great way to compound interest over time, bring confidence and financial security to your family.

What is a dividend? A dividend is when you own a share of stock and that company simply shares their profits with you. Dividends are not guaranteed.

Some companies have a track record of increasing their dividends every year, that’s not guaranteed. Companies declare dividends based on many things, one of them being corporate profitability. When you have an understanding of which companies are more profitable, which businesses are doing well, which businesses should continue to do well, you can have a very good understanding of which dividend stocks to own.

I’m not saying you need to get this involved and understand this much about the companies, this is what professionals like Oak Harvest and others are for but when you start to understand the power behind the dividend reinvestment concept, I think you’ll understand this is a very, very viable way to potentially grow your wealth over time and bring financial security to your family. I just want to go through a very, very basic example here. This is rudimentary, this is not a ton of in-depth analysis. This is just conveying the concept of how dividend reinvesting can work overtime. We have price per share here. $100 per share.

That’s a share of stock, let’s call it IBM. Number of shares, let’s say we own 1,000 shares of IBM, at $100 per share. That’s a $100,000 investment. If we’re getting $3 per share, we’re getting total dividends of $3,000. To calculate this, this is $3 we will receive in the form of a dividend for every share of stock that we own. If we own 1,000 shares and we get $3 per share, $3 times 1,000 is $3,000. Whether the stock goes up or the stock goes down, that does not determine if the company pays us $3. What determines if the company pays us $3 is the board of directors and typically, they do that based on corporate profitability.

Some companies have a very, very long track record of paying a dividend every single year. Some companies have a very strong track record of increasing the amount of the dividend that they pay every year. Dividend Aristocrats, for example, are companies that for 25 years have increased the dividend they pay you every single year. It’s a way to potentially have increasing income in retirement. For the purpose of this video, we’re going to assume the price of the stock does not go up at all and we’re also going to assume that the dividend does not increase at all. Again, I just want to convey to you the power of accumulating shares through dividend reinvestment.

If we take this $3,000, and we reinvest it, and we buy more shares at $100 per share, we’re able to buy 30 more shares of IBM in this example. That means we are now going to have 1,030 shares. These 1,030 shares are now going to also pay us a dividend. We have 30 more shares on top of our original 1,000 that are paying us a $3 dividend. Now we have $3,090. If we’re in retirement, maybe we just want to take this income and live off this income but this example is about reinvesting dividends. If we take this 3,090 and now we reinvest it, if the stock doesn’t go up, now we’re able to buy more shares because we have more dollars that we’re reinvesting.

In the real world, the price of the stock fluctuates, the dividend could fluctuate. We want companies that have a track record of increasing dividends, again, remember. Ultimately, what we’re trying to do here is, over long periods of time, 10, 20, 30 years, through taking these dividends every single year and reinvesting them, buying more shares, which means we’ve been getting more dividends, which then means we have, potentially, more income. All we’re doing is reinvesting, buying more shares, getting more dividends. Reinvesting, buying more shares, getting more income, reinvesting, that trend continues. I want to show you what happens over time.

The price of the share of stock, let’s say it doesn’t increase over a 30 year period. You might be upset, especially if you weren’t reinvesting dividends because 30 years ago it was $100 per share, and today it’s $100 per share. If you’ve been reinvesting dividends over time, this is just an example, but what we’ve done is we’ve accumulated shares. It may have grown to have 3,000 shares, 4,000 shares, 5,000 shares. This is not an exact calculation, but I just want to show you the power of accumulating more shares. Even if your investment doesn’t grow in this hypothetical example here, we have 4,000 shares whereas we started with 1,000.

Remember up here we started with 1,000. Even though the money or the share of the stock didn’t grow, we have quadrupled our number of shares, we’ve quadrupled our investment. We started with $100,000, now we’re at $400,000 and the price of the stock didn’t go up in this example. Again, this is just a hypothetical example, none of these numbers are to convey any type of accuracy whatsoever, it’s just a concept. By reinvesting our dividends, it doesn’t matter to me personally, over the long-term if that stock goes up or it goes down. Personally, I would rather it go down because when I reinvest those dividends, I can buy more shares.

With a long-term outlook, the number one thing I’m trying to do is to accumulate the most amount of shares possible. If it goes down and I can buy more, that’s great. Because eventually, I do believe it will go back up. The more shares I have, and the higher it goes up the more value of money I’ll have later. Very basic video, introducing you to the concept of dividend reinvestment. It’s one of the most powerful concepts of investing and building wealth over the long term. It’s how I personally invest a lot of my money and it’s a way that we invest money for our clients as well.

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