Some companies, often large profitable ones in established industries, pay out a portion of their profits to the owners (shareholders). These are dividends. Dividends are real cash payouts that arrive in the investment account of the shareholders on a (hopefully) regular basis, often quarterly.
What are capital gains?
Capital gains (or losses) are the amount that a stock price goes up (or down) between the time you buy and sell.
How much is a typical dividend?
We seek companies that pay out dividends in the range of 3 – 6%. This is what is referred to as the “yield” or the percent of the stock price that is paid out annually. For example, if a stock trades at $100 and pays out a dividend of $1.25 quarterly (which is $5 annually), its yield would be 5%.
Over the years, the average yield of our portfolio has hovered around 5%. It is important to remember that this is only part our total investment return. There is also dividend growth and capital gains (see below)!
What is dividend growth?
Dividend growth is the raising of dividends over time. Companies that have a history of consistent dividend payouts AND raise those payouts over time are ideal candidates for our portfolios. These companies tend to be large, profitable and committed to their dividend-expecting shareholders.
What is more reliable – dividends or capital gains?
Stock prices are volatile. On any given day there is a 50/50 chance that the market will go up or down. A large company that pays a $5 dividend this year will very likely pay a $5 dividend again next year – or maybe even $5.50! Dividends are more reliable than capital gains. Furthermore, BTSX stocks have less volatility than the index.
Why don’t all companies pay dividends?
Profitable companies can do different things with their earnings. Some companies choose to use all their earnings to maintain and grow the business, i.e. if the company has excellent potential to grow, profits may be reinvested into things like research, and product development that will eventually result in higher profits. If they are successful, future investors will be willing to pay more to be an owner of a more valuable company, hence the stock price will rise.
What is the “ex-dividend” date?
The ex-dividend date is the “cut-off” day for dividends. In general, you need to own the stock the day before the ex-dividend day to receive the next dividend. If you buy the stock after the ex-dividend date, you are out of luck. But don’t bother trying to time your trades to take advantage of this because immediately after the ex-dividend date the share price will open lower than the previous closing price by exactly the amount of the dividend.
For example, Oct 1, 2018 was the ex-dividend date for BNS with a declared dividend of $0.85 to be payable on Oct 29, 2018. On Oct 1st the stock ended the day at $76.19. On Oct 2nd trading started at $76.05. Exactly 85 cents lower.