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Finance Allah shmoop what our dividends and how do they

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affect stock prices Well guess what People they help That's

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how they affect stock prices Well what are they What

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are dividends Well they're usually paid in cash to shareholders

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of record I legally if you own the stock than

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you're entitled to the dividend that is if you were

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In fact according to the brokerage where you held these

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shares the owner of record as of say June fifteenth

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then you too will receive a dividend of twelve cents

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for each share you own payable on July twenty eighth

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or something like that So dividends are declared at will

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by the board of the company and are usually the

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domain of well heeled already established large companies with so

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much excess cash profits that the more or less don't

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know what else to do with it A T and

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T Coke Disney Apple They all pay huge dollar amounts

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in aggregate total dividends Some have done so for a

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hundred years or more like a T Others like Apple

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just started Apple had just passed one hundred billion dollars

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in cash on their balance sheet when finally shareholders said

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Hey what about some of that cash for me So

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they're at least two logical ways to think about dividends

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offense and defense from an offensive perspective And you know

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we love being offensive here It shmoop central dividends Add

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to the compound ing of stock returns like Tongue Guards

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Inc has grown in share price six percent a year

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kind of meth performance flood It has had a three

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percent dividend and it keeps raising that dividend each year

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So combined that stock is delivering total return of nine

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percent better than in ten years The six percent compound

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ER would grow to one point Owe six to the

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tenth power or about one point eight acts Not quite

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double But if it compounded at one point o nine

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to the tenth power well it is grown to two

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point four acts like before two and a half times

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as much money as you started with a decade earlier

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right or in an initial thousand dollar investment What you'd

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have twenty four hundred dollars minus the eighteen hundred dollars

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or six hundred dollars Mohr with dividends in there and

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gas were rounding dramatically and the dividends get raised each

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year Bottom line Just dividends are good they add to

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your total return We're ignoring taxes also here and we're

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ignoring the possibility that you could directly reinvest those dividends

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Taub I'm or shares of that stock which would then

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have even Mohr Power incom pounding All right But that's

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offense What about defense Like your young you want to

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own stocks for thirty years but you're afraid of the

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downside The dark side the century stocks right That's one

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of stock goes down one hundred percent Yeah well stocks

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that pay a dividend rarely if ever go fully bust

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for them to have gotten to that happy place where

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they pay a divvy They're probably a pretty well established

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domain owner or at least one point had enough excess

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cash to distribute back to its owners in the form

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of a dividend But there's another even better defensive thing

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that dividend paying stocks offer That is they are cushions

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in a bad market And the number of feathers in

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that cushion is metered or measured by what's called the

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payout ratio which is the percentage of earnings that a

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company is paying out in dividends That is if the

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company is earning a dollar a share in his paying

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out thirty cents a share in DV dollars while their

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payout ratio is only thirty percent So their earnings could

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drop a lot and they'd still easily be ableto pay

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their thirty cent dividend But if they're ratio was more

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like eighty percent like they earned a dollar and they're

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paying eighty cents in dividend dough than Ooh that's tight

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If earnings dropped well even a quarter the company would

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be paying out Maurin dividend payments than they have earnings

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And this has happened in spades with modern day oil

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industry who had to borrow money to be able to

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continue to pay its dividend and not cut it Why

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such a stretch and all the effort to not cut

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the divvy Well because Wall Street views a dividend is

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a kind of commitment like a promise ring It means

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you are fully off tinder and match and J date

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So if you ever cut or do away with your

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divvy the management is usually all fired with their careers

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pretty much oriented toward the uber you know driving them

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not running a company like Doria Well look at what

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happened to G E in the modern era when they

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cut their dividend Yeah Ouch But let's say the whole

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market craps out you know bad economic cycle or whatever

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and our company goes from earning a dollars shared only

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seventy cents and the stock goes from twenty bucks a

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share to ten Well then it's payout ratio in that

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thirty cent dividend world is now thirty over seventy or

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forty three percent payout ratio It's higher payout ratio than

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it wass but still presumably really safe to continue going

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Maybe they won't raise it again this year but it's

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not going away And on twenty bucks a share A

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thirty cents of Devi well then was only yielding one

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point five percent Pretty small Davey But now at ten

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bucks a share and thirty of Debbie Well it's yielding

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thirty cents over ten dollars or three percent Well with

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Treasury Bills yielding about the same amount they quote on

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ly unquote bet you have to make and buying that

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stock is if it won't cut The dividend comes up

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You get more money and dividends that air pretty safe

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Well you feel pretty good about buying stock if you're

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gonna hold it along And if they don't cut the

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Davy well you not only get a low price to

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earnings multiple stock likely with a lot of price appreciation

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in the future but you get a more tax efficient

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cash piece coming back to you How our dividends Mohr

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tax efficient Well bonds or tax as ordinary income think

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forty or fifty percent for hire Taxpayers in blue states

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while qualified equity dividends are tax that much lower rates

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like half that rate in twenty twenty five percent Something

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like that So three percent on bonds nets the big

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taxpayers one point five percent and three percent on Davies

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And that's more like two and a quarter percent something

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like that Seventy five more basis points toe like you

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know buy a lot with anyway Dividends They're good They

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cushion stocks in the bad times and they add your

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compound returns and you want to come pound at a

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really high rate Kind of like you're compounding your lock 00:06:03.527 --> [endTime] Yeah Yeah

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