The Drip Dilemma, and interpreting dividends
Sep 29 '00
The purpose of investing in the stock market is to make money. Most people however focus on "Capital Gains" which just is the difference in buy price from sell price. In this new high tech era, many people have forget about the second way to make money--dividends. Yes, that's right, dividends.
Dividends 101
If you're looking to invest in stocks and checking out a stock that pays dividends, this is how it will be quoted (let's take for example JCPenney whose ticker is JCP)
[data is correct as of the market's close on FRI 09/29/2000]
JCP- price= 11 13/16
EPS = 0.01
P/E = 1200.00
Div/shr= 0.50
Yield= 4.17
So what exactly does that mean? 0.50? This is an estimate of the anticipated yearly dividend in dollars and cents. (or, 50 cents). The reason it is called an 'estimate' is that it is based on the current stated dividend/sahre of stock. However, companies can decide to change their dividend, it may go up, down, or perhaps be cut off all together. The yield is a percentage, it compares the current price of the stock to the annual dividend payout and puts that in terms of the rate you get back per year.
Ie- the price, decimalized, is 11.8125$/share for JC Penney. Per share you get 0.50$/yr. Which at the current price is a return of .50/11.8125, or 4.23%. (So I guess yahoo! is a little behind, sometimes their P/E and other information is a day behind).
Dividend Yields
Know that for every stock that pays dividends, there are about 10-15 that DON'T. Most new issues (IPOs) don't pay. When a company reaches a high level of maturity--(the Fords, Daimler Chrysler's, Coca-Cola's) and growth tapers off and most growth has been experienced, then dividends are expected. Yields can go as low as sub 1% (Intel) or higher than 10%. Investor should be wary of high yield stocks (higher than say 8-9%). Generally at this level the stock is considered very risky, and the dividend is there to draw investors who may just see the high dividend yield and decide to buy in. (Another reason for a high yield could be that a stock paying a respectable rate (4-5%) reported poor earnings or something of the like and dropped in price).
For example, if JC Penney fell from 11.8125 to 5.9, the yield would be twice as high (over 8.4%).
Receiving Dividends, DRPs
Hopefully you got all that figured out. Now when it comes to actually receiving dividends, the investor can get in one of two ways (or perhaps a combination of the two). Dividends are most commonly paid out in cash. You may have experienced this before. If you ever got a check from Disney or some company you own stock in for a few bucks, that's your dividend for the quarter. (Dividends are quoted in the paper at their annual rate, and usually paid out quarterly).
The other way (which isn't always offered by the company) is to have your dividends reinvested into the stock. So if you had 100 shares of JC Penney, and they paid a dividend today you would expect to get:
100 shares * .50/4 (convert annual rate to quarterly rate)= 12.50$.
If JCP offered dividend reinvestment (also called DRPs, pronounced 'Drips' which stands for dividend-reinvestment program) then this money would be used to purchase shares of JCP at the current price. So, with JCP trading at 11.8125, you would pick up an additional 1.0582 shares of their stock. Notice that you can own fractional amounts.
These shares are generally held on account (no certificates are issued). When the next dividend gets paid out, you get additional dividends on the stock you have on account (shares you own from your DRP). Ya got that? So basically you keep getting bigger and bigger dividends (hopefully, unless the payout changes) because each time they payout you have more shares.
The problem with DRPs is that when it comes time to sell all your shares, it isn't obvious what price to quote for your buy price. The reason is that you paid a difference price for your DRP shares each time. The solution? Keep track of all dividends and acquisition price for your DRPs). Otherwise, the tax man may decide to come after you ...
Till next time.
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boden11 loves gambling...errr investing in the stock market and and doing his own taxes
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