Ever wondered why some investors swear by dividends as the secret to their success? Join me, on a journey through the fascinating world of investing, where I shine a spotlight on the power of dividends as a steady source of returns. I'll bust the myth that investing is all about stock prices, showing how dividends provide a consistent return irrespective of market volatility.
I'll also dig deep into what makes a quality stock, comparing the remarkable record of ADM, a company that has faithfully increased its dividends since 1927, versus companies that don't pay dividends. Discover the 12 rules of Simply Investing, guiding you on how to discern if a company is worth your investment and if it is priced low.
I cover the following topics in this episode:
- What is the sole purpose of investing?
- What provides you with an immediate return on your investment?
- What are dividends?
- What is dividend yield?
- What happens to the dividend when the stock price drops?
- Looking at ADM's 20 year dividend record
Watch till the end to get 10% off coupon code for Simply Investing.
Learn more at: https://www.simplyinvesting.com/
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What is the sole purpose of investing? I'm going to answer that question in today's episode. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. So what is the sole purpose of investing? It is to generate a return on your investment. And what is an immediate return on your investment? It's the dividend. Now, some of you have already seen some of these slides in previous episodes, but for those of you that are new to this podcast and this episode today, I'm just going to take a couple of minutes to explain what our dividends are, and then we'll get back into our episode. So dividends are nothing more than the company sharing its profits with you, the shareholder. So if we take a look at this example and let's say the company is giving a dividend of $1 per share and you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay that dividend. Now you can spend that money if you wish, or you can reinvest it into other stocks that pay dividends. Now the dividends are deposited directly into your trading account as cash. So, like I said, you can spend that money if you wish, or you can reinvest it, and we're going to see a little later on in this episode that you receive those dividends regardless of fluctuations in stock prices. Stock prices go up and down all the time, but the dividend is going to remain consistent and hopefully grow in the future. So now that we're talking about, like I said in the beginning, an immediate return on your investment while you hold on to the shares is, of course, dividends. Now let's take a minute to look at the dividend yield, because that's going to tell you right away what is the return on your investment. So the dividend yield is quite simple. It's the annual dividend per share divided by the share price or the purchase price if you were to buy those shares. So let's take a look at a real-life example with Tyson Foods. Now, as of this recording today, the annual dividend is $1.92 per share and the stock price is $54.23. So if we take $1.92 divided by $0.54.23, we want to express that as a percentage you can see that the dividend yield today for Tyson Foods is 3.54%. So that is the return on your investment while you hold on to those shares. So if you were to invest $500 in this company, or $1,000 or $10,000 in this company, you would expect, within the next 12 months, to receive 3.54% back to you in cash in the form ofa dividend. So that might not seem like a lot of money initially when you look at it, but look at what happens over time. So at the top of the screen you can see that I've kept the same dividend of $1.92 per share, and then I have the share price, which let's assume this is the purchase price. So if you bought the shares today at this price, like I said, your dividend yield is going to be 3.54%. Now watch what happens to the dividend yield when the dividend goes up. So let's say the company was to increase the dividend to $2.90 and again we take that and divide it by the purchase price, you can see that the dividend yield then goes up to 5.35%. Let's do one more. So let's say the company increases the dividend again to $3.97 and we divide that by the purchase price, and now you can see that your dividend yield is going to grow to 7.32%. So every time the dividend is increased, the dividend yield goes up, and every time the dividend yield goes up, you are now earning more money. Now this is regardless of stock prices. Like stock prices go up and down all the time, but the dividend is paid based on the number of shares you own. Now in this example on the screen, I've increased the dividend twice as an example, but the number of shares that you own remains the same, assuming you haven't sold any or bought any more. So if you still own the same number of shares and the dividend used to be $1.92, now the dividend is $2.90 and then the dividend is $3.97, you can see that you are going to be getting more money in your pocket in the form of dividends. Now I know some of you might be thinking well, what happens if the stock price drops like just tanks? What if there's a recession? What if there's a market downturn? What happens to the dividend? So let's take a look at another real-life example, and this time with Coca-Cola. So now we are looking at over 20 years, the last 20 years, and you can see on the screen the blue line represents the stock price and, like I said before, stock prices go up and down all the time and if you look carefully enough on the screen, on the graph, you can see sometimes the stock price over the last 20 years. You can see that sometimes the stock price drops by $5 a share, sometimes $10 a share, even $20 a share. So those are drastic drops in the share price and there's a number of dips in the last 20 years. You can see the stock price goes down and it goes up, then it comes down again. It might go down even further and those are big drops. But what is happening to the dividend? That's what we're focused on as dividend investors. That's the return on our investment. So what's happening to the dividend? And you can see that on the screen. The orange line represents the dividend and you can see that the line goes up every single year. So in the last 20 years, has it ever gone down? Of course not. Take a look at that orange line and it continues to go up year after year after year after year. So how can a company Continue to increase its dividend? How can they continue to pay you a dividend when the stock price tanks? And that's because this, the dividend, is not paid from the stock price. It's paid from the earnings, the profits. So as long as the company is profitable over the long term and as long as they continue to make Money, they can continue to pay that dividend. So Coca-Cola is an interesting example. It's a great example. And you can see that Coca-Cola has been paying dividends since 1893, so that's not a mistake. They have been paying dividends since 1893. And even more impressive than that is that Coca-Cola has consecutively increased their dividend for over 60 years. So that's incredible. So think about how many market crashes, how many market downturns we've had in the last 60 years. But companies like this, and especially with Coca-Cola, they have continued to grow the dividend year after year after year. So I'm going to go back to this previous slide that we looked at before. So what is an immediate return on your investment? It is the dividend, because it's consistent and Hopefully it continues to grow over time. So now let's take a look at an example, a real-life example, and we're going to go into a little bit more detail. So we're going to look at an American company here called ADM. So let's suppose in 2003 you invested $4,968 in ADM and back in 2003 the share price was $10.80. So back then, if you were going to invest $4,968, you would be able to purchase 460 shares in ADM. So let's say you went ahead and did that. So now you can see up on the screen here that in the year 2003 you can see that the dividend per share, the company was giving a dividend of 24 cents. Now, remember you bought 460 shares. So if we multiply that by 24 cents, we should see that the dividends received in the first year would have amounted to $110.40. Now, if you look on the screen, I'm also showing you the dividend yield. So remember that's the dividend per share divided by your purchase price. So if we take 24 cents divided by $10.80, you can see that in the first year, you made a return of 2.22% on your investment. Now, that doesn't seem like a lot. That's not a fantastic return. It's an okay return. But watch what happens in the following year and the company increases in 2004. Let's take a look. What is the dividend in 2004? It's 27 cents. So you can see that now the dividend yield has gone up to 2.5%. And in the next, the following year, you would have made over $124 in dividends. Now the company has increased its dividends Every single year. So you can see that on the screen. The dividend goes up, continues to go up and, as of this recording, the dividend is now $1.80. Now, remember when we started in 2003, the dividend was 24 cents. So now, if we look at the dividend yield today. Let's take the $1.80 dividend divided by your purchase price and now you can see that your dividend yield is over 16.80. That is a 16% return Every single year. Hopefully it'll go up if the company increases the dividend again, but if they don't, then you're looking at a 16% return year after year after year after year. So this year, if you held on to the shares and continue to do so, you would receive $828 in dividends. Now, if we add up all the dividends Since 2003. Now keep in mind when you invested initially in this company, you invested $4,688. That was your capital investment. Since then, you would have received over $8,700 in dividends. So you can see that you've more than made up the return on your investment. So we'll just put some of the numbers up on the screen again so you can see. Your initial investment was $4,968. The share price today, as of this recording, is $83.74. So if we're just looking at the stock price appreciation, the stock has gone up over 670%. But even more important than that is what is the value of our entire investment? We're talking about return on investment. So you started by investing $4,968. Today, that investment would be worth over $47,000 because we're adding in the dividends. So once you add the dividends in, you can see that the total return on your investment is over 850%. So that's the power of dividends they're consistent. They start off very small but then they grow and as they continue to grow, your return on your investment grows year after year after year. So now you can see here ADM has been paying a dividend since 1927. That's an impressive track record and they have consecutively increased their dividend for over 47 years. So this is important Dividends provide a tangible, real return on your investment, because without the dividend, you're only hoping for the stock price to keep going up, and hope is not going to cover your living expenses, or any expenses for that matter. But dividends will, because it is cash that's deposited directly into your trading account and it's available to you at any time and, regardless of stock prices going up and down, market recessions, market downturns, it is consistent income that is coming to you. Now let's take a look at what happens, and we're going to just pick a company here as an example. So First, solar. This is a company that does not pay a dividend and we're looking at what are we looking at? Almost the last 15 years here. Yeah, we're looking at a 15 year price chart and you can see that, again, prices go up and down all the time. But if you invested, let's say, the same $4,968 back in 2008, today it would be worth $3,200. So you would have lost money and without the dividend, like I said, you're only hoping for the stock price to keep going up, and that doesn't always happen, and this is a long period. Here we're looking at 15 year period where you would have lost money in this company. Now, I'm not picking on this company specifically. I just wanted to show an example of a company that doesn't pay dividends and what can happen Now. Of course, if you bought it earlier on, you held it on for more than I don't know 20 years or much longer, or if you were lucky enough to buy it back in 2012 when the price was really low, then you could have made some money off of this. But it's not a reliable and consistent return annually. You have to just pick and choose the right time to buy and sell, and that's not what we do here as dividend investors. We don't do that. We don't time the market, we don't time stocks and we're looking for safe and reliable returns on our investment. So this is where the dividend can help you so much. This is a great example. I'm going to just repeat that again. Initial investment was $4,968.00 in ADM and then you received over $8,700.00 in dividends. So that is a great return, and you still own the shares. You didn't have to sell any of the shares to make that return. Now does that mean should you buy any stock that pays a dividend? And the answer is no. Our approach to investing is to invest safely and reliably for the long term. So how do we do that? And what I teach is to invest in quality dividend stocks not just any stock, but a quality stock when they're priced low. So how do you know, when you're looking at a company, if it's a quality stock and how do you know if it's priced low? So to help you with that, I've created what I call the 12 rules of simply investing. And for those of you, if you're watching, you can see the 12 rules up on the screen. If you're listening to the audio version, I'm going to read out the rules for you just in a minute here and, if you're interested, I cover the 12 rules in the Simply Investing course. But let's take a look at the rules first. So rule number one do you understand how the company is making money? If you don't skip it, move on to something else. The rules are designed to save you from making mistakes. This is your checklist. So before you invest in any company, make sure that it passes all of the 12 rules, not just nine out of the 12 or eight out of the 12,. It passes all of the 12 rules. Okay, rule number two 20 years from now, will people still need its products and services? If not, skip it. Move on to something else. Rule number three does the company have a low cost competitive advantage? Rule number four is the company recession proof? Rule number five is the company profitable? Rule number six does it grow its dividend? And that's what we talked about in this episode today. And you saw the example with ADM, where the company was consistently growing its dividend. We saw the example with Coca-Cola, where they've consecutively increased the dividend for over 60 years. Now, nobody can predict the future. I don't know what's going to happen next week, next month or next year in the stock market, but when we look at companies like Coca-Cola, like ADM, that have a track record of growing their dividend, we then have a high degree of confidence that they will continue to pay us a dividend next year and hopefully increase that dividend year after year after that. So rule number six is important, but all of the rules are important. Rule number seven can the company afford to pay the dividend? Rule number eight is the debt less than 70%? Rule number nine avoid companies with recent dividend cuts. Rule number ten does the company buy back its own shares? Rule number eleven this is where we check to see if the company is the stock priced low. So there's three things we look at the PE ratio, then we look at the current yield and compare it to the 20 year average yield, and then we look at the PB ratio, the price to book value. And if a company passes rule number 11, then you know that the stock is undervalued and it's priced low. In fact, you could check rule number 11 first and if the stock is not priced low, then you can just skip it and skip all of the other rules and you don't have to apply any of the other rules Because, like I said in the beginning, a company has to pass all 12 of the rules and then rule number 12, keep your emotions out of investing. So, like I said. For those of you that are interested, I cover these in the online Simply Investing course. I have 10 modules. The first module is the investing basics. Then I cover the 12 rules, then I show you how to apply the 12 rules to any stock anywhere in the world, and I also provide you with a Google Sheet so you can enter all the numbers in, and then the sheet will actually calculate and tell you which rules a company passes and which rules a company fails. And then I show you how to use the Simply Investing platform. And in the next module, I will show you, step by step, how to place your first stock order, especially if you're new to investing. And then in the next module, building and tracking your portfolio. After that, you're going to learn how to figure out when to sell. It's important to know when to buy, but it's equally as important to know when to sell. And then the next module we talk about reducing your fees and risk, especially when it comes to mutual funds, index funds and ETFs. And then the next module is I will provide you with your action plan to get started right away. And then, finally, module number 10 is answering your most frequently asked questions. Now, if you want to go a little quicker. I've designed and built it took three years to build the simply investing platform, and this is a web application where we track over 6000 companies in the US and in Canada and we apply the rules to all 6000 companies. So you can log into the website and immediately see which companies pass which of the rules, which companies are priced low, which ones are not, and so you know which companies to avoid and which ones to consider. So, for those of you that are interested in any of these, I also do one-on-one consultations. I can take a look at what you currently own and see what your fees are, how much you're currently making and how much you could be making in dividends without adding any more new money into your portfolio, and so that's also available to you. All of our product and services are available. If you write down this coupon code, you can save 10% off of everything the course, the platform, the online, the one-on-one consulting and the online course. So the coupon code is save10save10. If you enjoyed today's episode, please hit the subscribe button. Hit the like button as well. I have a new episode out every week, and for more information, please take a look at my website simplyinvestingcom. Thanks for watching.